e20vf
Form 20-F
Securities and Exchange Commission
Washington, D.C. 20549
FORM 20-F
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
for the fiscal year ended December 31, 2005
Commission file number 025566
ASML HOLDING N.V.
(Exact Name of Registrant as Specified in Its Charter)
THE NETHERLANDS
(Jurisdiction of Incorporation or Organization)
DE RUN 6501
5504 DR VELDHOVEN
THE NETHERLANDS
(Address of Principal Executive Offices)
Securities registered or to be registered pursuant to
Section 12(b) of the Act:
None
(Title of Class)
Securities registered or to be registered pursuant to
Section 12(g) of the Act:
Ordinary Shares
(nominal value Eur 0.02 per share)
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
(Title of Class)
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.
484,670,183 Ordinary Shares
(nominal value Eur 0.02 per share)
23,100 Priority Shares
(nominal value Eur 0.02 per share)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes þ No o
If this
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 o No þ
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 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 þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o Item 18 þ
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 o No þ
Name and address of person authorized to receive notices and communications from the Securities and Exchange Commission:
Richard A. Ely
Skadden, Arps, Slate, Meagher & Flom (UK) LLP
40 Bank Street, Canary Wharf
London E14 5DS England
Contents
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2
Part I
Special Note Regarding Forward-Looking Statements
In addition to historical information, this annual report on Form 20-F contains statements relating
to our future business and/or results. These statements include certain projections and business
trends that are forward-looking within the meaning of the Private Securities Litigation Reform
Act of 1995. You can generally identify these statements by the use of words like may, will,
could, should, project, believe, anticipate, expect, plan, estimate, forecast,
potential, intend, continue and variations of these words or comparable words.
Forward-looking statements do not guarantee future performance and involve risks and uncertainties.
Actual results may differ materially from projected results as a result of certain risks and
uncertainties. These risks and uncertainties include, without limitation, those described under
Item 3.D. Risk Factors and those detailed from time to time in our other filings with the U.S.
Securities and Exchange Commission (the Commission or the SEC). These forward-looking
statements are made only as of the date of this annual report on Form 20-F. We do not undertake to
update or revise the forward-looking statements, whether as a result of new information, future
events or otherwise.
Presentation of Financial and Operational Information
In May 2001, we consummated our merger with Silicon Valley Group, Inc. (SVG), now part of ASML
US, Inc. (ASML US). The merger was accounted for under the pooling of interests method.
Therefore, the selected financial data of ASML Holding N.V. (ASML or the Company) for the year
ended December 31, 2001, reflects the combination of financial statements for ASMLs historical
operations with those of SVG.
On December 18, 2002, we announced our decision to divest our Thermal business, including related
customer support activities, and the termination of our manufacturing activities in the Track
business. As a result of this decision, our consolidated financial statements for each of the three
years ended December 31, 2005, our selected financial data for each of the five years ended
December 31, 2005 and the financial and operational information presented in this annual report on
Form 20-F present these businesses as discontinued operations, instead of as a separate segment as
they had been reported prior to the divestiture announcement.
Item 1
Identity of Directors, Senior Management and Advisors
Not applicable.
Item 2
Offer Statistics and Expected Timetable
Not applicable.
Item 3
Key Information
A. Selected Financial Data
The following selected consolidated financial data should be read in conjunction with Item 5
Operating and Financial Review and Prospects and Item 18 Financial Statements.
4
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Year ended December 31 |
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands, except per share data) 1 |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Consolidated statements of operations data |
|
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|
|
|
|
|
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Net sales |
|
|
1,589,247 |
|
|
|
1,958,672 |
|
|
|
1,542,737 |
|
|
|
2,465,377 |
|
|
|
2.528,967 |
|
Cost of sales |
|
|
1,558,234 |
|
|
|
1,491,068 |
|
|
|
1,173,955 |
|
|
|
1,559,738 |
|
|
|
1,554,772 |
|
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|
|
|
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|
|
|
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|
|
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Gross profit on sales |
|
|
31,013 |
|
|
|
467,604 |
|
|
|
368,782 |
|
|
|
905,639 |
|
|
|
974,195 |
|
Research and development costs |
|
|
347,333 |
|
|
|
324,419 |
|
|
|
305,839 |
|
|
|
352,920 |
|
|
|
347,901 |
|
Research and development credits |
|
|
(16,223 |
) |
|
|
(26,015 |
) |
|
|
(19,119 |
) |
|
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(21,961 |
) |
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|
(24,027 |
) |
Selling, general and
administrative expenses |
|
|
245,962 |
|
|
|
263,243 |
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|
212,609 |
|
|
|
201,629 |
|
|
|
201,204 |
|
Restructuring and merger and
acquisition costs (credits) |
|
|
44,559 |
|
|
|
0 |
|
|
|
24,485 |
|
|
|
(5,862 |
) |
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0 |
|
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Operating income (loss) |
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|
(590,618 |
) |
|
|
(94,043 |
) |
|
|
(155,032 |
) |
|
|
378,913 |
|
|
|
449,117 |
|
Minority interest in net result from
subsidiaries |
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|
3,606 |
|
|
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0 |
|
|
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0 |
|
|
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0 |
|
|
|
0 |
|
Interest income (expense), net |
|
|
(7,207 |
) |
|
|
(36,781 |
) |
|
|
(29,149 |
) |
|
|
(16,073 |
) |
|
|
(14,094 |
) |
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|
Income (loss) from continuing
operations before income taxes |
|
|
(594,219 |
) |
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|
(130,824 |
) |
|
|
(184,181 |
) |
|
|
362,840 |
|
|
|
435,023 |
|
(Provision for) benefit from
income taxes |
|
|
179,017 |
|
|
|
42,779 |
|
|
|
59,675 |
|
|
|
(127,380 |
) |
|
|
(123,559 |
) |
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|
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|
|
|
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|
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|
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|
Income (loss) from
continuing operations |
|
|
(415,202 |
) |
|
|
(88,045 |
) |
|
|
(124,506 |
) |
|
|
235,460 |
|
|
|
311,464 |
|
Loss from discontinued operations
before income taxes |
|
|
(103,001 |
) |
|
|
(183,624 |
) |
|
|
(59,026 |
) |
|
|
0 |
|
|
|
0 |
|
Benefit from income taxes |
|
|
39,211 |
|
|
|
63,846 |
|
|
|
23,316 |
|
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|
0 |
|
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0 |
|
|
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|
|
|
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|
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|
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|
Loss from discontinued
operations |
|
|
(63,790 |
) |
|
|
(119,778 |
) |
|
|
(35,710 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
Net income (loss) |
|
|
(478,992 |
) |
|
|
(207,823 |
) |
|
|
(160,216 |
) |
|
|
235,460 |
|
|
|
311,464 |
|
|
|
|
|
|
|
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|
Earnings per share data 2, 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income (loss) from continuing
operations per ordinary share |
|
|
(0.89 |
) |
|
|
(0.18 |
) |
|
|
(0.26 |
) |
|
|
0.49 |
|
|
|
0.64 |
|
Basic loss from discontinued
operations per ordinary share |
|
|
(0.14 |
) |
|
|
(0.26 |
) |
|
|
(0.07 |
) |
|
|
0.00 |
|
|
|
0.00 |
|
Basic net income (loss) per ordinary share |
|
|
(1.03 |
) |
|
|
(0.44 |
) |
|
|
(0.33 |
) |
|
|
0.49 |
|
|
|
0.64 |
|
Diluted net income (loss) per ordinary share |
|
|
(1.03 |
) |
|
|
(0.44 |
) |
|
|
(0.33 |
) |
|
|
0.49 |
|
|
|
0.64 |
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
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|
Number of ordinary shares used in
computing per share amounts
(in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
465,866 |
|
|
|
476,866 |
|
|
|
482,240 |
|
|
|
483,380 |
|
|
|
484,103 |
|
Diluted |
|
|
465,866 |
|
|
|
476,866 |
|
|
|
482,240 |
|
|
|
484,661 |
|
|
|
542,979 |
|
|
|
|
1 |
|
The selected consolidated data for all periods reflect the effects of our
decision in December 2002 to discontinue our Track business and divest our Thermal business which
we substantially divested in October 2003. |
|
2 |
|
Net income (loss) per ordinary share amounts have been retroactively
adjusted to reflect the issuance of 47,139,000 ordinary shares in connection with the May 2001
merger with SVG, which was accounted for as a pooling of interests. |
|
3 |
|
The calculation of the number of ordinary shares used in computing
diluted net income per ordinary share (i) in 2001, 2002, 2003 and 2004 does not assume conversion
of ASMLs outstanding Convertible Subordinated Notes and (ii) in 2001, 2002 and 2003 does not
assume the exercise of options issued under ASMLs stock option plans, as such conversions and
exercises would have an anti-dilutive effect. |
5
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|
As of December 31 |
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Consolidated balance sheets data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
910,678 |
|
|
|
668,760 |
|
|
|
1,027,806 |
|
|
|
1,228,130 |
|
|
|
1,904,609 |
|
Working capital4 |
|
|
1,822,711 |
|
|
|
1,662,570 |
|
|
|
1,463,308 |
|
|
|
1,868,871 |
|
|
|
1,785,836 |
|
Total assets |
|
|
3,643,840 |
|
|
|
3,301,688 |
|
|
|
2,868,282 |
|
|
|
3,243,766 |
|
|
|
3,756,023 |
|
Long-term liabilities |
|
|
1,588,846 |
|
|
|
1,233,398 |
|
|
|
1,040,556 |
|
|
|
1,039,023 |
|
|
|
624,203 |
|
Total shareholders equity |
|
|
1,226,287 |
|
|
|
1,315,516 |
|
|
|
1,141,207 |
|
|
|
1,391,602 |
|
|
|
1,711,837 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated statements of cash flows data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(160,427 |
) |
|
|
(89,282 |
) |
|
|
(48,567 |
) |
|
|
(74,979 |
) |
|
|
(72,660 |
) |
Depreciation, amortization and impairment |
|
|
138,959 |
|
|
|
186,686 |
|
|
|
156,900 |
|
|
|
93,144 |
|
|
|
98,881 |
|
Net cash provided by (used in)
continuing operating activities |
|
|
(328,017 |
) |
|
|
(61,127 |
) |
|
|
532,659 |
|
|
|
257,147 |
|
|
|
713,511 |
|
Net cash provided by (used in)
discontinued operating activities |
|
|
(35,937 |
) |
|
|
(121,039 |
) |
|
|
12,736 |
|
|
|
(5,880 |
) |
|
|
(2,018 |
) |
Net cash provided by (used in)
total operating activities |
|
|
(363,954 |
) |
|
|
(182,166 |
) |
|
|
545,395 |
|
|
|
251,267 |
|
|
|
711,493 |
|
Net cash used in continuing
investing activities |
|
|
(197,693 |
) |
|
|
(72,876 |
) |
|
|
(49,028 |
) |
|
|
(60,398 |
) |
|
|
(60,803 |
) |
Net cash used in discontinued
investing activities |
|
|
(33,878 |
) |
|
|
(6,434 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Net cash used in total investing activities |
|
|
(231,571 |
) |
|
|
(79,310 |
) |
|
|
(49,028 |
) |
|
|
(60,398 |
) |
|
|
(60,803 |
) |
Net cash provided by (used in)
continuing financing activities |
|
|
664,290 |
|
|
|
21,427 |
|
|
|
(68,156 |
) |
|
|
18,871 |
|
|
|
2,879 |
|
Net cash provided by (used in)
discontinued financing activities |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Net cash provided by (used in)
total financing activities |
|
|
664,290 |
|
|
|
21,427 |
|
|
|
(68,156 |
) |
|
|
18,871 |
|
|
|
2,879 |
|
Net increase (decrease) in cash and
cash equivalents |
|
|
(73,522 |
) |
|
|
(241,918 |
) |
|
|
359,046 |
|
|
|
200,324 |
|
|
|
676,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios and other data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in net sales (in percent) |
|
|
(40.5 |
) |
|
|
23.2 |
|
|
|
(21.2 |
) |
|
|
59.8 |
|
|
|
2.6 |
|
Gross profit as a percentage of net sales |
|
|
2.0 |
|
|
|
23.9 |
|
|
|
23.9 |
|
|
|
36.7 |
|
|
|
38.5 |
|
Operating income (loss) as a
percentage of net sales |
|
|
(37.2 |
) |
|
|
(4.8 |
) |
|
|
(10.0 |
) |
|
|
15.4 |
|
|
|
17.8 |
|
Net income (loss)
as a percentage of net sales |
|
|
(26.1 |
) |
|
|
(4.5 |
) |
|
|
(8.1 |
) |
|
|
9.6 |
|
|
|
12.3 |
|
Shareholders equity as a percentage
of total assets |
|
|
33.7 |
|
|
|
39.8 |
|
|
|
39.8 |
|
|
|
42.9 |
|
|
|
45.6 |
|
Backlog of new systems (in units) at
year end |
|
|
117 |
|
|
|
103 |
|
|
|
103 |
|
|
|
119 |
|
|
|
86 |
|
Backlog of used systems (in units) at
year end |
|
|
1 |
|
|
|
7 |
|
|
|
21 |
|
|
|
12 |
|
|
|
9 |
|
Backlog of systems (in units) at
year end |
|
|
118 |
|
|
|
110 |
|
|
|
124 |
|
|
|
131 |
|
|
|
95 |
|
Sales of systems (in units) |
|
|
197 |
|
|
|
205 |
|
|
|
169 |
|
|
|
282 |
|
|
|
196 |
|
Number of employees at year end
for continuing operations |
|
|
6,039 |
|
|
|
5,971 |
|
|
|
5,059 |
|
|
|
5,071 |
|
|
|
5,055 |
|
Number of ordinary shares
outstanding (in thousands) at year end |
|
|
466,978 |
|
|
|
482,182 |
|
|
|
482,514 |
|
|
|
483,676 |
|
|
|
484,670 |
|
Stock price ASML at year end5 |
|
|
19.52 |
|
|
|
7.96 |
|
|
|
15.72 |
|
|
|
11.81 |
|
|
|
16.90 |
|
Volatility % ASML shares (260 days)6 |
|
|
71.0 |
|
|
|
89.0 |
|
|
|
60.9 |
|
|
|
37.4 |
|
|
|
26.0 |
|
|
|
|
4 |
|
Working Capital is calculated as the difference between total current assets,
including cash and cash equivalents, and total current liabilities. |
|
5 |
|
Closing price of ASMLs ordinary shares listed on the Official Segment of
the stock market of Euronext Amsterdam N.V. (Source: Bloomberg) |
|
6 |
|
Volatility represents the variability in our share price on the Official
Segment of the stock market of Euronext Amsterdam N.V. as measured over the last 260 business days
of each year presented. (Source: Bloomberg) |
6
Exchange Rate Information
We publish our consolidated financial statements in euro. In this Annual Report, references to
, EUR or euro are to euro, and references to $, dollars, U.S. dollars,
U.S. dollar, USD or US$ are to United States dollars. Solely for the convenience of the
reader, certain U.S. dollar amounts have been translated into euro amounts using an exchange rate
in effect on December 31, 2005 of US$ 1.00 = EUR 0.84782.
A portion of our net sales and expenses is, and historically has been, denominated in currencies
other than the euro. For a discussion of the impact of exchange rate fluctuations on our financial
condition and results of operations, see Item 5.A. Operating results, Foreign Exchange Management
and Note 1 to our consolidated financial statements.
The following are the Noon Buying Rates certified by the Federal Reserve Bank of New York for
customs purposes (the Noon Buying Rate) expressed in U.S. dollars per euro.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar period |
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Jan. 24) |
|
|
Period End |
|
|
0.89 |
|
|
|
1.05 |
|
|
|
1.26 |
|
|
|
1.35 |
|
|
|
1.18 |
|
|
|
1.23 |
|
Average1 |
|
|
0.89 |
|
|
|
0.95 |
|
|
|
1.13 |
|
|
|
1.24 |
|
|
|
1.24 |
|
|
|
1.21 |
|
High |
|
|
0.95 |
|
|
|
1.05 |
|
|
|
1.26 |
|
|
|
1.36 |
|
|
|
1.35 |
|
|
|
1.23 |
|
Low |
|
|
0.84 |
|
|
|
0.86 |
|
|
|
1.04 |
|
|
|
1.18 |
|
|
|
1.17 |
|
|
|
1.20 |
|
|
|
|
1 |
|
The average of the Noon Buying Rates on the last business day of each month during
the period presented. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Months of |
|
July |
|
|
August |
|
|
September |
|
|
October |
|
|
November |
|
|
December |
|
|
January |
|
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2005 |
|
|
2006 (Jan. 24) |
|
|
High |
|
|
1.22 |
|
|
|
1.24 |
|
|
|
1.25 |
|
|
|
1.21 |
|
|
|
1.21 |
|
|
|
1.20 |
|
|
|
1.23 |
|
Low |
|
|
1.19 |
|
|
|
1.21 |
|
|
|
1.20 |
|
|
|
1.19 |
|
|
|
1.17 |
|
|
|
1.17 |
|
|
|
1.20 |
|
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
In conducting our business, we face many risks that may interfere with our business objectives.
Some of these risks relate to our operational processes, while others relate to our business
environment. It is important to understand the nature of these risks and the impact they may have
on our business, financial condition and results of operations. Some of the more relevant risks are
described below.
Risks Related to the Semiconductor Industry
The Semiconductor Industry is Highly Cyclical and We May be Adversely Affected by Any Future
Downturns
As a supplier to the global semiconductor industry, we are subject to the industrys business
cycles, the timing, duration and volatility of which are difficult to predict. The semiconductor
industry has historically been cyclical. Sales of our photolithography systems depend in large part
upon the level of capital expenditures by semiconductor manufacturers. These capital expenditures
depend upon a range of competitive and market factors, including:
|
|
the current and anticipated market demand for semiconductors and for
products utilizing semiconductors; |
|
|
|
semiconductor prices; |
|
|
|
semiconductor production costs; and |
|
|
|
general economic conditions. |
Changes in demand for our products as a result of these business cycles have been affected by the
timing and amounts of customers capital equipment purchases and investments in new technology.
Future reductions or delays in capital equipment
purchases by our customers could have a material adverse effect on our business, financial
condition and results of operations.
In anticipation of periods of increasing demand for semiconductor manufacturing equipment, we must
maintain sufficient manufacturing capacity and inventory, and we must attract, hire, integrate and
retain a sufficient number of qualified employees to meet customer demand. Our ability to predict
the timing and magnitude of industry fluctuations is limited and our products require significant
lead time to complete. Accordingly, we may not be able to effectively increase our production
capacity to
7
respond to an increase in customer demand in an industry upturn resulting in lost
revenues and damage to customer relationships.
Conversely, in an industry downturn, our ability to maintain profitability will depend
substantially on whether we are able to lower our costs and break-even level, which is the number
of lithography systems we must sell in a year to achieve net income. If we are unable to lower
costs in an industry downturn, our net income may decline significantly. As we need to keep certain
levels of inventory on hand to meet anticipated product demand, we also incur costs related to
inventory obsolescence in an industry downturn. In addition, industry downturns generally result in
overcapacity, exercising downward pressure on prices, which has had in the past, and could have in
the future, a material adverse effect on our business, financial condition and results of
operations.
Our Business Will Suffer If We Do Not Respond Rapidly to Commercial and Technological Changes
in the Semiconductor Industry
The semiconductor manufacturing industry is subject to:
|
|
rapid change towards more complex technologies; |
|
|
frequent new product introductions and enhancements; |
|
|
evolving industry standards; |
|
|
changes in customer requirements; and |
|
|
continued shortening of product life cycles. |
Our products could become obsolete sooner than anticipated because of a faster than anticipated
change in one or more of the technologies related to our products or in market demand for products
based on a particular technology. Our success in developing new products and in enhancing our
existing products depends on a variety of factors, including the successful management of our
research and development programs and timely completion of product development and design relative
to competitors. If we do not develop and introduce new and enhanced systems at competitive prices
and on a timely basis, our customers will not integrate our systems into the planning and design of
new fabrication facilities and upgrades of existing facilities, which would have a material adverse
effect on our business, financial condition and results of operations.
In addition, we may invest considerable financial and other resources to develop and introduce new
technologies, products and product enhancements, such as Extreme Ultraviolet lithography (EUV),
that our customers may not ultimately adopt. If our customers do not adopt these or other products
or enhancements that we develop due to a preference for more established technologies and products
or for other reasons, we would not recoup any return on our investments in these technologies or
products, which may result in charges to our statement of operations and materially and adversely
affect the future growth of the Company.
We Face Intense Competition
The semiconductor equipment industry is highly competitive. The principal elements of competition
in our markets are:
|
|
the technical performance characteristics of a photolithography system; |
|
|
the value of ownership of that system based on its purchase price, maintenance costs, productivity and customer service and
support; and |
|
|
the strength and breadth of our portfolio of patents and other intellectual property rights. |
Our competitiveness will increasingly depend upon our ability to develop new and enhanced
semiconductor equipment that is competitively priced and introduced on a timely basis, as well as
our ability to protect and defend our intellectual property rights. See Item 4.B. Business
Overview, Intellectual Property and Note 14 to our consolidated financial statements.
The costs to develop new systems, in particular photolithography systems, are extremely high and
accordingly, the photolithography equipment industry is characterized by fierce competition between
a few suppliers. ASMLs primary competitors are Nikon Corporation (Nikon) and Canon Kabushika
Kaisha (Canon). Nikon and Canon are the dominant suppliers in the Japanese market, which accounts
for a significant portion of worldwide semiconductor production. This market historically has been
difficult for non-Japanese companies to penetrate, and ASML has sold only a limited number of
systems to Japanese customers.
Both Nikon and Canon have substantial financial resources and broad patent portfolios. Each
continues to introduce new products with improved price and performance characteristics that
compete directly with our products, and may cause a decline in our sales or loss of market
acceptance for our photolithography systems. In addition, adverse market conditions, industry
overcapacity or a decrease in the value of the Japanese yen in relation to the euro or the U.S.
dollar could further intensify price-based competition in those markets that account for the
majority of our sales, resulting in lower prices and margins and a material adverse effect on our
business, financial condition and results of operations.
8
Risks Related to ASML
The Number of Systems We Can Produce is Limited by Our Dependence on a Limited Number of
Suppliers of Key Components
We rely on outside vendors for the components and subassemblies used in our systems, each of which
is obtained from a single supplier or a limited number of suppliers. Our reliance on a limited
group of suppliers involves several risks, including a potential inability to obtain an adequate
supply of required components and the risk of untimely delivery of these components and
subassemblies.
The number of photolithography systems we have been able to produce has occasionally been limited
by the production capacity of Carl Zeiss SMT AG (Zeiss). Zeiss is our single supplier of lenses
and other critical optical components. The inability of Zeiss to maintain and increase production
levels or our inability to maintain our business relationship with Zeiss in the future could result
in our inability to fulfill orders, which could damage relationships with current and prospective
customers and have a material adverse effect on our business, financial condition and results of
operations. If Zeiss were to terminate its relationship with us or if Zeiss were unable to maintain
production of lenses over a prolonged period, we would effectively cease to be able to conduct our
business. See Item 4.B. Business Overview, Manufacturing, Logistics and Suppliers.
In addition to Zeiss current position as our single supplier of lenses, the excimer laser
illumination systems that provide the ultraviolet light source, referred to as deep UV, used in
our high resolution steppers and Step & Scan systems, are available from only a limited number of
suppliers. In particular, we rely heavily on Cymer, Inc., a U.S. based company, to provide excimer
laser systems.
Although the timeliness, yield and quality of deliveries to date from our remaining subcontractors
generally have been satisfactory, manufacturing certain of these components and subassemblies is an
extremely complex process and delays caused by suppliers may occur in the future. A prolonged
inability to obtain adequate deliveries, or any other circumstance that requires us to seek
alternative sources of supply, could significantly hinder our ability to deliver our products in a
timely manner, which could damage relationships with current and prospective customers and have a
material adverse effect on our business, financial condition and results of operations.
A High Percentage of Net Sales is Derived from a Few Customers
Historically, we have sold a substantial number of lithography systems to a limited number of
customers. While the identity of our largest customers may vary from year to year, we expect sales
to remain concentrated among relatively few customers in any particular year. The loss of any
significant customer or any reduction in orders by a significant customer may have a material
adverse effect on our business, financial condition and results of operations.
In 2005, sales to one customer accounted for EUR 609 million, or 24 percent of net sales, compared
to EUR 434 million, or 18 percent of net sales, in 2004. As a result of the limited number of our
customers, credit risk on our receivables is concentrated. Our three largest customers accounted
for 49 percent of accounts receivable at December 31, 2005, compared to 38 percent at December 31,
2004. Business failure of one of our main customers may have a material adverse effect on our
business, financial condition and results of operations.
The Pace of Introduction of Our New Products is Accelerating and is Accompanied by Potential
Design and Production Delays and by Significant Costs
The development and initial production, installation and enhancement of the systems we produce is
often accompanied by design and production delays and related costs of a nature typically
associated with the introduction and transition to full-scale manufacturing of complex capital
equipment. While we expect and plan for a corresponding learning curve effect in our product
development cycle, we cannot precisely predict the time and expense required to overcome these
initial problems and to ensure full performance to specifications. There is a risk that we may not
be able to introduce or bring to full-scale production new products as quickly as we expected in
our product introduction plans, which could have a material adverse effect on our business,
financial condition and results of operations.
In particular, our current backlog includes a significant number of technology enhancements,
including those associated with immersion systems. In order for the market to accept these
technology enhancements, our customers, in many cases, must upgrade their existing technology
capabilities. For instance, in order for our customers to effectively use immersion systems, they
must have sophisticated technology to make use of resist (a fluid) and track equipment used in the
immersion process. Such upgrades from established technology may not be available to our customers
to enable volume production using our immersion systems or other technology
9
enhancements. This could result in our customers pushing back or canceling orders for our
technology enhancements, which could negatively impact our business, financial condition and
results of operations.
We Derive Most of Our Revenues from the Sale of a Relatively Small Number of Products
We derive most of our revenues from the sale of a relatively small number of lithography equipment
systems (196 units in 2005), with an average selling price (ASP) in 2005 of EUR 11.4 million (EUR
13.5 million for new systems and EUR 2.9 million for used systems). As a result, the timing of
recognition of revenue from a small number of transactions may have a significant impact on our net
sales and other operating results for a particular reporting period. Specifically, the failure to
receive anticipated orders, or delays in shipments near the end of a particular reporting period,
due, for example, to:
|
|
the highly cyclical semiconductor business industry; |
|
|
|
unanticipated shipment rescheduling; |
|
|
|
cancellation by customers; |
|
|
|
unexpected manufacturing difficulties; and |
|
|
|
delays in deliveries by suppliers, |
may cause net sales in a particular reporting period to fall significantly below our expectations,
which would, in turn, have a material adverse effect on our operating results for that period.
Since the first quarter of 2003, we have published financial results on a quarterly basis. Our
published quarterly earnings have varied significantly from quarter to quarter and may vary in the
future as a result of the above.
Compliance with Internal Controls Evaluations and Attestation Requirements May Increase Our
Costs and We May Identify Significant Deficiencies or Material Weaknesses
Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, ASML will be required, as a foreign
private issuer, beginning in fiscal year 2006, to perform an evaluation of its internal controls
over financial reporting and have its auditor publicly attest to such evaluation. We are following
an internal plan of action for compliance, which includes a timeline and scheduled activities,
although as of the date of this filing we have not yet finalized the evaluation.
Compliance with these requirements is expensive and time-consuming. If we fail to complete this
evaluation in a timely manner, or if our independent auditor cannot attest to our evaluation in a
timely manner, we could be subject to regulatory scrutiny and a loss of public confidence in our
internal controls. In addition, we may uncover significant deficiencies or material weaknesses.
Measures taken by us to remedy these issues may require significant effort and expense, as well as
the commitment of significant managerial resources. Each of these circumstances may have an adverse
impact on our business, financial condition and results of operations or on our share price.
Failure to Adequately Protect the Intellectual Property Rights upon Which We Depend Could Harm
Our Business
We rely on patents, copyrights, trade secrets and other measures to protect our proprietary
technology. However, there is no assurance that such measures will be adequate. We face risks that:
|
|
intellectual property laws may not sufficiently protect our proprietary rights or may adversely change in the future; |
|
|
|
pending patent applications may not be granted or construed as expected; |
|
|
|
the steps we take to prevent misappropriation or infringement of our proprietary rights may not be successful; and |
|
|
|
third parties may be able to develop or obtain patents for similar competing technology. |
In addition, litigation may be necessary in order to enforce our intellectual property rights or to
determine the scope and validity of the proprietary rights of others. Any such litigation may
result in substantial costs and diversion of resources, and, if decided unfavorably to us, could
have a material adverse effect on our business, financial condition and results of operations.
Defending Against Intellectual Property Claims by Others Could Harm Our Business
We face a continuing risk that we will be subject to claims alleging the infringement of others
intellectual property rights. If successful, these claims could limit or prohibit us from
developing our technology and producing our products, which could have a material adverse effect on
our business, financial condition and results of operations.
In the course of our business, we are subject to claims by third parties alleging that our products
or processes infringe upon their intellectual property rights. In addition, our customers may be
subject to claims of infringement from third parties, alleging that our products used by such
customers in the manufacture of semiconductor products and/or the processes relating to the use of
our products infringe one or more
10
patents issued to such parties. If such claims were successful, we could be required to indemnify
customers for some or all of any losses incurred or damages assessed against them as a result of
such infringement. We may also incur substantial licensing or settlement costs where doing so would
strengthen or expand our intellectual property rights or limit our exposure to intellectual
property claims by others. This may have a material adverse effect on our business, financial
condition and results of operations.
We Are Subject to Risks in our International Operations
The majority of our business activity is conducted outside Europe, including in developing and
emerging markets in Asia. There are a number of risks inherent in doing business in those markets,
including the following:
|
|
potentially adverse tax consequences; |
|
|
|
unfavorable political or economic environment; |
|
|
|
unexpected legal or regulatory changes; and |
|
|
|
inability to effectively protect intellectual property. |
If we are unable to manage successfully the risks inherent in our international activities, our
business, financial condition and results of operations could be materially and adversely affected.
In particular, approximately 18 percent of our 2005 revenues and approximately 27 percent of our
2004 revenues were derived from customers in Taiwan. Taiwan has a unique international political
status. The Peoples Republic of China asserts sovereignty over Taiwan and does not recognize the
legitimacy of the Taiwan government. Relations between Taiwan and the Peoples Republic of China,
changes in Taiwanese government policies and other factors affecting Taiwans political, economic
or social environment could have a material adverse effect on our business, financial condition and
results of operations.
We Are Subject to Environmental Laws and Regulations
We are subject to Netherlands and foreign environmental regulations in areas such as energy
resource management, use, storage, discharge and disposal of hazardous substances, recycling, clean
air, water protection and waste disposal. We believe that we have taken adequate measures to comply
with these regulations in the course of our ordinary business operations. Furthermore, we do not
believe that any environmental laws or regulations currently in effect will have a material adverse
effect on our business, financial condition and results of operations. However, we cannot predict
whether any pending or future legislation will be adopted or what the effect of such legislation
would be on our business, financial condition and results of operations.
We Are Dependent on the Continued Operation of a Limited Number of Manufacturing Facilities
All of our manufacturing activities, including subassembly, final assembly and system testing, take
place in one clean room facility located in Veldhoven, the Netherlands, and one clean room facility
in Wilton, Connecticut, U.S. These facilities are subject to disruption for a variety of reasons,
including work stoppages, fire, energy shortages, flooding or other natural disasters. We cannot
ensure that alternative production capacity would be available if a major disruption were to occur
or that, if it were available, it could be obtained on favorable terms. Such a disruption could
have a material adverse effect on our business, financial condition and results of operations.
Because of Labor Laws and Practices, Any Workforce Reductions That We May Wish to Implement In
Order To Reduce Costs Company-Wide May Be Delayed or Suspended
The semiconductor market is highly cyclical and as a consequence we may need to implement workforce
reductions in case of a downturn, in order to adapt to such market changes. In accordance with
labor laws and practices applicable in the jurisdictions in which we operate, a reduction of any
significance may be subject to certain formal procedures, which can delay, or may result in the
modification of our planned workforce reductions. For example, in the Netherlands, if our Works
Council does not agree with a proposed workforce reduction in the Netherlands, but we nonetheless
determine to proceed, we must temporarily suspend any action while the Works Council determines
whether to appeal to the Netherlands Courts. This appeal process can cause a delay of several
months and may require us to address any procedural inadequacies identified by the Court in the way
we reached our decision. Such delays could impair our ability to reduce costs company-wide to
levels comparable to those of our competitors. See Item 6.D. Employees.
Fluctuations in Foreign Exchange Rates Could Harm Our Results of Operations
We are exposed to currency risks. We are particularly exposed to fluctuations in the exchange rate
between the U.S. dollar and the euro as we incur manufacturing costs and price our systems
predominantly in euro while a portion of our net sales and cost of sales is denominated in U.S.
dollars.
In addition, a substantial portion of our assets and liabilities and operating results are
denominated in U.S. dollars, and a small portion of our assets, liabilities and
11
operating results are denominated in currencies other than the euro and the U.S. dollar. Our
consolidated financial statements are expressed in euro. Accordingly, our results of operations are
exposed to fluctuations in various exchange rates.
Furthermore, a strengthening of the euro particularly against the U.S. Dollar and the Japanese Yen
could lead to intensified price-based competition in those markets that account for the majority of
our sales, resulting in lower prices and margins and a material adverse effect on our business,
financial condition and results of operations.
Also see Item 5.A. Operating Results, Foreign Exchange Management, Item 5.F. Tabular Disclosure
of Contractual Obligations, Item 11 Quantitative and Qualitative Disclosures About Market Risk
and Note 4 to our consolidated financial statements.
Risks Related to Our Ordinary Shares
The
Price of Our Ordinary Shares is Very Volatile
The current market price of our ordinary shares may not be indicative of prices that will prevail
in the future. In particular, the market price of our ordinary shares experiences significant
fluctuation, including fluctuation that is unrelated to our performance. We expect that this
fluctuation will continue in the future.
Restrictions
on Shareholder Rights May Dilute Voting Power
Our Articles of Association provide that we are subject to the provisions of Netherlands law
applicable to large corporations, called structuurregime. These provisions have the effect of
concentrating control over certain corporate decisions and transactions in the hands of our
Supervisory Board. In addition, the provisions in our Articles of Association relating to our
Priority Shares have the effect of taking control over certain significant corporate decisions away
from holders of ordinary shares. As a result, holders of ordinary shares may have more difficulty
in protecting their interests in the face of actions by members of the Board of Management or
members of our Supervisory Board than if we were incorporated in the United States.
We also have a class of protective cumulative preference shares (the Preference Shares) and have
granted to Stichting Preferente Aandelen ASML, a Netherlands foundation, an option to acquire
from us, at their nominal value of EUR 0.02 per share, a number of preference shares equal to the
number of ordinary shares outstanding at the time of option exercise. This effectively would dilute
by one-half the voting power of our outstanding ordinary shares, which may discourage or
significantly impede a third party from acquiring a majority of our voting shares.
See further Item 6.C. Board Practices and Item 10.B. Memorandum and Articles of Association.
Item 4
Information on the Company
A. History and Development of the Company
We commenced business operations in 1984. ASM Lithography Holding N.V. was incorporated in the
Netherlands on October 3, 1994 to serve as the holding company for our worldwide operations, which
include operating subsidiaries in the Netherlands, the United States, Taiwan, Italy, France,
Germany, the United Kingdom, Ireland, the Republic of Korea, Singapore, Israel, China (including
Hong Kong), Japan and Malaysia. In 2001, we changed our name from ASM Lithography Holding N.V. to
ASML Holding N.V. Our registered office is located at De Run 6501, 5504 DR Veldhoven, the
Netherlands, telephone +31 40 268 3000.
In May 2001, we merged with SVG (now part of ASML US, Inc.), a company that was active in the
Lithography, Track and Thermal businesses. In December 2002, we announced the termination of our
manufacturing activities in the Track business and the divestiture of our Thermal business. In
October 2003, we substantially completed the divestiture of our Thermal business.
Capital Expenditures
Our capital expenditures over the past three years amounted to EUR 79.8 million for 2005, EUR 111.3
million for 2004 and EUR 74.5 million for 2003. The related cash outflows amounted to EUR 74.0
million for 2005, EUR 75.5 million for 2004 and EUR 51.7 million for 2003. Our capital expenditures
consist of machinery and equipment (e.g. prototypes, demonstration systems and training systems),
information technology investments, leasehold improvements to our facilities and licenses of
patents related to lithography equipment. Our Veldhoven headquarters is financed through a special
purpose vehicle that is a variable interest entity. See Item 5.E. Off-Balance Sheet Arrangements
and Note 12 to our consolidated financial statements. All other current capital expenditures are
financed internally.
12
Disposals within continued operations, principally comprising machinery and equipment (more
specifically, demonstration systems and training systems), amounted to EUR 30.3 million for 2005,
EUR 36.2 million for 2004 and EUR 48.8 million for 2003. See Notes 8 and 9 to our consolidated
financial statements.
B. Business Overview
We are one of the worlds leading providers of advanced technology systems for the semiconductor
industry, based on market share. We offer an integrated portfolio of lithography systems mainly for
manufacturing complex integrated circuits (semiconductors or ICs). We supply systems to
integrated circuit manufacturers throughout the United States, Asia and Europe and also provide our
customers with a full range of support from advanced process and product applications knowledge to
complete round-the-clock service support.
Value of Ownership
Our business model is based on our Value of Ownership concept that consists of the following:
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offering ongoing improvements in productivity, imaging and overlay by
introducing advanced technology based on modular platforms; |
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providing customer services that ensure rapid, efficient installation
and superior on-site support and training to optimize manufacturing
processes and improve productivity; |
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maintaining appropriate levels of research and development to offer
the most advanced technology suitable for high-throughput and low-cost
volume production at the earliest possible date; |
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enhancing the capabilities of the installed base through ongoing field
upgrades of key value drivers (productivity, imaging and overlay)
based on further technology developments; |
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reducing the cycle time between customer order of a system and the use
of that system in volume production on-site; |
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expanding operational flexibility in research and manufacturing by
reinforcing strategic alliances with world-class partners; |
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improving the reliability and uptime of our installed system base; and |
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providing re-marketing services that effectively increase residual
value by extending the life of equipment. |
Market and Technology Overview
The worldwide electronics and computer industries have experienced significant growth since the
commercialization of ICs in the 1960s, largely due to the continual reduction in the cost per
function performed by ICs. Improvement in the design and manufacture of ICs with higher circuit or
packing densities has resulted in smaller and lower cost ICs capable of performing a greater
number of functions at higher speeds and with lower power consumption. We believe that these
long-term trends will continue for the foreseeable future and will be accompanied by a continuing
demand, subject to ongoing cyclical variations, for production equipment that can accurately
produce advanced ICs in high volumes at the lowest possible cost. Photolithography is used to print
complex circuit patterns onto the wafers that are the primary raw material for ICs and is one of
the most critical and expensive steps in their fabrication. It is therefore a significant focus of
the IC industrys demand for cost-efficient enhancements to production technology.
We primarily design, manufacture, market and service semiconductor processing equipment used in the
fabrication of integrated circuits. Our photolithography equipment includes Step & Scan systems,
which combine stepper technology with a photoscanning method.
Our TWINSCAN product platform was introduced in July 2000 and leverages the production-proven
elements from our PAS 5500 product family to address the industry shift toward larger (300
millimeter) wafers. The TWINSCAN platform became in 2003 the vehicle to introduce improved
resolution products both for 300 millimeter and 200 millimeter wafer size factories. Our PAS 5500
product family, which supports a maximum wafer size of 200 millimeters in diameter, comprises
advanced wafer steppers and Step & Scan systems suitable for i-line and deep UV (including
248-nanometer (nm) and 193-nm wavelengths) processing of wafers.
In 2005, we intensified our research and development on immersion lithography as we believe this is
the most probable solution to lower the cost per wafer and increase resolution. During the second
half of 2004, we delivered two pre-production immersion systems to research institutes and one to a
commercial customer. In 2005 we delivered 10 immersion tools to commercial customers. One tool is
delivered for evaluation purposes and one tools revenue is deferred as the ownership of the system
will only transfer to the customer in 2006.
We are also performing research & development on maskless lithography. Maskless lithography is one
of the possible solutions to manage escalating mask cost, which is becoming a dominant factor in
bringing new semiconductor designs to market for
13
advanced technology nodes. Designs resulting in small quantities of wafers produced, designs with
many changes or designs that require a fast time-to-market will particularly benefit from this
technology. In December 2004, Micronic Laser Systems AB (Micronic) and ASML agreed to a license
agreement relating to the development of optical maskless lithography technology for semiconductor
manufacturing.
Furthermore, we are currently performing research & development on EUV. EUV combines a wavelength
of 13.5 nanometers and a lens system with an initial numerical aperture of 0.25 to provide imaging
at a resolution of 40 nm. EUV will provide a large process window compared to todays approaches
and will be a multi-generation lithography solution. We are currently in the integration phase of
the first prototype systems which are expected to be delivered to research institutes in the first
half of 2006. The timing of the introduction of systems for volume applications is not clear at the
moment.
Products
We develop lithography systems for the semiconductor industry and related technologies. Our product
development strategy focuses on the development of product families based on a modular, upgradeable
design.
Our older PAS 2500 and PAS 5000 families are suitable for g-line and i-line processing of wafers up
to 150 millimeters in diameter and are employed in manufacturing environments and in special
applications for which design resolutions no more precise than 0.5 microns are required.
Our PAS 5500 product family comprises advanced wafer steppers and Step & Scan systems suitable for
i-line and deep UV processing of wafers up to 200 millimeter in diameter. In mid-1997, we
introduced the PAS 5500 Step & Scan systems with improved resolution and overlay. Since then, we
have further developed and expanded this Step & Scan family. This modular upgradeable design
philosophy has been further refined and applied in the design of our most advanced product family,
the TWINSCAN platform, which is the basis for our current and next generation Step & Scan systems,
producing wafers up to 300 millimeter in diameter and capable of extending shrink technology beyond
70 nanometers.
For processing of 200 millimeter wafers using step-and-scan technology, PAS 5500 series is the most
suitable product range. We offer PAS 5500 systems based on i-line technology (using light with a
365-nm wavelength), KrF (using light with a 248-nm wavelength) and ArF (using light with a 193-nm
wavelength).
For processing of 300 millimeter wafers, we offer TWINSCAN systems based on i-line, KrF and ArF
technology. In 2003, we introduced the second generation of TWINSCAN systems based on the XT body
with a reduced footprint and a 50 percent reduction in the main production area occupied by our
system. In 2004, we shipped our first lithography systems based on immersion technology. These
shipments marked the delivery of the industrys first high productivity immersion scanners for
production applications. We have a unique competitive advantage in immersion techniques due, in
part, to the dual-stage design of the TWINSCAN system. Wafer measurement including focus and
overlay is completed on the dry stage while the imaging process, using water applied between the
wafer and the lens, is completed on the wet stage. The dual-stage advantage of TWINSCAN systems
enables our customers to gain the process enhancements of immersion and to continue with familiar
and proven metrology technology.
In July 2005, we announced the TWINSCAN XT:1700i, a 193-nm immersion scanner capable of imaging at
the 45-nm node in volume production environments. This new system has an Numerical Aperture (NA)
of 1.2, substantially higher than the XT:1400 with NA of 0.93, breaking the perceived,
pre-immersion barrier of 1.0. We expect to execute on volume production ramp in the second quarter
of 2006. The XT:1700i allows chipmakers to improve resolution by 30 percent. We believe this new
system will increase the value of each wafer since better resolution will likely result in more
chips being produced per wafer or more functionality per chip. Additionally, we believe the
XT:1700i has the highest throughput currently available, 122 wafers per hour, for the 45-nm node.
We also continually develop and sell a range of product options and enhancements designed to
increase productivity and to optimize value of ownership over the entire life of our systems.
Current ASML Lithography product portfolio of Steppers and Step & Scan Systems
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Feature Size
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Wavelength of Light |
Feature size =
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Wavelength = length of light going through projection lens; |
Resolution =
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The shorter the wavelength, the smaller the line width |
14
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Size of line |
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and the finer the pattern on the IC |
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width in Nanometer |
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365 nm (i-line)
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248 nm (KrF)
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193 nm (ArF) |
700
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PAS 5500/22 |
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350
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PAS 5500/125 |
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300
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PAS 5500/275 |
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280
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PAS 5500/400 |
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AT:400 |
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XT:400 and XT:450 |
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150
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PAS 5500/350 |
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130
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PAS 5500/750 |
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AT:750 and XT:760 |
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120
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PAS 5500/800 |
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110
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PAS 5500/850 and AT:850 |
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100
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XT:860 |
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100
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PAS 5500/1100 and AT:1100 |
90
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PAS 5500/1150 and AT:1150 |
80
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AT:1200 |
70
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XT:1250 and XT:1250i |
65
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XT:1400 and XT:1400i |
45
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XT:1700i |
Notes:
1000 nanometer = 1 micron (µ) = 0.001 millimeter (mm) = one
millionth of a meter
PAS 5500/22/125/250/350 = Stepper system with wafer size of 200 mm
PAS 5500/400 and up = Step & Scan system with wafer size of 200
mm
AT and XT = TWINSCAN systems with wafer sizes of 200 and 300 mm
This table does not include the older products sold on the PAS 2500 and PAS 5000 platforms.
Sales and Customer Support
We market and sell our products principally through our direct sales staff.
We support our customers with applications, service and technical support. Our field engineers and
applications, service and technical support specialists are based throughout the United States,
Europe and Asia.
Customers and Geographic Markets
In 2005, sales to one customer accounted for EUR 609 million, or 24 percent of net sales, compared
to EUR 434 million, or 18 percent of net sales, in 2004. We expect that sales to relatively few
customers will continue to account for a high percentage of our net sales in any particular year
for the foreseeable future. See Item 3.D. Risk Factors A High Percentage of Our Net Sales is
Derived From a Few Customers and Note 16 to our consolidated financial statements for a breakdown
of our sales by geographic location.
Manufacturing, Logistics and Suppliers
Our business model is based on outsourcing a significant part of the components and modules that
comprise our lithography systems, working in partnership with suppliers from all over the world.
Our manufacturing activities comprise the assembly, fine tuning and testing of a finished system
from components and subassemblies that are manufactured to our specifications by third parties and
by us and the testing of those components and subassemblies. All of our manufacturing activities
(subassembly, final assembly and system testing) are performed in one clean room facility located
in Veldhoven, the Netherlands, and one clean room facility in Wilton, Connecticut. We procure
stepper and scanner system components and subassemblies from a single supplier or a limited group
of suppliers in order to ensure overall quality and timeliness of delivery. We jointly operate a
formal strategy with suppliers known as value sourcing that is based on competitive performance in
quality, logistics, technology and total cost. The essence of value sourcing is to maintain a
supply base that is world class, globally competitive and globally present.
Our value sourcing strategy is based on the following strategic principles:
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maintaining long-term relationships with our suppliers; |
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sharing risks and rewards with our suppliers; |
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dual sourcing of knowledge, globally, together with our suppliers; and |
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single, dual or multiple sourcing of products, where possible or required. |
Value sourcing aligns the actual supplier performance to our requirements on quality, logistics,
technology and total costs.
15
Zeiss is our sole external supplier of main optical systems and one of the suppliers of other
optical components. Total purchased value from Zeiss accounted for between 20 percent and 50
percent of our cost of goods sold, varying by product type in 2005, and which collectively
accounted for approximately 29 percent of our aggregate cost of goods sold in 2005.
From time to time, the number of systems we have been able to produce has been limited by the
capacity of Zeiss to provide us with lenses and optical components. Zeiss currently is capable of
manufacturing a limited number of lenses and optical components for our stepper and scanner systems
and is highly dependent on its manufacturing and testing facilities in Oberkochen and Wetzlar,
Germany, and their suppliers. During 2005, we were not constrained by the number of lenses that
Zeiss could produce.
If Zeiss is unable to maintain or increase production levels, we might not be able to respond to
customer demand. As a result, our relationships with current and prospective customers could be
harmed, which would have a material adverse effect on our business, financial condition and results
of operations.
Our relationship with Zeiss is structured as a strategic alliance pursuant to several agreements
from 1997 onwards. These agreements define an exclusive framework for cooperation in all areas of
our joint business. The partnership between ASML and Zeiss is focused on continuous improvement of
operational excellence.
Pursuant to these agreements, ASML and Zeiss will continue their strategic alliance until either
party provides at least three years notice of its intent to terminate. Although we believe such an
outcome is unlikely, if Zeiss were to terminate its relationship with us, or if Zeiss were unable
to produce or develop over a prolonged period, we would effectively cease to be able to conduct our
business.
In addition to Zeiss, we rely also on other outside vendors for the components and subassemblies
used in our systems, each of which is obtained from a single supplier or a limited number of
suppliers. Our reliance on a limited group of suppliers involves several risks, including a
potential inability to obtain an adequate supply of required components and the risk of untimely
delivery of these components and subassemblies. See Item 3.D. Risk Factors The Number of
Systems We Can Produce is Limited by Our Dependence on a Limited Number of Suppliers as Key
Components.
Research and Development
The semiconductor manufacturing industry is subject to rapid technological changes and new product
introductions and enhancements. We believe that continued and timely development and introduction
of new and enhanced systems are essential for us to maintain our competitive position. To meet this
ongoing requirement, we have established sophisticated development centers in the Netherlands and
the United States and, in addition, work jointly with independent research centers in
nano-electronics and nano-technology. Those research centers focus on the next generations of chips
and systems.
We have historically devoted a significant portion of our financial resources to research and
development programs and we expect to continue to allocate significant resources to these efforts.
We also apply for subsidy payments in connection with specific development projects under programs
sponsored by the Netherlands government, the European Union and the U.S. government. Amounts
received under these programs generally are not required to be repaid. See our discussions of
research and development in Item 5 Operating and Financial Review and Prospects, and Note 1 to
our consolidated financial statements.
We invested EUR 348 million on research and development in continuing operations in 2005, compared
to EUR 353 million in 2004 (including a charge of EUR 49 million with respect to a cross-license
agreement entered into between ASML and Nikon) and EUR 306 million in 2003. We are also involved in
joint research and development programs with both public and private partnerships and consortiums,
involving independent research centers, leading chip manufacturers and governmental programs. We
aim to own or license, our jointly developed technology and designs of critical components.
In 2005, our research and development efforts propelled further development of the TWINSCAN
platform along with several leading edge technologies, including 248 nanometer, 193 nanometer,
immersion and EUV. The continuous drive for cost reductions has led to a significant increase in
the commonality of the different models of the TWINSCAN platform. Our research and development
activities in 2005 have also led to productivity and performance enhancements for our other product
families. In 2005, we established joint development programs with the leading track suppliers on
productivity and process integration. Moreover, we continued our research into the feasibility of
maskless technology.
16
Intellectual Property
We rely on intellectual property rights such as patents, copyrights and trade secrets to protect
our proprietary technology. We aim to obtain ownership rights on technology developed by or for us
or, alternatively, to have appropriate licensing in place with respect to such technology. However,
we face the risk that such measures will be inadequate. Intellectual property laws may not
sufficiently support our proprietary rights and our patent applications may not be granted or
construed as intended. Also, competitors may be able to develop or protect similar technology
earlier and independently.
Litigation may be necessary in order to enforce our intellectual property rights, to determine the
validity and scope of the proprietary rights of others, or to defend against claims of
infringement. Any such litigation may result in substantial costs and diversion of resources, and,
if decided unfavorably to us, could have a material adverse effect on our business, financial
condition and results of operations. We also may incur substantial licensing or settlement costs
where doing so would strengthen or expand our intellectual property rights or limit our exposure to
intellectual property claims of third parties.
Patent litigation with Nikon
From 2001 through late 2004, we were a party to a series of civil litigations and administrative
proceedings in which Nikon alleged ASMLs infringement of Nikon patents relating to
photolithography. ASML in turn filed claims against Nikon.
Pursuant to agreements executed on December 10, 2004 (effective November 12, 2004), ASML, Zeiss and
Nikon agreed to settle all pending worldwide patent litigation between the companies. The
settlement included an agreement to dismiss all pending patent litigation between the companies, an
exchange of releases, a cross-license of patents related to lithography equipment used to
manufacture semiconductor devices and payments to Nikon by ASML and Zeiss. In connection with the
settlement, ASML made an initial payment to Nikon of US$60 million (approximately EUR 49 million)
in 2004, a further required payment of US$9 million (approximately EUR 8 million) before November
12, 2005, and is obligated to make additional payments to Nikon of US $9 million each in 2006 and
2007. Zeiss made an initial payment to Nikon of US$40 million (approximately EUR 32 million) in
2004, a further required payment of US$6 million (approximately EUR 4 million) in 2005, and is
required to make additional payments to Nikon of US$6 million in each of 2006 and 2007. See Item
10.C. Material Contracts for a summary of the ASML-Nikon patent Cross-License Agreement and the
ASML-Zeiss Sublicense Agreement.
Patent litigation with Ultratech Stepper, Inc
In May 2000, Ultratech Stepper, Inc. (Ultratech) filed a lawsuit against ASML that is proceeding
in the United States District Court for the Northern District of California. Ultratech alleges that
ASML is infringing Ultratechs rights under a United States patent in connection with its
manufacture and commercialization in the U.S. of advanced photolithography equipment embodying
technology that, in particular, is used in Step & Scan equipment. Ultratechs complaint seeks
injunctive relief prohibiting future sales and damages for past sales of this equipment. Ultratech
may also seek prejudgment interest. Ultratechs complaint also seeks enhanced damages based on
alleged willful infringement. If the jury finds that ASML willfully infringed the patent, the court
has the discretion to award three times the damages.
In August 2002, the Court granted ASMLs motion for summary judgment of non-infringement, after
which Ultratech appealed this judgment to the United States Court of Appeals for the Federal
Circuit. On March 30, 2004, the Federal Circuit reversed the District Courts grant of summary
judgment and remanded the case to the District Court for determination of infringement under the
Federal Circuits new construction of one of the terms of the asserted patent.
Ultratechs patent infringement claims were tried before a jury in Oakland, California, in May and
June of 2005. On June 21, 2005 the jury unanimously determined that each of the claims of
Ultratechs patent that Ultratech asserted against ASML was invalid, and thus ASML was not liable
for patent infringement, notwithstanding the jurys finding that each of these claims was infringed
by ASML and certain of its customers. The Court entered judgment in favor of ASML following receipt
of the jury verdict.
Ultratech has filed motions with the Court seeking to overturn the jurys finding that the asserted
claims of its patent are invalid or, in the alternative, seeking a new trial. ASML has also filed
motions seeking to overturn the jurys finding that the asserted claims of Ultratechs patent are
infringed by ASML, and to establish additional bases for the invalidity of the asserted claims of
Ultratechs patent. The Court has not yet ruled on any of these motions. In the event the Court
overturns the jurys finding that the asserted claims of Ultratechs patent are invalid, orders a
new trial and ASML is found to infringe valid claims of Ultratechs patent in the new trial, or
that an appellate court overturns the jurys verdict in favor of ASML on appeal, it could result in
a damages award and substantially restrict or prohibit
17
ASMLs sales in the United States, which in turn could have a material adverse effect on the
Companys financial position and results of operations.
Competition
The semiconductor equipment industry is highly competitive. The principal elements of competition
in our markets are the technical performance characteristics of a photolithography system and the
value of ownership of that system based on its purchase price, maintenance costs, productivity and
customer service and support. In addition, we believe that an increasingly important factor
affecting our ability to compete is the strength and breadth of our portfolio of patent and other
intellectual property rights. We believe that the market for photolithography systems and the
investments required to be a significant competitor in this market have resulted in increased
competition for market share through the aggressive prosecution of patents. Our competitiveness
will increasingly depend upon our ability to protect and defend our patents, as well as our ability
to develop new and enhanced semiconductor equipment that is competitively priced and introduced on
a timely basis. See Item 3.D. Risk Factors, We Face Intense Competition.
Government Regulation
Our business is subject to direct and indirect regulation in each of the countries in which our
customers or we do business. As a result, changes in various types of regulations could affect our
business adversely. The implementation of new technological or legal requirements could impact our
products, or our manufacturing or distribution processes, and could affect the timing of product
introductions, the cost of our production, and products as well as their commercial success.
Moreover, environmental and other regulations that adversely affect the pricing of our products
could adversely affect our net sales and operating profit. The impact of these changes in
regulation could adversely affect our business even where the specific regulations do not directly
apply to us or to our products.
C. Organizational Structure
ASML Holding N.V. is a holding company that operates through its subsidiaries. Our major operating
subsidiaries, each of which is a direct wholly-owned subsidiary, are as follows:
See Exhibit 8.1 for a list of our material subsidiaries.
D. Property, Plants and Equipment
We principally obtain and operate our facilities under operating leases. However, we also own a
limited number of buildings. The book value of the buildings used in our continuing operations and
owned by ASML amounted to EUR 76 million as of December 31, 2005.
We expect capital expenditures in 2006 to range between EUR 80 million and EUR 100 million, of
which the majority will be allocated to machinery and equipment, tools and to IT hardware. See Item
4.A. History and Development of the Company, Capital Expenditures. See also Item 5.B. Liquidity
and Capital Resources and Note 9 to our consolidated financial statements.
While we anticipate continuing capital expenditures for the purpose of upgrading and, where
appropriate, incrementally expanding our facilities to accommodate new product types and
technologies, we believe that our existing facilities are sufficient to accommodate the likely
range of production volumes that we currently expect in the market for semiconductor manufacturing
equipment for the next 2 years.
Facilities in Europe
Our headquarters, applications laboratory and research and development facilities are located in
the Netherlands in a 120,000 square meter state-of-the-art facility, of which 65,000 square meters
is used as office space and 55,000 square meters is used for manufacturing and research and
development activities. We lease the majority of these facilities through long-term operating
leases that contain purchase options. Some of our office facilities at our headquarters in
Veldhoven are financed through a special purpose vehicle that is a variable interest entity. See
Item 5.E. Off-Balance Sheet Arrangements and Note 12 to our consolidated financial statements.
18
We also lease several sales and service locations across Europe.
Facilities in the United States
We maintain lithography research, development and manufacturing operations in Wilton, Connecticut
in a 27,142 square meter facility. Our American headquarters and American training facilities are
located in Tempe, Arizona in two buildings, comprising a 8,840 square meter office building space
and a 10,485 square meter training space.
We also have several sales and service locations across the United States.
Facilities in Asia
Our Asian headquarters are located in Hong Kong in a 250 square meter office space. We also have
several sales and service/training locations across Asia.
Item 4A
Unresolved Staff Comments
Not applicable.
Item 5
Operating and Financial Review and Prospects
Executive Summary
ASML is the worlds leading provider of lithography systems for the semiconductor industry,
manufacturing complex machines that are critical to the production of integrated circuits (ICs)
or chips. Headquartered in Veldhoven, the Netherlands, ASML operates globally, with activities in
Europe, the United States and Asia.
In 2005, we earned net sales of approximately EUR 2.5 billion, employed approximately 5,000
employees and operated in 14 countries and at over 50 sales and service locations.
Semiconductor equipment industry update
Historically the semiconductor industry has experienced significant growth largely due to the
continual reduction in the cost per function performed by ICs. Improvement in the design and
manufacture of ICs with higher circuit densities has resulted in smaller and cheaper ICs capable of
performing a greater number of functions at higher speed with lower power consumption. We believe
that these long term trends will continue for the foreseeable future and will be accompanied by a
continuing demand for production equipment that can accurately produce advanced ICs in high volumes
at the lowest possible cost.
Lithography equipment is used to imprint complex circuit patterns onto silicon wafers, which are
the primary raw material for ICs. The imprinting process is one of the most critical and expensive
steps in wafer fabrication. Lithography equipment is therefore a significant focus of the IC
Industrys demand for cost efficient enhancements to production technology.
The costs to develop new lithography equipment are very high. Accordingly, the lithography
equipment industry is characterized by the dominance of a few primary suppliers: ASML, Nikon and
Canon. ASML is the worlds leading provider of lithography equipment with a market share of 55-60
percent in 2005 based on revenue.
Nikon and Canon are the main suppliers in the Japanese market, which accounts for a significant
portion of worldwide semiconductor production. This market historically has been difficult for
non-Japanese companies to penetrate and ASML has sold only a limited number of systems to Japanese
customers. In 2004, ASML increased its service, sales and marketing operations in Japan to serve
its growing regional customer base. In 2005, we continued our long
term market development strategy in Japan, and we now have six
customers.
The lithography equipment industry has been highly cyclical. Total lithography equipment shipped by
the industry as a whole in the five years ended December 31, 2004 is set forth in the following
table:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
|
|
Total units shipped |
|
1,182 |
|
789 |
|
413 |
|
456 |
|
694 |
Total Value (in Millions USD) |
|
5,321 |
|
3,792 |
|
2,817 |
|
3,229 |
|
5,268 |
|
|
|
(Source: Gartner Dataquest)
19
ASML operations update on key performance indicators
In 2005, we achieved net sales of EUR 2,529 million, comprising the shipment of 196 systems (156
new and 40 refurbished). This includes net sales in field and service options of EUR 301 million.
2004 showed net sales of EUR 2,465 million, comprising shipment of 282 systems (216 new and 66
refurbished) and net sales in field and service options of EUR 290 million.
The ASP in 2005 was EUR 11.4 million, an increase of 48 percent over the ASP in 2004 of EUR 7.7
million. The increase in ASP was mainly offset by a decrease in the number of systems shipped from
282 in 2004 to 196 in 2005, a decrease of 30 percent. This increase in ASP and decrease in number
of systems shipped reflects the change in nature of market demand from capacity driven in 2004 to
technology driven in 2005. Our customers shifted from 248-nm KrF production capacity demand in 2004
to 193-nm ArF leading edge technology demand in 2005.
In 2005, we generated operating income of EUR 449 million, representing 17.8 percent of net sales.
In 2004, operating income amounted to EUR 379 million, representing 15.4 percent of net sales. This
increase in operating income of EUR 70 million is due to an increase in gross profit of EUR 68
million and a decrease in operating expenses of EUR 2 million.
The increase in gross profit of EUR 68 million is mainly due to higher ASPs and lower cost of goods
reflecting he results of our continuous cost of goods reduction program partially offset by a
change in product mix. Our gross margin in 2005 was 38.5% compared with 36.7% in 2004.
The decrease in operating expenses of EUR 2 million in 2005 compared to 2004 is mainly due to a
decrease in research and development expenses by EUR 7 million and a decrease in restructuring
credits of EUR 6 million. Non recurring research and development expenses of EUR 49 million in 2004
relating to the patent litigation settlement with Nikon, were mainly offset by an increase in
regular research and development expenses of EUR 42 million or 15 percent in 2005 reflecting our
decision to accelerate investment in technology leadership.
Net income in 2005 was EUR 311 million, representing EUR 0.64 per ordinary share compared with net
income in 2004 of 235 million, representing EUR 0.49 per ordinary share.
ASML generated EUR 676 million of cash in 2005, which increased its level of cash and cash
equivalents to EUR 1,905 million as of December 31, 2005.
As of December 31, 2005, our order backlog was valued at EUR 1,434 million and included 95 systems
with an ASP of EUR 15.1 million. As of December 31, 2004 the order backlog was valued at EUR 1,691
million, which included 131 systems with an ASP of EUR 12.9 million. The increase in ASP of 17
percent reflects the high content of leading edge technology in the backlog.
The following table presents the key performance indicators used by our Board of Management and
senior management to measure performance in our monthly operational review meetings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
2005 |
|
|
|
|
|
(in millions) |
|
EUR |
|
|
|
|
|
|
EUR |
|
|
|
|
|
|
EUR |
|
|
|
|
|
|
Growth |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems shipped number |
|
|
169 |
|
|
|
|
|
|
|
282 |
|
|
|
|
|
|
|
196 |
|
|
|
|
|
Systems shipped value |
|
|
1,279 |
|
|
|
|
|
|
|
2,175 |
|
|
|
|
|
|
|
2,228 |
|
|
|
|
|
Systems shipped ASP |
|
|
7.6 |
|
|
|
|
|
|
|
7.7 |
|
|
|
|
|
|
|
11.4 |
|
|
|
|
|
Systems backlog number |
|
|
124 |
|
|
|
|
|
|
|
131 |
|
|
|
|
|
|
|
95 |
|
|
|
|
|
Systems backlog value |
|
|
993 |
|
|
|
|
|
|
|
1,691 |
|
|
|
|
|
|
|
1,434 |
|
|
|
|
|
Systems backlog ASP |
|
|
8.0 |
|
|
|
|
|
|
|
12.9 |
|
|
|
|
|
|
|
15.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Profitability |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
|
1,543 |
|
|
|
|
|
|
|
2,465 |
|
|
|
|
|
|
|
2,529 |
|
|
|
|
|
Gross profit |
|
|
369 |
|
|
|
23.9 |
% |
|
|
906 |
|
|
|
36.7 |
% |
|
|
974 |
|
|
|
38.5 |
% |
R&D1 |
|
|
287 |
|
|
|
|
|
|
|
331 |
|
|
|
|
|
|
|
324 |
|
|
|
|
|
SG&A |
|
|
213 |
|
|
|
|
|
|
|
202 |
|
|
|
|
|
|
|
201 |
|
|
|
|
|
Restructuring |
|
|
24 |
|
|
|
|
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(155 |
) |
|
|
(10.0 |
%) |
|
|
379 |
|
|
|
15.4 |
% |
|
|
449 |
|
|
|
17.8 |
% |
Net income (loss) 1 |
|
|
(160 |
) |
|
|
(10.4 |
%) |
|
|
235 |
|
|
|
9.6 |
% |
|
|
311 |
|
|
|
12.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
1,028 |
|
|
|
|
|
|
|
1,228 |
|
|
|
|
|
|
|
1,905 |
|
|
|
|
|
Net cash2 |
|
|
185 |
|
|
|
|
|
|
|
425 |
|
|
|
|
|
|
|
1,037 |
|
|
|
|
|
Operating cash flow |
|
|
545 |
|
|
|
|
|
|
|
251 |
|
|
|
|
|
|
|
711 |
|
|
|
|
|
20
|
|
|
1 |
|
ASML, Nikon Corporation and Carl Zeiss SMT AG have agreed to a
comprehensive settlement of legal proceedings and cross-license of patents related to lithography
equipment. This agreement had the following effects on ASMLs results for the twelve months ended
December 31, 2004 (i) an increase of EUR 49 million in our Research and Development costs and
consequently a decrease in operating income; (ii) a decrease of EUR 33 million in net income.
|
|
2 |
|
Net cash is calculated as the difference between cash and cash equivalents and
convertible subordinated notes. |
ASML financial performance
We strive to achieve an average operating income to sales of 15 percent over the industrys
business cycle with 5-10 percent at the downturn point and 20-25 percent at the upturn point. In
2005, we generated net sales of EUR 2,529 million and operating income of EUR 449 million or 17.8
percent of net sales. We believe these results were mainly driven by our strong market position in
2005 as well as our continuous investment in technology leadership and operational excellence.
Investment in technological leadership
ASML is the worlds leading provider of lithography equipment with a market share of 55-60 percent
in 2005 based on net sales. ASML sustained global product leadership through its TWINSCAN platform,
the industrys only dual-stage wafer imaging system that allows exposure of one wafer while
simultaneously measuring another wafer. In 2005, we shipped a total of 129 TWINSCAN systems,
including 65 ArF systems.
We further accelerated our investment in technology leadership in 2005 through our next generation
TWINSCAN systems based on immersion technology. Research and development expenses in 2005 were EUR
324 million, an increase of EUR 42 million compared to 2004 (excluding a charge of EUR 49 million
in 2004 with respect to a croslicense agreement entered into between ASML and Nikon). We believe
immersion technology will improve lithography system resolution by 30 percent and that this
technology will result in more functionality and increased value per chip. The new ASML TWINSCAN
XT:1700i system is a dual stage immersion scanner with the industrys highest numerical aperture of
1.2 which is capable of volume chip production at a resolution of 45-nm node using a 193-nm
wavelength light source. Additionally, the XT:1700i a throughput of 122 wafers per hour which is
the highest wafer throughput currently available for this node.
Operational excellence
We continue to implement improvement programs aimed at a year-on-year cost of ownership reduction
and cycle time reduction of our systems. The cycle time of our TWINSCAN systems has been reduced by
more than 50 percent at the end of 2005 compared with the cycle time at its introduction in 2001.
We have also implemented several cost reduction and fixed to variable cost conversion programs in
the past few years to further lower our break-even level, which is the minimum number of new
lithography systems that have to be sold in a period to achieve positive net income in that period.
We further lowered our break-even level to below 130 systems on an annual basis, depending upon our
product mix, and are confident that with this break-even level we are well positioned to maintain
profitability even in a period of industry downturn.
A. Operating Results
Critical accounting policies using significant estimates
Our discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The
preparation of our financial statements requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, net sales and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those
related to revenue recognition, long-term service contracts, warranty and installation obligations,
tangible assets, intangible assets, inventories, bad debt provisions, restructuring provisions,
contingencies and litigation and income taxes. We base our estimates on historical experience and
on various other assumptions that we believe to be reasonable under the circumstances. While we
regularly evaluate our estimates and assumptions, actual results may differ from these estimates if
these assumptions prove incorrect. To the extent there are material differences between actual
results and these estimates, our future results of operations could be materially and adversely
affected. We believe that the accounting policies below require us to make significant judgments
and estimates in the preparation of our consolidated financial statements.
Revenue recognition
In general, we recognize the revenue from the sale of a system upon shipment and the revenue from
the installation of a system upon completion of that installation at the customer site. Each system
undergoes, prior to shipment, a Factory Acceptance Test
21
in our clean room facilities, effectively
replicating the operating conditions that will be present on the customers site, in order to
verify whether the system will meet its standard specifications and any additional technical and
performance criteria agreed with the customer. A system is shipped, and revenue recognized, only
after all specifications are met and customer sign-off is received or waived. Although each
systems performance is re-tested upon installation at the customers site, we have never failed to
successfully complete installation of a system at a customer premises.
At the end of 2000, we departed from our standard revenue recognition policy in connection with the
introduction of our TWINSCAN family of lithography systems. Although each TWINSCAN system
successfully completed a Factory Acceptance Test prior to shipment, we considered the TWINSCAN to
constitute new technology for which we did not have sufficient evidence to conclude that (i)
installation at the customer site would occur consistently within a pre-determined time period
comparable to our other systems; and (ii) upon installation, the system would perform within the
specifications for which customer sign-off had been obtained in the pre-shipment Factory Acceptance
Test. Consequently, we initially deferred all revenue with respect to each TWINSCAN system until
installation and acceptance of the system at the customers premises had been completed. At
December 31, 2001, this resulted in the deferral of revenue totaling EUR 138 million in respect of
13 TWINSCAN systems that had been shipped but for which installation had not yet been completed.
All of this revenue was recognized during the succeeding year. By the end of 2002, however, we had
successfully shipped and installed a total of 70 TWINSCAN systems, which provided us with
sufficient evidence to conclude that installation of TWINSCAN systems would occur consistently
within a predetermined time period and that the performance of these systems would not reasonably
be different from that exhibited in the pre-shipment Factory Acceptance Test. As a result, at the
end of 2002, we commenced recognizing revenues from TWINSCAN systems upon shipment. Therefore, no
revenue was deferred pending installation of a TWINSCAN system (or any other ASML system).
In our annual report on Form 20-F for the year ended December 31, 2003, we disclosed that whether
we would consider immersion as new technology or proven technology would depend on our progress in
immersion lithography technology during 2004. During 2004 the engineering and design obstacles
associated with immersion technology were overcome in rapid fashion through the development of
add-on modules to existing models within ASMLs TWINSCAN family of systems. After the development
of the immersion tool was completed, we determined that the addition of immersion features to its
existing TWINSCAN systems did not constitute new technology, since it is a straightforward
enhancement to existing technology.
We anticipate that, in connection with future introductions of new technology, we will initially
defer revenue recognition until completion of installation and acceptance of the new technology at
customer premises. This deferral would continue until we could conclude that installation of the
technology in question would occur consistently within a predetermined time period and that the
performance of the new technology would not reasonably be different from that exhibited in the
pre-shipment Factory Acceptance Test. Any such deferral of revenues, however, could have a material
effect on our results of operations for the fiscal period in which the deferral occurred and on the
succeeding fiscal period.
A portion of our revenue is derived from contractual arrangements with our customers that have
multiple elements, such as installation services and prepaid service contracts. For these
arrangements, the revenue relating to the undelivered elements is deferred at estimated fair value
until delivery of the deferred elements. The fair value of installation services provided to our
customers is initially deferred and is recognized when the installation is completed. The deferred
revenue balance from installation services amounted to approximately EUR 9.3 million at December
31, 2005. Sales from service contracts are recognized when performed. Revenue from prepaid service
contracts is recognized over the term of the contract. As of December 31, 2005, the deferred
revenue balance on prepaid service contracts (including training) amounted to approximately EUR
109.8 million.
Warranty
We provide standard warranty coverage on our systems for 12 months, providing labor and parts
necessary to repair systems during the warranty period. The estimated warranty costs are accounted
for by accruing these costs for each system upon recognition of the system sale. The estimated
warranty cost is based on historical product performance and field expenses. Based upon historical
service records, we calculate the charge of average service hours and parts per system to determine
the estimated warranty charge. We update these estimated charges periodically. The actual product
performance and/or field expense profiles may differ, and in those cases we adjust our warranty
reserves accordingly. Future warranty expenses may exceed our estimates, which could lead to an
increase in our cost of sales.
Evaluation of long-lived assets for impairment and costs associated with exit or disposal
activities
22
We evaluate our long-lived assets, including intellectual property, for impairment whenever events
or changes in circumstances indicate that the carrying amount of those assets may not be
recoverable. If an impairment test is warranted, we assess whether the undiscounted cash flows
expected to be generated by our long-lived assets exceed their carrying value. If this assessment
indicates that the long-lived assets are impaired, the assets are written down to their fair value.
These assessments are based on our judgment, which includes the estimate of future cash flows from
long-lived assets and the estimate of the fair value of an asset if it is impaired. In determining
impairments of long-lived assets, we must make judgments and estimates to determine whether the
cash flows generated by those assets are less than their carrying value. These estimates are based
on financial plans updated with the latest available projections of the semiconductor market
evolution, our sales expectations and our costs evaluation, and are consistent with the plans and
estimates that we use to manage our business. It is possible, however, that the outcome of the
plans and estimates used may differ, and future adverse changes in market conditions, may require
impairment of certain long-lived assets. During 2005, we recorded impairment charges of
EUR 8.4 million relating to machinery and equipment as the carrying amounts of these assets were
not recoverable, of which EUR 1.7 million is recorded in research and development expenses and EUR
6.7 million in cost of sales. In addition, during 2005, we recorded a charge of approximately EUR
1.9 million relating to the fact that we ceased using certain of our facilities in Tempe, United
States. The facility exit charges included estimated future obligations for non-cancelable lease
payments (net of estimated sublease income of EUR 1.4 million that could be reasonably obtained for
these facilities).
See Notes 2, 3 and 9 to our consolidated financial statements.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market value. Cost
includes net prices paid for materials purchased, charges for freight and customs duties,
production labor cost and factory overhead. Inventory provisions are made for slow moving, obsolete
or unsaleable inventory and are reviewed on a quarterly basis. Our methodology involves matching
our on-hand and on-order inventory with our manufacturing forecast. In determining inventory
provisions we evaluate inventory in excess of our forecasted needs on both technological and
economical criteria and take appropriate provisions to reflect the risk of obsolescence. This
methodology is significantly affected by our forecasted needs for inventory. If actual demand or
usage were to be lower than estimated, additional inventory provisions for excess or obsolete
inventory may be required, which could have a material adverse effect on our business, financial
condition and results of operations. See Note 6 to our consolidated financial statements.
Trade Receivables
A majority of ASMLs trade receivables are derived from sales to large multinational semiconductor
manufacturers throughout the world. In order to monitor potential credit losses, ASML performs
ongoing credit evaluations of its customers financial condition. An allowance for doubtful
accounts is maintained for potential credit losses based upon managements assessment of the
expected collectibility of all accounts receivable. The allowance for doubtful accounts is reviewed
periodically to assess the adequacy of the allowance. We take into consideration (i) any
circumstances of which we are aware regarding a customers inability to meet its financial
obligations; and (ii) our judgments as to potential prevailing economic conditions in the industry
and their potential impact on the Companys customers. Where we deem it prudent to do so, we may
require some form of credit enhancement, such as a letter of credit or bank guarantee, before
shipping systems to a customer that presents a credit risk. ASML has not incurred any material
accounts receivable credit losses during the past three years. However, we sell a substantial
number of systems to a limited number of customers. ASMLs three largest customers accounted for
49% of accounts receivable at December 31, 2005, compared to 38% at December 31, 2004. An
unanticipated business failure of one of ASMLs main customers could result in a substantial credit
loss in respect to amounts owed to the Company by that customer, which could adversely affect
ASMLs results of operations and financial condition. See Note 19 to our consolidated financial
statements.
Restructuring
ASML applies the criteria defined in Statement of Financial Accounting Standards (SFAS) No. 146,
Accounting for Costs Associated with Exit or Disposal Activities and SFAS No. 112, Employers
Accounting for Postemployment Benefits, in order to determine when a liability for restructuring
or exit costs should be recognized.
With respect to employee termination costs, we apply SFAS No. 146 (effective since January 1, 2003)
in the case of benefit arrangements that, in substance, do not constitute an ongoing benefit
arrangement. ASML applies SFAS No. 112 when termination
benefits are provided under an ongoing benefit arrangement. SFAS No. 146 provides that a liability
for a cost associated with an exit or disposal activity that does not constitute an ongoing benefit
arrangement shall be recognized and measured initially
23
at its fair value in the period in which the
liability is incurred; that is when a detailed exit or disposal plan exists, has been committed to
by management and has been communicated to the employees. SFAS No. 112 provides that a liability
for termination benefits provided under an ongoing benefit arrangement covered by SFAS No. 112
shall be recognized when the likelihood of future settlement is probable and can be reasonably
estimated. As a result, whether an employee termination plan constitutes an ongoing benefit
arrangement or not, and accordingly, whether SFAS No. 146 or SFAS No. 112 is applied, will affect
the timing of recognition of employee termination costs, as well as the amounts recognized. In
2003, ASML announced workforce reductions of approximately 550 positions worldwide due to the
continuing downturn in the semiconductor equipment industry. During 2003, ASML recorded a provision
of EUR 15.3 million as an ongoing benefit arrangement. The amount of the provision was based upon
severance arrangements agreed with our Works Council in the Netherlands for the previous workforce
reductions announced in December 2002. ASMLs Board of Management and ASMLs Dutch Works Council
then commenced a joint study on implementing these workforce reductions in the Netherlands, which
delayed the workforce reductions until the beginning of 2004. Thereafter, in response to a sharp
improvement in market conditions during 2004, we decreased the reductions to approximately 300
positions worldwide, of which 150 were contract employees with limited rights upon termination. As
a result, in 2004 we recorded a restructuring credit of EUR 12.1 million, EUR 3.8 million of which
was recorded in cost of sales and EUR 8.3 million of which was recorded under restructuring
expenses.
Other exit costs include purchase and other commitments to be settled or fulfilled. These costs are
estimated based on expected settlement fees and committed payments, taking into account future
potential benefits, if any, from those commitments.
ASML applies the criteria defined in SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities and SFAS No. 112, Employers Accounting for Postemployment Benefits, in
order to determine when a liability for restructuring or exit costs should be recognized.
Contingencies and litigation
As of December 31, 2003, 2004 and 2005, ASML was party to various legal proceedings generally
incidental to its business, as disclosed in Note 14 to the consolidated statements. In connection
with these proceedings and claims, ASMLs management evaluated, based on the relevant facts and
legal principles, the likelihood of an unfavorable outcome and whether the amount of the loss could
be reasonably estimated. In each case, management determined that either a loss was not probable or
was not reasonably estimable. As a result, no estimated losses were recorded as a charge to its
statement of operations in 2003, 2004 and 2005. Significant subjective judgments were required in
these evaluations, including judgments regarding the validity of asserted claims and the likely
outcome of legal and administrative proceedings. The outcome of these proceedings, however, is
subject to a number of factors beyond ASMLs control, most notably the uncertainty associated with
predicting decisions by courts and administrative agencies. In addition, estimates of the potential
costs associated with legal 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, ASML may agree to settle
or to terminate a claim or proceeding in which it believes it would ultimately prevail where it
believes that doing so, when taken together with other relevant commercial considerations, is more
cost-effective than engaging in an expensive and protracted litigation, the outcome of which is
uncertain. Such a decision occurred when ASML determined to enter into a cross-license agreement as
an alternative to continuing its intellectual property dispute with Nikon. See Item 10.C. Material
Contracts for a summary of the Nikon-ASML Cross License Agreement and the ASML/Zeiss Sublicense
Agreement.
Income tax
We operate in various tax jurisdictions in the United States, Europe and Asia and must comply with
the tax laws of each of these jurisdictions.
We use the asset and liability method in accounting for income taxes. Under this method, deferred
tax assets and liabilities are recognized for the tax effect of incurred net operating losses and
for tax consequences attributable to differences between the balance sheet carrying amounts of
existing assets and liabilities and their respective tax bases. If it is more likely than not that
the carrying amounts of deferred tax assets will not be realized, a valuation allowance will be
recorded to reduce the carrying amounts of those assets.
In 2005, we assessed our ability to realize our deferred tax assets resulting from net operating
loss carry-forwards. The total amount of loss carry-forwards as of December 31, 2005 was EUR 370
million, which resides completely with ASML US Inc. We believe that it is more likely than not that
all losses will be offset by future taxable
income before the Companys ability to utilize those losses expires. This analysis takes into
account the Companys projected future taxable income from operations, possible tax planning
alternatives available to the Company, and a realignment of
24
group assets that the Company effected
during the period 2001 through 2003 that included the transfer of certain tangible and intangible
assets of ASML US Inc. to ASML Netherlands B.V. The value of the assets transferred is expected to
result in additional income to ASML US, Inc., which we believe will, more likely than not, be
sufficient to absorb the net operating losses that ASML US Inc. has incurred, prior to the expiry
of those losses. In order to determine with certainty the tax consequences and value of this asset
transfer, in 2002 ASML requested a bilateral advance pricing agreement (APA) from the U.S. and
Netherlands tax authorities. Since December 2002, management has held numerous meetings with
representatives of those authorities. The most recent meeting with the U.S. and Netherlands tax
authorities took place in December 2005. Based on these meetings, and feedback from both these
authorities, ASML is confident that ASMLs APA request will be successful. The specific timing for
completion of the APA remains in the control of those tax authorities. See Note 15 to our
consolidated financial statements.
Business strategy
Our business strategy is to provide superior value of ownership for our customers while ASML
achieves top financial performance. We implement this strategy through customer focus, technology
leadership and operational excellence.
Customer focus
We satisfy different types of chipmakers by customizing our products to provide premium value for
all market segments, including memory, foundries or made-to-order chip contractors, and integrated
device manufacturers.
Of the top-20 chipmakers worldwide, in terms of semiconductor capital expenditure, 17 are customers
of ASML. We plan to solidify our position in this segment through superior execution. We also have
a significant market share of customers below the top-20, and we strive for continued growth in
this segment.
Japan has historically been dominated by our competitors. In 2005, we continued our long term
market development strategy in Japan, and we now have 6 customers.
Technology leadership
Our product range for steppers and advanced Step & Scan systems spans all the industrys current
wavelengths for both 200- and 300-millimeter wafers.
Since 2000, we offer the industrys only dual-stage wafer imaging platform called TWINSCAN
which allows exposure of one wafer while simultaneously measuring another wafer. Customers have
embraced our technology platform and, in 2005, we installed our 300th TWINSCAN system.
In 2005, we introduced the industrys highest numerical aperture (NA of 0.93) dry and wet family of
tools, the XT:1400. We also announced the first immersion system for volume production at 45-nm
circuit line width, the TWINSCAN XT:1700i, a 193-nm wavelength system expected to be ready for
volume production in the second quarter of 2006. The NA of the new system increased from 0.93 to
1.20. A higher NA number corresponds with a higher resolution which facilitates shrinking circuit
line widths further on silicon wafers.
ASML believes that EUV technology represents a multi-generation lithography solution. We are
preparing the first two EUV alpha demo tools. They are expected to be shipped in 2006.
For a market and technology overview and further information about ASML products, see Item 4.B.
Business Overview.
Operational excellence
We strive to continue our business success based on our technology leadership by continuing to
improve our operational excellence, including reduction in lead time while improving our cost
competitiveness.
Our strategy includes outsourcing the majority of components and subassemblies that make up our
lithography products. We work in partnership with suppliers, jointly operating a strategy known as
value sourcing, based on quality, logistics, technology and total cost. Through value sourcing, we
strive to attain flexibility and cost savings from our suppliers thanks to mutual commitment,
shared risk and reward. Value sourcing also allows the necessary flexibility to adapt to the
cyclicality of the world market for semiconductor lithography systems.
We strive to continuously improve efficiency in our own fixed and variable costs, and to strengthen
our capability to generate cash. We seek to improve efficiency by
continuously reducing cost of goods and increasing manufacturing efficiency as well as by
redesigning for cost efficiency and constantly reducing cycle time.
25
Financial criteria for ASML
We measure ourselves on financial key performance criteria based on growth, profitability and
liquidity (see Executive Summary Key Performance Indicators).
Results of Operations
The following discussion and analysis of results of operations should be viewed in the context of
the risks affecting our business strategy, described in Item 3.D. Risk Factors.
Our decision in December 2002 to sell our Thermal business and to terminate our Track equipment
business has resulted in separate disclosure for continuing and discontinued operations for the
three years ended December 31, 2005.
Set forth below are our consolidated statements of operations from continuing operations data for
the three years ended December 31, 2005, expressed as a percentage of total net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
Total net sales |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
Cost of sales |
|
|
76.1 |
1 |
|
|
63.3 |
2 |
|
|
61.5 |
|
Gross profit on sales |
|
|
23.9 |
|
|
|
36.7 |
|
|
|
38.5 |
|
Research and development costs |
|
|
19.8 |
|
|
|
14.3 |
|
|
|
13.8 |
|
Research and development credits |
|
|
(1.2 |
) |
|
|
(0.9 |
) |
|
|
(1.0 |
) |
Selling, general and administrative costs |
|
|
13.8 |
|
|
|
8.2 |
|
|
|
8.0 |
|
Restructuring and merger and acquisition related charges |
|
|
1.6 |
|
|
|
(0.2 |
) |
|
|
0.0 |
|
Operating income (loss) |
|
|
(10.0 |
) |
|
|
15.4 |
|
|
|
17.8 |
|
Interest expense, net |
|
|
1.9 |
|
|
|
0.7 |
|
|
|
0.6 |
|
Income (loss) from continuing operations before income taxes |
|
|
(11.9 |
) |
|
|
14.7 |
|
|
|
17.2 |
|
(Provision for) Benefit from income taxes |
|
|
(3.9 |
) |
|
|
5.2 |
|
|
|
4.9 |
|
Income (loss) from continuing operations |
|
|
(8.1 |
) |
|
|
9.6 |
|
|
|
12.3 |
|
|
|
|
1 |
|
Includes restructuring charges of EUR 5 million. |
|
2 |
|
Includes reversal of restructuring charges of EUR 3 million. |
Results of operations from continuing operations 2005 compared with 2004
Consolidated sales and gross profit
The following table shows a summary of sales (revenue and units sold), gross profit on sales and
ASP data on an annual and semi-annual basis for the years ended December 31, 2005 and 2004. We have
made reclassifications to prior periods to conform with current year presentation of net system
sales and net services and field option sales. In prior years annual report, field option sales
were presented under net product sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
First |
|
|
Second |
|
|
Full |
|
|
First |
|
|
Second |
|
|
Full |
|
Year ended December 31 |
|
half year |
|
|
half year |
|
|
year |
|
|
half year |
|
|
half year |
|
|
year |
|
|
Net sales (EUR million) |
|
|
1,070 |
|
|
|
1,395 |
|
|
|
2,465 |
|
|
|
1,448 |
|
|
|
1,081 |
|
|
|
2,529 |
|
Net system sales (EUR million) |
|
|
933 |
|
|
|
1,242 |
|
|
|
2,175 |
|
|
|
1,313 |
|
|
|
915 |
|
|
|
2,228 |
|
Net service and field option sales (EUR million) |
|
|
137 |
|
|
|
153 |
|
|
|
290 |
|
|
|
135 |
|
|
|
166 |
|
|
|
301 |
|
Total systems recognized |
|
|
130 |
|
|
|
152 |
|
|
|
282 |
|
|
|
110 |
|
|
|
86 |
|
|
|
196 |
|
Total new systems recognized |
|
|
99 |
|
|
|
117 |
|
|
|
216 |
|
|
|
94 |
|
|
|
62 |
|
|
|
156 |
|
Total used systems recognized |
|
|
31 |
|
|
|
35 |
|
|
|
66 |
|
|
|
16 |
|
|
|
24 |
|
|
|
40 |
|
Gross profit on sales (% of sales) |
|
|
34.2 |
|
|
|
38.7 |
|
|
|
36.7 |
|
|
|
39.6 |
|
|
|
37.1 |
|
|
|
38.5 |
|
ASP for systems (EUR million) |
|
|
7.2 |
|
|
|
8.2 |
|
|
|
7.7 |
|
|
|
11.9 |
|
|
|
10.6 |
|
|
|
11.4 |
|
ASP for new systems (EUR million) |
|
|
8.7 |
|
|
|
9.8 |
|
|
|
9.3 |
|
|
|
13.5 |
|
|
|
13.6 |
|
|
|
13.5 |
|
ASP for used systems (EUR million) |
|
|
2.3 |
|
|
|
2.9 |
|
|
|
2.6 |
|
|
|
2.8 |
|
|
|
2.9 |
|
|
|
2.9 |
|
Consolidated net sales increased by 2.6 percent from EUR 2,465 million in 2004 to EUR 2,529 million
in 2005. Net system sales increased by 2.4 percent from EUR 2,175 million in 2004 to EUR 2,228
million in 2005. Net service and field option sales increased by 3.8 percent from EUR 290 million
to EUR 301 million in 2005. The 2.4 percent increase in net system sales was mainly driven by an
increase in ASP partially offset by a decrease in the number of systems.
The ASP of systems recognized in net system sales increased by 48.1 percent from EUR 7.7 million in
2004 to EUR 11.4 million in 2005. This increase in ASP was mainly driven by an increased share of
300-mm ArF TWINSCAN systems with higher ASPs and a
26
decreased share of 200-mm KrF systems,
reflecting a shift in market demand from manufacturing capacity in 2004 to leading edge technology
in 2005. The number of systems recognized in net system sales decreased from 282 systems in 2004 (216 new
systems and 66 used systems) to 196 systems in 2005 (156 new systems and 40 used systems). The
decrease in the number of systems shipped in 2005 reflected the large number of 200 mm systems
shipped in 2004 that increased our customers manufacturing capacity and were not yet fully
utilized. Demand in 2005 was mainly driven by leading edge technology.
At December 31, 2005, ASML had no deferred revenue from shipments of new technology. During 2005,
no revenue from new technology was recorded that had been previously deferred.
From time to time, ASML repurchases systems that it has manufactured and sold and, following
factory-rebuild or refurbishment, resells those systems to other customers. This repurchase
decision is mainly driven by market demand for capacity expressed by other customers and not by
explicit or implicit contractual arrangements relating to the initial sale. The number of used
systems sold in 2005 decreased to 40 from 66 in 2004. This decrease was driven by lower utilization
of the lithography equipment in 2005 compared to 2004 which lowered to demand for capacity. The ASP
for used systems increased from EUR 2.6 million in 2004 to EUR 2.9 million in 2005, reflecting a
further shift from our older PAS 2500 towards our newer PAS 5500 family, including scanner systems.
Service sales showed a 3.8 percent increase from EUR 290 million in 2004 to EUR 301 million in
2005. This increase was mainly due to an increase in option sales to customers to enhance system
performance.
Of the top 20 chipmakers worldwide, in terms of semiconductor capital expenditure, 17 are customers
of ASML. In 2005, sales to one customer accounted for EUR 609 million, or 24 percent of net sales.
In 2004, sales to one customer accounted for EUR 434 million, or 18 percent of net sales.
Gross profit as a percentage of sales increased from 36.7 percent in 2004 to 38.5 percent in 2005.
The increased gross profit was mainly driven by increased ASPs (2.4 percent positive impact on
gross profit) and decreased cost of goods (1.6 percent positive impact on gross profit) reflecting
the results of our continuous cost of goods reduction program. This increase in gross profit was
offset by the change in 2005 product mix (2.0 percent negative impact on gross profit). Furthermore
lower charges for obsolete inventory (0.5 percent positive impact on gross profit) and lower cost
of freight (0.4 percent positive impact on gross profit) offset by negative currency results (1.1
percent negative impact on gross profit) also contributed to the increase in gross margin.
We started 2005 with an order backlog of 131 systems (119 new and 12 used). In 2005, we booked
orders for 178 systems and received order cancellations or push-outs beyond 12 months of 18 systems
and recognized sales for 196 systems. This resulted in an order backlog of 95 systems (86 new and 9
used) as of December 31, 2005. The total value of our backlog as of December 31, 2005 amounted to
EUR 1.4 billion, compared with a backlog of approximately EUR 1.7 billion as of December 31, 2004.
See also Item 5.D. Trend Information.
Research and development
Research and development costs decreased from EUR 353 million in 2004 to EUR 348 million in 2005.
This decrease in research and development costs is primarily due to a charge in 2004 of EUR 49
million with respect to a cross-license agreement entered into with Nikon (see Note 8 to our
consolidated financial statements for more information). Excluding this one-time charge in 2004
there was an increase in research and development spending in 2005 of
15 percent to further
accelerate our investment in technology leadership. Main investments in research and development
relate to the newest versions of our high resolution TWINSCAN systems and our next generation
TWINSCAN systems based on immersion and EUV.
Research and development credits increased from EUR 22 million in 2004 to EUR 24 million in 2005
due to an increased volume of research and development projects that qualified for credits under
governmental funding programs.
Selling, general and administrative costs
Selling, general and administrative costs remained stable on a level of approximately EUR 201
million for both 2004 and 2005. Selling, general and administrative costs as a percentage of net
sales decreased from 8.2 percent in 2004 to 8.0 percent in 2005, primarily due to higher net sales.
Restructuring costs (credits)
27
Restructuring credits of EUR 6 million in 2004 are adjustments on the 2003 plans as described under
Results of operations from continuing operations 2004 compared with 2003. In 2005 we did not
record any restructuring expenses.
Net interest expense
Net interest expense decreased from EUR 16 million in 2004 to EUR 14 million in 2005 due to an
increase in interest income, partially offset by an increase in interest expense. Our interest
income relates primarily to interest earned on our cash and cash equivalents, which had higher
balances in 2005 as a result of an increase in cash flows from operations. Our interest expense
relates primarily to our convertible subordinated notes.
Income taxes
Income taxes represented 28.4 percent of income before taxes in 2005, compared to 35.1 percent in
2004. The decrease in income taxes in 2005 is mainly related to a tax rate reduction in the
Netherlands..
Results of operations from continuing operations 2004 compared with 2003
Consolidated sales and gross profit
The following table shows a summary of sales (revenue and units sold), gross profit on sales and
ASP data on an annual and semi-annual basis for the years ended December 31, 2004 and 2003. We
have made reclassifications to prior periods to conform with current year presentation of net
system sales and net services and field option sales. In prior years annual report, field option
sales were presented under net product sales.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
First |
|
|
Second |
|
|
Full |
|
|
First |
|
|
Second |
|
|
Full |
|
Year ended December 31 |
|
half year |
|
|
half year |
|
|
year |
|
|
half year |
|
|
half year |
|
|
year |
|
|
Net sales (EUR million) |
|
|
647 |
|
|
|
896 |
|
|
|
1,543 |
|
|
|
1,070 |
|
|
|
1,395 |
|
|
|
2,465 |
|
Net system sales (EUR million) |
|
|
515 |
|
|
|
764 |
|
|
|
1,279 |
|
|
|
933 |
|
|
|
1,242 |
|
|
|
2,175 |
|
Net service and field option sales (EUR million) |
|
|
132 |
|
|
|
131 |
|
|
|
263 |
|
|
|
137 |
|
|
|
153 |
|
|
|
290 |
|
Total systems recognized |
|
|
74 |
|
|
|
95 |
|
|
|
169 |
|
|
|
130 |
|
|
|
152 |
|
|
|
282 |
|
Total new systems recognized |
|
|
55 |
|
|
|
71 |
|
|
|
126 |
|
|
|
99 |
|
|
|
117 |
|
|
|
216 |
|
Total used systems recognized |
|
|
19 |
|
|
|
24 |
|
|
|
43 |
|
|
|
31 |
|
|
|
35 |
|
|
|
66 |
|
Gross profit on sales (% of sales) |
|
|
19.4 |
|
|
|
27.2 |
|
|
|
23.9 |
|
|
|
34.2 |
|
|
|
38.7 |
|
|
|
36.7 |
|
ASP for systems (EUR million) |
|
|
7.0 |
|
|
|
8.0 |
|
|
|
7.6 |
|
|
|
7.2 |
|
|
|
8.2 |
|
|
|
7.7 |
|
ASP for new systems (EUR million) |
|
|
8.7 |
|
|
|
10.0 |
|
|
|
9.5 |
|
|
|
8.7 |
|
|
|
9.8 |
|
|
|
9.3 |
|
ASP for used systems (EUR million) |
|
|
1.8 |
|
|
|
2.2 |
|
|
|
2.0 |
|
|
|
2.3 |
|
|
|
2.9 |
|
|
|
2.6 |
|
Consolidated net sales increased by approximately 59.8 percent from 2003 to 2004 with net system
sales increasing by approximately 70.1 percent over that period, primarily due to an increased
number of systems recognized.
The number of new systems recognized in net sales increased from 126 units in 2003 to 216 units in
2004 due to an increase in equipment demand by the semiconductor industry in 2004 after three
consecutive years of downturn in the global semiconductor industry. The year-on-year increase in
the number of new systems recognized mainly related to an increase in sales of our 193-nm ArF and
248-nm KrF systems for 300 millimeter wafer processing and 365-nm i-line for 200 millimeter wafer
processing.
The ASP for new systems decreased by approximately 2.1 percent reflecting an increased share of
i-line lithography systems for 200 millimeter wafer processing with lower ASPs, which was partially
offset by an increased share of KrF lithography systems for 300 millimeter wafer processing with
higher ASPs. Furthermore, we experienced higher second half 2004 and 2003 ASPs as a consequence of
the sales mix during those periods reflecting an increasing portion of sales of our more advanced
systems.
At December 31, 2004 and 2003, ASML had no deferred revenue from new technology. During 2004 and
2003, no revenue from new technology was recorded that had been previously deferred.
The number of used systems sold increased from 43 units in 2003 to 66 in 2004. This increase was
driven by high utilization of the lithography equipment, which drove our customers to seek
opportunities to expand production capacity in their existing production facilities. The increase
in demand for used systems was also related to a change in product mix, which was driven by
specific demand in application areas that required less critical resolution capabilities. The ASP
for used systems increased by approximately 30.0 percent, reflecting a further shift from our older
PAS 2500 towards our newer PAS 5500 family, including scanner systems.
28
Net service and field option sales increased 10.3 percent from EUR 263 million in 2003 to EUR 290
million in 2004. This increase was mainly due to new contract sales with major customers and
relocation of systems in the United States, partially offset by a decline in the exchange rate of
the U.S. dollars versus the euro during 2004.
In 2004, sales to one customer accounted for EUR 434 million, or 18 percent of net sales. In 2003,
sales to one customer accounted for EUR 314 million, or 20 percent of net sales.
Gross profit as a percentage of net sales in 2004 increased to 36.7 percent from 23.9 percent in
2003. The gross profit on new systems increased from 21.7 percent to 36.2 percent mainly due to
lower cost of sales reflecting the results from our cost of goods reduction programs (approximately
6.0 percent positive impact on our gross profit) and improved ASPs (approximately 0.8 percent
positive impact on our gross profit). This increase in gross profit was offset by the 2004 product
mix (approximately 1.2 percent negative impact on our gross profit). Furthermore, improved
utilization of our production facilities positively impacted our gross margin by 6.5 percent,
caused by higher sales. Finally, lower costs for obsolete inventory (1.2 percent) and positive
currency results (1.2 percent) contributed to the increase in gross margins.
Lithography order backlog
We started 2004 with an order backlog of 124 systems (103 new and 21 used), and received orders for
delivery of 318 systems during the year. In 2004, we recorded 282 system sales and 29 order
cancellations or push-outs beyond 12 months, resulting in an order backlog of 131 systems (119 new
and 12 used) as of December 31, 2004. The total value of the backlog as of December 31, 2004
amounted to EUR 1.7 billion, compared with a backlog of approximately EUR 993 million as of
December 31, 2003.
Research and development
Research and development costs increased from EUR 306 million in 2003 to EUR 353 million in 2004
primarily due to a charge of EUR 49 million with respect to a cross-license agreement entered into
between ASML and Nikon (see Note 8 to our consolidated financial statements).
The level of research and development expenditures in 2003 and 2004 reflected our continuing effort
to introduce several leading edge lithography products for 193-nm applications and the newest
versions of the TWINSCAN platform, combined with continued investments in 248 nanometer high
numerical aperture (NA) program, immersion and EUV.
Research and development credits increased from EUR 19 million in 2003 to EUR 22 million in 2004
due to an increased volume of research and development projects that qualified for credits.
Selling, general and administrative costs
Selling, general and administrative costs decreased by 5.2 percent from EUR 213 million in 2003 to
EUR 202 million in 2004, mainly due to a continuing increased focus on reducing costs and decreased
legal fees associated with patent infringement cases, which were partially offset by increased IT
costs and consultancy fees with respect to implementing provisions of Section 404 of the U.S.
Sarbanes-Oxley Act of 2002. Selling, general and administrative costs as a percentage of net sales
decreased from 13.8 percent in 2003 to 8.2 percent in 2004, primarily due to an increase in net
sales.
Restructuring costs (credits)
In response to the semiconductor industrys continuing downturn and a corresponding decrease in
demand for ASMLs products and services, on December 18, 2002, we announced measures to contain
costs for our lithography business, including customer support, and thereby lower our break-even
point. These measures resulted in the recognition of restructuring charges of EUR 78.5 million,
recorded during 2002 as cost of sales, for slow-moving and obsolete lithography inventory and
impairments of tangible fixed assets. We also announced workforce reductions of approximately 700
positions worldwide. The related lay-off costs were largely recorded in 2003 since the final
details of the plan had not been finally determined by December 31, 2002. With respect to these
reductions, we recorded in 2003 restructuring charges totaling EUR 6.9 million, of which EUR 4.1
million was reflected in cost of sales and EUR 2.8 million was reflected in restructuring costs. By
adjusting labor capacity, we expected to achieve annual cost savings of EUR 49 million. As of
December 31, 2003, this plan had been fully effectuated and cash payments equivalent to the full
EUR 6.9 million in accrued expenses had been made.
The worldwide slowdown in the semiconductor industry continued into 2003 and, on July 16, 2003,
ASML announced further workforce reductions of approximately 550 positions worldwide, of which the
majority was planned for the Netherlands. During 2003, ASML recorded a provision of EUR 15.3
million as an ongoing benefit arrangement, of which EUR 3.9 million was included in cost of sales
and EUR 11.4 million was included in restructuring costs. The amount of the provision was based
upon the severance
29
arrangements as agreed with our Works Council in the Netherlands for the previous workforce
reductions announced in December 2002. The estimated initial annual cost savings were EUR 47
million. ASMLs Board of Management and ASMLs Dutch Works Council then commenced a joint study on
implementing these workforce reductions in the Netherlands, which delayed the reductions until the
beginning of 2004. Thereafter, in response to a sharp improvement in market conditions during 2004,
we decreased the reductions to approximately 300 positions worldwide, of which 150 were contract
employees with limited rights upon termination. As a result, we recorded a restructuring credit of
EUR 12.1 million, EUR 3.8 million of which was recorded in cost of sales and EUR 8.3 million of
which was recorded under restructuring expenses. We made payments associated with these workforce
reductions in 2004 of EUR 2.5 million and our initially anticipated cost savings were reduced to
approximately EUR 24 million.
Also during 2003, we recorded restructuring costs of approximately EUR 7 million relating to the
consolidation of our office and warehouse facilities at our headquarters in Veldhoven as we ceased
using certain of our facilities. The facility exit charges included estimated future obligations
for non-cancelable lease payments and the impairment of property and equipment (primarily leasehold
improvements) for which there were insufficient cash flows to support the carrying cost. During
2004, we recorded adjustments to the related restructuring provision due to postponed commencement
dates of sublease agreements and higher exit costs than originally estimated. This resulted in an
additional charge of EUR 3.5 million, EUR 1.1 million of which was recorded in cost of sales and
EUR 2.5 million of which was recorded under restructuring expenses.
Net interest expense
Net interest expense decreased from EUR 29 million in 2003 to EUR 16 million in 2004 due to an
increase in interest income and a decrease in interest expense. Our interest income related
primarily to interest earned on our cash and cash equivalents. Interest income increased compared
with 2003, primarily due to higher cash and cash equivalent balances throughout the year, as a
result of an increase in cash flows from operations. Our interest expense related primarily to our
convertible notes. Our interest expense decreased in 2004 compared with 2003, primarily due to
repurchases and the redemption of our US$ 520 million 4.25 percent Convertible Subordinated Notes
during the second half of 2003, partially offset by the issuance in May 2003 of EUR 380 million
5.50% Convertible Subordinated Notes due 2010.
Income taxes
A corporate income tax rate reduction in the Netherlands was enacted in the fourth quarter of 2004.
As a consequence, ASML had to re-measure the valuation of its tax assets and liabilities
accordingly. This re-measurement led to a one-time tax charge of approximately EUR 15 million.
Income taxes represented 35.1 percent of income before taxes in 2004, compared to 32.4 percent in
2003. See Note 15 to our consolidated financial statements.
Discontinued operations
Results from discontinued operations comprised the results of our Thermal business, which we
substantially divested in October 2003, and our Track equipment business which we terminated in
December 2002.
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
Revenues |
|
|
|
|
|
|
|
|
Track |
|
|
2,514 |
|
|
|
0 |
|
Thermal |
|
|
38,198 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
40,712 |
|
|
|
0 |
|
Loss from discontinued operations, net of taxes |
|
|
|
|
|
|
|
|
Track loss from operations |
|
|
(1,456 |
) |
|
|
0 |
|
Track exit costs |
|
|
(1,944 |
) |
|
|
0 |
|
Thermal loss from operations |
|
|
(21,906 |
) |
|
|
0 |
|
Thermal exit costs |
|
|
(10,404 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(35,710 |
) |
|
|
0 |
|
In October 2003, we completed the sale of our Thermal business to a privately held company formed
by VantagePoint Venture Partners. In June 2003, ASML sold certain of its fixed assets and
inventories related to its Track business to Rite Track. The exit costs of EUR 2 million, net of
tax, were recorded in 2003 as impairment charges on a building previously used in our Track
operations.
30
Foreign Exchange Management
See Item 3.D. Risk Factors, Fluctuations in Foreign Exchange Rates Could Harm our Results of
Operations, Item 11 Quantitative and Qualitative Disclosures About Market Risk and Note 4 to our
consolidated financial statements.
New U.S. GAAP Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued a revision of FASB
statement No. 123, Accounting for Stock-Based Compensation (SFAS No. 123(R)). This statement
supersedes Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and its related implementation guidance. SFAS No. 123(R) addresses the accounting for
share-based payment transactions in which a company receives employee services in exchange for
either equity instruments of the company or liabilities that are based on the fair value of the
companys equity instruments or that may be settled by the issuance of such equity instruments.
SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using
the intrinsic method that we currently use and generally requires that such transactions be
accounted for using a fair-value-based method and recognized as expense in our consolidated
statement of operations. In January 2005, the SEC issued Staff Accounting Bulletin No. 107, which
provides supplemental implementation guidance for SFAS No. 123(R). In April 2005, the SEC extended
the compliance requirement date of SFAS No. 123(R), with the result that this requirement will be
effective for ASML beginning with the first fiscal quarter of 2006. We expect that the adoption of
SFAS No. 123(R) will have a material impact on our results of operations. Uncertainties, however,
including our future stock-based compensation strategy, stock price volatility, selection of stock
option-pricing model, estimated forfeitures and employee stock option exercise behavior, make it
difficult to determine whether the stock-based compensation expense that we will incur in future
periods will be similar to the SFAS No. 123 pro forma expense disclosed in Note 1 to the
consolidated financial statements.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS No.
154) which replaces Accounting Principles Board Opinions No. 20 Accounting Changes and SFAS No.
3, Reporting Accounting Changes in Interim Financial Statements An Amendment of APB Opinion No.
28. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and
error corrections. SFAS No. 154 establishes retrospective application, or application as of the
earliest practicable date, as the required method for reporting a change in accounting principle
and restatement with respect to the reporting of a correction of an error. SFAS No. 154 is
effective for accounting changes and corrections of errors made in fiscal years beginning after
December 15, 2005.
In June 2005, the FASB issued a FASB Staff Position (FSP) interpreting FASB Statement 143,
Accounting for Asset Retirement Obligations, specifically FSP 143-1, Accounting for Electronic
Equipment Waste Obligations (FSP 143-1). FSP 143-1 addresses the accounting for obligations
associated with Directive 2002/96/EC, Waste Electrical and Electronic Equipment, which was adopted
by the European Union (EU). The FSP provides guidance on how to account for the effects of the
Directive but only with respect to historical waste associated with products placed on the market
on or before August 13, 2005. FSP 143-1 is effective the later of the first reporting period ending
after June 8, 2005, or the date of the adoption of the law by the applicable EU-member country. The
adoption of FSP 143-1 did not have a material impact on our consolidated financial statements.
In June 2005, the EITF reached a consensus on Issue No. 05-06, Determining the Amortization Period
for Leasehold Improvements (EITF No. 05-06). EITF No. 05-06 provides guidance for determining the
amortization period used for leasehold improvements acquired in a business combination or purchased
after the inception of a lease (collectively referred to as subsequently acquired leasehold
improvements). EITF No. 05-06 provides that the amortization period used for the subsequently
acquired leasehold improvements to be the lesser of (a) the subsequently acquired leasehold
improvements useful lives, or (b) a period that reflects renewals that are reasonably assured upon
the acquisition or the purchase. EITF No. 05-06 is effective on a prospective basis for
subsequently acquired leasehold improvements purchased or acquired in periods beginning after the
date of the FASBs ratification, which was on June 29, 2005. ASML does not believe that the
adoption of EITF No. 05-06 will have a material impact on its consolidated results of
operations.
B. Liquidity and Capital Resources
The following discussion and analysis of financial condition should be viewed in the context of the
risks affecting our business strategy, described in Item 3.D. Risk Factors.
Our balance of cash and cash equivalents amounted to EUR 1,228 million and EUR 1,905 million as of
December 31, 2004 and 2005, respectively. Net cash flows provided by operating activities were EUR
251 million and EUR 711 million in 2004 and 2005, respectively. Cash provided by operating
activities in 2005 was primarily derived from our net income. As we have deferred tax assets
resulting from net operating losses
31
carried forward, the tax charge of EUR 124 million reflected in 2005 net income resulted in a cash
outflow of only EUR 15 million for corporate income taxes, leaving a cash inflow from net income of
the year of approximately EUR 420 million in 2005. Net cash flows provided by operating activities
reflected EUR 99 million of depreciation, amortization and impairment charges and EUR 203 million
of changes in assets and liabilities. The cash flow from changes in assets and liabilities in 2005
is mainly derived from EUR 203 million in accounts receivable collections.
Net cash used in investing activities was EUR 60 million in 2004 and EUR 61 million in 2005. The
2004 and 2005 figures mainly related to expenditures in information technology investments and
machinery and equipment.
Net cash provided by financing activities was EUR 3 million in 2005 compared to EUR 19 million in
2004. In 2005, proceeds from financing activities mainly reflect EUR 16 million in proceeds from
the exercise of stock options offset by EUR 13 million in repayments of long term debts, mainly
relating to 2 yen-denominated loans which ASML assumed in connection with its merger with SVG in
1999 (see Note 11 to the consolidated financial statements).
Our principal sources of liquidity consist of EUR 1,905 million of cash and cash equivalents as of
December 31, 2005, and EUR 400 million of available credit facilities as of December 31, 2005, and
cash flows from operations. For further details of our credit facilities, see Note 11 to our
consolidated financial statements. In addition to cash and available credit facilities, we may from
time to time raise additional capital in debt and equity markets. Our liquidity needs are affected
by many factors, some of which are based on the normal ongoing operations of the business, and
others which relate to the uncertainties of global economies and the semiconductor and the
semiconductor equipment industries. Although our cash requirements will fluctuate based on the
timing and extent of these factors, we believe that cash generated from operations, together with
the liquidity provided by existing cash balances, will be sufficient to satisfy our liquidity
requirements for the next 12 months. We expect to steadily improve our cash conversion cycle during
2006, although cash generation will reduce in the first half of 2006 because the company intends to
employ additional cash to finance expected growth, prepare the industrys first two EUV tools for
delivery, and make payments for prior year tax liabilities. We expect in 2006 an increase in cash
outflow with respect to income taxes as the amounts of loss carry-forwards in the Netherlands and
Asia have fully been utilized at the end of 2005. We expect capital expenditures in 2006 to range
between EUR 80 million and EUR 100 million. In addition, at December 31, 2005 we have operating
lease commitments of approximately EUR 214 million and certain open inventory purchase commitments
of approximately EUR 676 million with our suppliers to ensure a smooth and continuous supply chain
for key components. Pursuant to agreements executed on December 10, 2004 (effective November 12,
2004), ASML, Zeiss and Nikon agreed to settle all pending worldwide patent litigation between the
companies. The settlement included a cross-license of patents related to lithography equipment used
to manufacture semiconductor devices and payments to Nikon by ASML and Zeiss. In connection with
the settlement, in addition to amounts already paid, ASML is obligated to make additional payments
to Nikon of US $9 million (approximately EUR 8 million) in each of the years 2006 and 2007. See
Item 4.B. Business Overview Patent Litigation with Nikon.
In 2006, we have repayment obligations, amounting to US$ 575 million, on our 5.75 percent
Convertible Subordinated Notes due 2006, issued in October 2001, assuming no conversions occur.
These notes are convertible into 30,814,576 ordinary shares at a conversion price of US$ 18.66 (EUR
15.82) per share at any time prior to maturity. Since October 22, 2004, the notes have been
redeemable at the option of ASML, in whole or in part, at 100 percent of their principal amount,
together with accrued interest, provided that our shares close above 130 percent of the conversion
price for twenty trading days out of a 30-day period. None of the notes were converted into
ordinary shares during 2005. We have additional repayment obligations in 2010, amounting to EUR 380
million, on our 5.50 percent Convertible Subordinated Notes due 2010 issued in May 2003, assuming
no conversions occur. These notes are convertible into an aggregate of 26,573,426 ordinary shares
at a conversion price of EUR 14.30 per share at any time prior to maturity. We currently intend to
fund our future repayment obligations under our convertible notes primarily with cash on hand and
cash generated through operations. A description of our convertible notes, lines of credit and
borrowing arrangements is provided in Note 11 to our consolidated financial statements. See also
Item 3.D. Risk Factors.
As of December 31, 2005, ASML has achieved its strategic target level of EUR 1 billion in net cash,
which is comprised of total cash and cash equivalents minus convertible subordinated bonds. ASML
will therefore prepare for a potential share buy back program to be executed, subject to whether
the company decides during 2006 to make significant investments.
32
Our contractual obligations and commercial commitments are disclosed in further detail in Item 5.F.
Tabular Disclosure of Contractual Obligations and Note 12 to our consolidated financial
statements.
See Notes 4 and 11 to our consolidated financial statements for discussion of our funding, treasury
policies and currencies in which cash and cash equivalents are held and convertible notes and other
borrowing arrangements.
C. Research and Development, Patents and Licenses
Research and Development
See Item 4.B. Business Overview, Research and Development and Item 5.A. Operating Results.
Intellectual Property Matters
See Item 3.D. Risk Factors, Defending Against Intellectual Property Claims by Others Could Harm
Our Business and Item 4.B. Business Overview, Intellectual Property.
D. Trend Information
The year 2005 showed similar sales levels compared to 2004, however ASPs are higher and the number
of systems shipped lower in 2005 due to a change in nature of market demand from capacity driven in
2004 to technology driven in 2005.
We have accumulated a strong backlog for deliveries in the first half of 2006: our unit backlog is
smaller than that of December 2004 but the ASP is significantly higher, as a result of a higher
proportion of 300 millimeter TWINSCAN advanced systems in backlog. The order backlog as of December
31, 2005 comprises 95 lithography systems with an ASP of EUR 15.1 million. The company expects to
ship 48 systems in the first quarter of 2006 with an ASP of EUR 14.1 million for new systems and an
ASP for all systems of EUR 12.0 million; however, given market momentum, short-term demand for a
few additional system shipments in the first quarter of 2006 may materialize. The company expects a
gross margin in the first quarter of 2006 ranging from 38 to 39 percent. However, we remain
cautious in our forecast as customer order push-outs are always possible, if overall semiconductor
demand were not to materialize as expected.
The following table sets forth our backlog of systems as of December 31, 2004 and 2005.
|
|
|
|
|
|
|
|
|
As of December 31 |
|
2004 |
|
|
2005 |
|
|
Backlog sales of new systems (units) |
|
|
119 |
|
|
|
86 |
|
Backlog sales of used systems (units) |
|
|
12 |
|
|
|
9 |
|
Backlog sales of total systems (units) |
|
|
131 |
|
|
|
95 |
|
Value of backlog new systems (EUR million) |
|
|
1,664 |
|
|
|
1,411 |
|
Value of backlog used systems (EUR million) |
|
|
27 |
|
|
|
23 |
|
Value of backlog of total systems (EUR million) |
|
|
1,691 |
|
|
|
1,434 |
|
ASP for new systems (EUR million) |
|
|
14.0 |
|
|
|
16.4 |
|
ASP for used systems (EUR million) |
|
|
2.2 |
|
|
|
2.6 |
|
ASP for total systems (EUR million) |
|
|
12.9 |
|
|
|
15.1 |
|
Our backlog includes only system orders for which written authorizations have been accepted and
shipment dates within 12 months have been assigned. Historically, orders have been subject to
cancellation or delay by the customer. Due to possible customer changes in delivery schedules and
to cancellation of orders, our backlog at any particular date is not necessarily indicative of
actual sales for any succeeding period.
In view of current order demand for ASML immersion tools, the company is preparing for a number of
shipments in 2006 which could exceed the range of 20 to 25 immersion systems.
We expect research and development costs (net of credit) will increase to EUR 85 million in the
first quarter of 2006. When annualized, expected first quarter 2006 research and development costs
represent a spending level of EUR 340 million for 2006, net of credits, an increased research and
development investment intended to strengthen ASMLs technology leadership and expand lithography
growth.
ASML expects selling, general and administrative expenses in the first quarter of 2006 to be EUR 51
million.
E. Off-Balance Sheet Arrangements
We have various contractual obligations, some of which are required to be recorded as liabilities
in our consolidated financial statements, including long- and short-term debt. Other contractual
arrangements, namely operating lease commitments and purchase obligations, are not generally
required to be recognized as liabilities on our balance sheet but are required to be disclosed.
33
Variable Interest Entities
In December 2003, the FASB issued FIN 46R, Consolidation of Variable Interest Entities. Under FIN
46R, an enterprise must consolidate a variable interest entity if that enterprise has a variable
interest (or combination of variable interests) that will absorb a majority of the entitys
expected losses if they occur, receive a majority of the entitys expected residual returns if they
occur, or both.
In 2003, ASML moved to its current Veldhoven headquarters. We lease these headquarters for a period
of 15 years from an entity (the lessor) that was incorporated by a syndicate of three banks
(shareholders) solely for the purpose of leasing this building. The shareholders equity in the
lessor amounts to EUR 1.9 million. Furthermore the shareholders each granted a loan of EUR 11.6
million and a fourth bank granted a loan of EUR 12.3 million to the lessor. ASML provided the
lessor with a subordinated loan of EUR 5.4 million and has a purchase option that is exercisable
either at the end of the lease in 2018, at a pre-determined price of EUR 24.5 million, or during
the lease at the book value of the assets. The total assets of the lessor entity amounted to
approximately EUR 54 million at inception of the lease.
ASML believes that it holds a variable interest in this entity and that the entity is a variable
interest entity (VIE) because it is subject to consolidation in accordance with the provisions of
paragraph 5 of FIN 46(R). The total equity investment at risk is approximately 3.6 percent of the
lessors total assets and is not considered and cannot be demonstrated, qualitatively or
quantitatively, to be sufficient to permit the lessor to finance its activities without additional
subordinated financial support provided by any parties, including the shareholders.
ASML determined that it is not appropriate to consolidate the VIE as it is not the primary
beneficiary. To make this determination, the expected losses and expected residual returns of the
lessor were allocated to each variable interest holder based on their contractual right to absorb
expected losses and residual returns. The analysis of expected losses and expected residual returns
involved determining the expected negative and positive variability in the fair value of the
lessors net assets exclusive of variable interests through various cash flow scenarios based upon
the expected market value of the lessors net assets. Based on this analysis, ASML determined that
other variable interest holders will absorb the majority of the lessors expected losses, and as a
result, ASML is not the primary beneficiary.
ASMLs maximum exposure to the lessors expected losses is estimated to be approximately EUR 5.4
million.
Purchase Obligations
We enter into purchase commitments with vendors in the ordinary course of business to ensure a
smooth and continuous supply chain for key components. Purchase obligations include medium to
long-term purchase agreements. These contracts differ and may include certain restrictive clauses.
Any identified losses that result from purchase commitments that are forfeited are provided for in
our financial statements. As of December 31, 2005, we had purchase commitments for a total amount
of approximately EUR 676 million, reflecting our backlog level at the end of 2005. In our
negotiations with suppliers we continuously seek to align our purchase commitments with our
business objectives. See also Item 5.F. Tabular Disclosure of Contractual Obligations.
Other Off-Balance Sheet Arrangements
We have certain additional commitments and contingencies that are not recorded on our balance sheet
but may result in future cash requirements. In addition to operating lease commitments and purchase
obligations, these off-balance sheet arrangements consist of product warranties.
From time to time we provide guarantees to third parties in connection with transactions entered
into by our subsidiaries in the ordinary course of business.
F. Tabular Disclosure of Contractual Obligations
Our contractual obligations as of December 31, 2005 can be summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
After 5 |
|
|
|
|
|
|
1 year |
|
|
years |
|
|
years |
|
|
years |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Long Term Debt, including interest expense1 |
|
|
1,003,796 |
|
|
|
537,764 |
|
|
|
43,101 |
|
|
|
422,851 |
|
|
|
80 |
|
Operating Lease Obligations |
|
|
213,878 |
|
|
|
33,032 |
|
|
|
53,657 |
|
|
|
39,707 |
|
|
|
87,482 |
|
Purchase Obligations |
|
|
676,007 |
|
|
|
672,424 |
|
|
|
3,583 |
|
|
|
0 |
|
|
|
0 |
|
Other Liabilities2 |
|
|
18,341 |
|
|
|
7,630 |
|
|
|
10,711 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations |
|
|
1,912,022 |
|
|
|
1,250,850 |
|
|
|
111,052 |
|
|
|
462,558 |
|
|
|
87,562 |
|
|
|
|
1 |
|
We refer to Note 11 to the consolidated financial statements for the amounts
excluding interest expense. |
34
|
|
|
2 |
|
Other liabilities relate mainly to the additional payments to Nikon due in 2006 and
2007 with respect to a cross-license of patents related to lithography equipment. See Item 10.C.
Material Contracts for a summary of the Nikon-ASML Cross License Agreement and the ASML/Zeiss
Sublicense Agreement. |
Several operating leases for our buildings contain purchase options, exercisable at the
option of the Company at the end of the lease, and in some cases, during the term of the lease. The
amounts to be paid if ASML should exercise these purchase options at the end of the lease can be
summarized as of December 31, 2005 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
After 5 |
|
|
|
|
|
|
1 year |
|
|
years |
|
|
years |
|
|
years |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Purchase options |
|
|
61,363 |
|
|
|
0 |
|
|
|
3,358 |
|
|
|
2,269 |
|
|
|
55,736 |
|
G. Safe Harbor
See Special Note regarding Forward-Looking Statements.
Item 6
Directors, Senior Management and Employees
A. Directors and Senior Management
The members of our Supervisory Board and our Board of Management are as follows:
|
|
|
|
|
|
|
|
|
Name |
|
Title |
|
Date of Birth |
|
|
Term Expires |
|
Henk Bodt1, 2, 3 |
|
Chairman of the Supervisory Board |
|
April 30, 1938 |
|
|
2007 |
|
Jan A. Dekker1, 4 |
|
Member of the Supervisory Board |
|
May 10, 1939 |
|
|
2006 |
|
Peter H. Grassmann4 |
|
Member of the Supervisory Board |
|
November 21, 1939 |
|
|
2006 |
|
Jos W.B. Westerburgen 2, 3 |
|
Member of the Supervisory Board |
|
June 24, 1942 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Fritz W. Fröhlich1 |
|
Member of the Supervisory Board |
|
March 19, 1942 |
|
|
2008 |
|
Arthur P.M. van der Poel3,4 |
|
Member of the Supervisory Board |
|
November 1, 1948 |
|
|
2008 |
|
Ieke C.J. van den Burg2 |
|
Member of the Supervisory Board |
|
March 6, 1952 |
|
|
2009 |
|
OB Bilous4 |
|
Member of the Supervisory Board |
|
November 7, 1938 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
Eric Meurice |
|
President and Chief Executive Officer and |
|
July 30, 1956 |
|
|
2008 |
|
|
|
Chairman and Member of the Board of |
|
|
|
|
|
|
|
|
Management |
|
|
|
|
|
|
Peter T.F.M. Wennink |
|
Executive Vice President, Chief Financial |
|
May 30, 1957 |
|
|
N/A |
5 |
|
|
Officer and Member of the Board of |
|
|
|
|
|
|
|
|
Management |
|
|
|
|
|
|
Martin A. van den Brink |
|
Executive Vice President Marketing |
|
May 21, 1957 |
|
|
N/A |
5 |
|
|
& Technology and Member of the Board |
|
|
|
|
|
|
|
|
of Management |
|
|
|
|
|
|
David P. Chavoustie |
|
Executive Vice President Sales and |
|
May 7, 1943 |
|
|
N/A |
5,6 |
|
|
Member of the Board of Management |
|
|
|
|
|
|
Klaus P. Fuchs |
|
Executive Vice President Operations and |
|
December 30, 1958 |
|
|
2010 |
7 |
|
|
Member of the Board of Management |
|
|
|
|
|
|
|
|
|
1 |
|
Member of the Audit Committee |
|
2 |
|
Member of the Remuneration Committee |
|
3 |
|
Member of the Selection and Nomination Committee |
|
4 |
|
Member of the Technology & Strategy Committee |
|
5 |
|
There are no specified terms for members of the Board of Management
appointed prior to March 2004 |
|
6 |
|
Mr. Chavoustie retired from his position on the Board of Management,
effective December 31, 2005 |
|
7 |
|
Mr. Fuchs appointment to ASMLs Board of Management is subject to
notification of the General Meeting of Shareholders, scheduled on March 23, 2006 |
Effective March 24, 2005, Mr. Attardo retired by rotation from the Supervisory Board. On that
same date, Mr. Westerburgen, was reappointed as member of the Supervisory Board and Mr. Bilous as
successor of Mr. Attardo- and Ms. Van den Burg who was appointed as a result of the strengthened
right of recommendation of the Works Council of ASML Netherlands B.V. (see Item 6 C)- were
appointed as new members of the Supervisory Board. Effective January 3, 2005, Mr. McIntosh retired
as Executive Vice President Operations and member of the Board of Management.
Mr. Dekker and Mr. Grassmann will retire by rotation on March 23, 2006.
35
The Works Council of ASML Netherlands B.V. has the strengthened right to make a
recommendation for one member of the Supervisory Board, to be appointed by the General Meeting of
Shareholders in 2006. As a result hereof, as from 2006, two members of our Supervisory Board will
have been appointed as a result of the strengthened right of recommendation of the Works Council of
ASML Netherlands B.V.
In October 2005, Mr. Chavoustie confirmed to the Supervisory Board that he plans to retire from his
position on the Board of Management, effective December 31, 2005.
Director and Officer Biographies
Henk Bodt
Mr. Bodt was appointed as Chairman of our Supervisory Board in 1995. Mr. Bodt is a former Executive
Vice President of Royal Philips Electronics. In addition to other positions, including Chairman and
Chief Executive Officer of the Consumer Electronics Division, he also served on the Board of
Management of Philips and on the Group Management Committee of Philips. He currently serves on the
Supervisory Boards of DSM N.V., Delft Instruments N.V. and Neo-Post SA.
Jan A. Dekker
Mr. Dekker has served on our Supervisory Board since 1997. Mr. Dekker is a former Chief Executive
Officer of TNO from which he retired in November 2003. He currently serves on the Supervisory
Boards of Koninklijke BAM Group N.V. and Syntens and he is also President of the Royal Institute of
Engineers (KIVI NIRIA).
Peter H. Grassmann
Mr. Grassmann has served on our Supervisory Board since 1996. Mr. Grassmann is a former President
and Chief Executive Officer of Zeiss and a former Executive Vice-President of Siemens AG, from
which positions he retired in 2000. He currently serves on the Supervisory Boards of Gambro B.V.
and the Medical University of Innsbruck.
Jos W.B. Westerburgen
Mr. Westerburgen was appointed to our Supervisory Board in March 2002. Mr. Westerburgen has
extensive experience in the field of corporate law and tax. Mr. Westerburgen is former Company
Secretary and Head of Tax of Unilever. Mr. Westerburgen currently serves as a member of the
Supervisory Board of Rodamco Europe N.V. and is also Vice-Chairman of the Board of the Association
Aegon.
Fritz W. Fröhlich
Mr. Fröhlich was appointed to our Supervisory Board in March 2004. He is the former Deputy Chairman
and Chief Financial Officer of Akzo Nobel N.V. Mr. Fröhlich is the Chairman of the Supervisory
Board of Randstad Holding N.V. and serves as a member of the Supervisory Board of the following
companies: Allianz Nederland N.V.; Draka Holding N.V.; Gamma Holding N.V. and Kempen & Co N.V.
Arthur P.M. van der Poel
Mr. Van der Poel was appointed to our Supervisory Board in March 2004. Until 2001 he was the Chief
Executive Officer of Philips Semiconductors. Mr. Van der Poel is a former member of the Board of
Management (until April 2003) and a former member of the Group Management Committee of Royal
Philips Electronics. Mr. Van der Poel is the chairman of the Board of MEDEA+, a member of the Board
of Directors of Axalto Holding N.V. and serves as a member of the Supervisory Boards of PSV N.V.
and DHV Holding B.V.
Ieke C.J. van den Burg
Ms. Van den Burg was appointed to our Supervisory Board in March 2005. She is a former member of
the Dutch Social and Economic Council and of the EU Economic and Social Committee. Ms. Van den Burg
also held various positions in Dutch and international trade union and labor organizations. Ms. Van
den Burg has been a member of the European Parliament (EP) since 1999 and has served on the EPs
Committee on Economic and Monetary Affairs since 1999 and on the Committee on the Internal Market
and Customer Protection since 2004.
OB Bilous
Mr. Bilous was appointed to our Supervisory Board in March 2005. From 1960 until 2000 Mr. Bilous
held various management positions at IBM, including General Manager and VP Worldwide Manufacturing
of IBMs Microelectronics Division. He also served on the Boards of SMST, ALTIS Semiconductor and
Dominion Semiconductor. Mr. Bilous currently serves as Chairman of the Board of Directors of
International Sematech and as Board member of Nantero, Inc.
Eric Meurice
Mr. Meurice joined ASML on October 1, 2004 as President, Chief Executive Officer and Chairman of
the Board of Management. Prior to joining ASML, and since March 2001, he was Executive Vice
President Thomson Television Worldwide. Between 1995 and 2001,
36
Mr. Meurice served as Vice President for Dell Computer, where he ran the Western, Eastern Europe
and Dells Emerging Markets business within EMEA. Before 1995, he gained extensive technology
experience in the semiconductor industry at ITT Semiconductors Group and Intel Corporation, in the
micro-controller group.
Peter T.F.M. Wennink
Mr. Wennink was appointed as Executive Vice President and Chief Financial Officer of ASML in 1999.
Mr. Wennink has an extensive background in finance and accounting. Prior to his employment with
ASML, Mr. Wennink worked as a partner at Deloitte Accountants, specializing in the high technology
industry with an emphasis on the semiconductor equipment industry. Mr. Wennink is a member of the
Netherlands Institute of Registered Accountants. Mr. Wennink is currently a member of the
Supervisory Board of Bank Insinger de Beaufort N.V.
Martin A. van den Brink
Mr. Van den Brink was appointed as Executive Vice President Marketing & Technology in 1999. Before
that, he served as Vice President Technology since 1995. Mr. Van den Brink was appointed as a
member of our Board of Management in July 1999.
David P. Chavoustie
Mr. Chavoustie has served as Executive Vice President Sales since 1998. He was appointed as a
member of our Board of Management in April 2000 and retired on December 31, 2005. Before then, he
served as Vice President Worldwide Sales of Vantis Corporation and as Vice President/General
Manager of the Embedded Processes Division of Advanced Micro Devices. Mr. Chavoustie currently also
serves on the Board of Directors of Three-Five Systems, Inc. and Brillian Corporation.
Klaus P. Fuchs
Mr. Fuchs appointment to our Board of Management will be effective as per the notification of the
General Meeting of Shareholders, scheduled on March 23, 2006. Mr. Fuchs will be responsible for the
Companys worldwide operations. Since 2003, Mr. Fuchs has served as Vice President of Linde AG in
Wiesbaden, Germany where he was responsible for strategic direction and operations of its
industrial sector. Before that he was technical director and member of the executive board at TRW
Aerospace and he also gained experience at Daimler Benz Aerospace as Vice President of electronic
systems.
B. Compensation
For details on compensation paid to or accrued for members of the Board of Management and members
of the Supervisory Board, see Note 17 to our consolidated financial statements.
For details on options granted to, and pension benefits of, the members of the Board of Management,
see Note 17 to our consolidated financial statements.
Bonus and Profit-sharing plans
For details on our bonus and profit sharing plans for our employees, see Note 13 to our
consolidated financial statements.
Pension plans
For details on our pension plans for our employees, see Note 13 to our consolidated financial
statements.
C. Board Practices
Board Practices
General
We endorse the importance of good corporate governance, in which independent oversight,
accountability and transparency are the most significant elements. Within the framework of
corporate governance, it is important that a relationship of trust exists between the Board of
Management, the Supervisory Board, our employees and the shareholders.
In addition to the exchange of ideas at the General Meeting of Shareholders, other important forms
of communication include the publication of our annual and quarterly financial results as well as
press releases and publications posted on our website.
In addition, we pursue a policy of active communication with our shareholders. Our corporate
governance structure is intended to:
|
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provide shareholders with regular, reliable and relevant transparent information regarding our activities, structure,
financial condition, performance and other information, including information on our social, ethical and environmental
records and policies; |
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apply high quality standards for disclosure, accounting and auditing; and |
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apply stringent rules with regard to insider securities trading. |
37
Two-tier structure
ASML is incorporated under Netherlands law and has a two-tier board structure. Responsibility for
the management of ASML lies with the Board of Management. Independent, non-executive members serve
on the Supervisory Board, which supervises and advises the members of the Board of Management in
performing their management tasks. The Board of Management has the duty to keep the Supervisory
Board informed, consult with the Supervisory Board on important matters and submit certain
important decisions to the Supervisory Board for its prior approval. The supervision of the Board
of Management by the Supervisory Board includes (i) achievement of ASMLs objectives, (ii)
corporate strategy and management of risks inherent to ASMLs business activities, (iii) the
structure and operation of internal risk management and control systems, (iv) the financial
reporting process and (v) compliance with applicable legislation and regulations.
Supervisory Board members are prohibited from serving as officers or employees of ASML, and members
of the Board of Management cannot serve on the Supervisory Board.
Board of Management
The Board of Management consists of at least two members or such larger number of members as
determined by the meeting of holders of priority shares in consultation with the Supervisory Board.
Members of the Board of Management are appointed by the Supervisory Board. The Supervisory Board
must notify the General Meeting of Shareholders of the intended appointment of a member of the
Board of Management. As a result of our compliance with the Netherlands Corporate Governance Code,
members of the Board of Management that are appointed in 2004 or later shall be appointed for a
maximum period of four years, but may be re-appointed. Members of the Board of Management serve
until the end of the term of their appointment, voluntary retirement, or suspension or dismissal by
the Supervisory Board. In the case of dismissal, the Supervisory Board must first inform the
General Meeting of Shareholders of the intended removal.
The Supervisory Board determines the remuneration of the individual members of the Board of
Management, in line with the remuneration policy adopted by the General Meeting of Shareholders,
upon a proposal of the Supervisory Board. ASMLs remuneration policy is posted on its website.
Supervisory Board
The Supervisory Board consists of at least three members or such larger number as determined by the
Supervisory Board. The Supervisory Board prepares a profile in relation to its size and
composition; ASMLs Supervisory Board profile is posted on its website.
Members of the Supervisory Board are appointed by the General Meeting of Shareholders from
nominations of the Supervisory Board. Nominations must be reasoned and must be made available to
the General Meeting of Shareholders and the Works Council simultaneously. Before the Supervisory
Board presents its nominations, both the General Meeting of Shareholders and the Works Council may
make recommendations (which the Supervisory Board may reject). In addition, the Works Council has a
strengthened right to make recommendations for at least one-third of the members of the Supervisory
Board, which recommendation may only be rejected by the Supervisory Board: (i) if the relevant
person is unsuitable or (ii) if the Supervisory Board would not be duly composed if the recommended
person were appointed as a Supervisory Board member. If no agreement can be reached between the
Supervisory Board and the Works Council on these recommendations, the Supervisory Board may request
the Enterprise Chamber of the Amsterdam Court to declare its objection legitimate. Any decision of
the Enterprise Chamber on this matter is non-appealable.
Nominations of the Supervisory Board may be overruled by the General Meeting of Shareholders by an
absolute majority of the votes representing at least one/third of the total outstanding capital. If
a nomination is overruled, the Supervisory Board will make a new nomination. If a nomination is not
overruled and the General Meeting of Shareholders did not appoint the nominated person, the
Supervisory Board will appoint the nominated person.
Members of the Supervisory Board serve for a maximum term of four years from the date of their
appointment, or a shorter period as set forth in the rotation schedule as adopted by the
Supervisory Board, and may be re-appointed, provided that their entire term of office does not
exceed twelve years. The General Meeting of Shareholders may, by an absolute majority of the votes
representing at least one-third of the total outstanding capital, dismiss the Supervisory Board in
its entirety for lack of confidence. In such event, the Enterprise Chamber of the Amsterdam Court
shall appoint one or more members of the Supervisory Board at the request of the Board of
Management.
Upon the proposal of the Supervisory Board, the General Meeting of Shareholders determines the
remuneration of the members of the Supervisory Board. A member of the Supervisory Board shall not be granted any shares or option rights by way of remuneration.
38
Approval of Board of Management Decisions
The Board of Management requires prior approval of the General Meeting of Shareholders for
resolutions concerning an important change in the identity or character of ASML or its business,
including in any case:
(i) |
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a transfer of all or substantially all of the business of ASML to a third party; |
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(ii) |
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entering into or the termination of a long-term joint venture between ASML and a third party,
if this joint venture is material to ASML; and |
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(iii) |
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an acquisition or divestment by ASML of an interest in the capital of a company with a value
of at least one third of ASMLs assets (determined by reference to ASMLs most recently
adopted annual accounts). |
Rules of Procedure
The Board of Management and the Supervisory Board have adopted Rules of Procedure for each of the
Board of Management, Supervisory Board and the four Committees of the Supervisory Board. These
Rules of Procedure are posted on ASMLs website.
Directors and Officers Insurance and Indemnification
Members of the Board of Management and Supervisory Board, as well as certain senior management
members, are insured under the ASMLs Directors and Officers Insurance Policy. Although the
insurance policy provides for a wide coverage, our directors and officers may incur uninsured
liabilities. ASML has indemnified its Board of Management and Supervisory Board against any claims
arising in connection with their position as director and officer of the Company, provided that
such claim is not attributable to willful misconduct or intentional recklessness of such officer or
director.
Corporate Governance Developments
ASML continuously monitors and assesses applicable corporate governance rules, including
recommendations and initiatives regarding principles of corporate governance. These include rules
that have been promulgated in the United States both by the NASDAQ National Market (Nasdaq) and
by the SEC pursuant to the Sarbanes-Oxley Act of 2002.
The Netherlands Corporate Governance Code (the Code) came into effect on January 1, 2004. A full
report on ASMLs compliance with the Code is required to be included in a companys statutory
annual report. Netherlands listed companies are required to either comply with the principles and
the best practice provisions of the Code, or to explain on which points they deviate from these
best practice provisions and why.
Pursuant to the Codes recommendations, ASML has included a separate chapter on corporate
governance in both its annual reports. The Code contains recommendations with regard to corporate
governance, including the following topics:
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strengthening the role of the Supervisory Board and its committees and to increase its
independence, quality and expertise; |
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strengthening the role of the shareholders with respect to control on the functioning
of the Board of Management and the Supervisory Board, as well as with respect to
nomination and remuneration of members of the Board of Management and with respect to the
nomination of members of the Supervisory Board; |
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facilitating and encouraging shareholders to use their voting power and to actively
participate in the General Meeting of Shareholders; and |
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defining the role of the external auditor vis-à-vis the Supervisory Board as its
principal contact. |
Committees of ASMLs Supervisory Board
The Supervisory Board has an Audit Committee, a Remuneration Committee, a Selection and Nomination
Committee and a Technology and Strategy Committee. Members of these committees are appointed from
among the Supervisory Board members.
Audit Committee
ASMLs Audit Committee is composed of three members of the Supervisory Board. The current members
of our Audit Committee are Fritz Fröhlich (chairman), Henk Bodt and Jan Dekker, each of whom is an
independent, non-executive member of the Supervisory Board. The Supervisory Board has determined
that Fritz Fröhlich qualifies as the Audit Committee financial expert pursuant to Section 407 of
the Sarbanes-Oxley Act and the rules promulgated thereunder. Our external auditor, our Chief
Executive Officer, our Chief Financial Officer, our Corporate Controller as well as other ASML
employees invited by the chairman of the Audit Committee may also attend the meetings of the Audit
Committee.
The Audit Committee assists the Supervisory Board in:
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overseeing the integrity of our financial statements and related non-financial
disclosure; |
39
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overseeing the qualifications, independence and performance of the external auditor;
and |
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overseeing the integrity of our systems of disclosure controls and procedures and the
system of internal controls regarding finance and accounting. |
The Audit Committee held six meetings in 2005. At these meetings the Audit Committee, reviewed our
quarterly earnings announcements and our audited annual consolidated financial statements,
discussed the system of internal controls over financial reporting and related audit findings,
approved the external audit plan and related audit fees and pre-approved any audit and non-audit
services to be rendered by our external auditor.
Remuneration Committee
ASMLs Remuneration Committee is composed of three members of the Supervisory Board. The current
members of our Remuneration Committee are Jos Westerburgen (chairman), Henk Bodt and Ieke van den
Burg. The Remuneration Committee is responsible for the preparation of the remuneration policy for
the Board of Management.
The Remuneration Committee prepares and the Supervisory Board establishes ASMLs general
compensation philosophy for members of the Board of Management, and oversees the development and
implementation of compensation programs for members of the Board of Management. The Remuneration
Committee reviews and proposes to the Supervisory Board corporate goals and objectives relevant to
the compensation of members of the Board of Management. The Committee further evaluates the
performance of members of the Board of Management in view of those goals and objectives, and makes
recommendations to the Supervisory Board on the compensation levels of the members of the Board of
Management based on this evaluation.
In proposing to the Supervisory Board the actual remuneration elements and levels applicable to the
members of the Board of Management, the Remuneration Committee considers, among other factors, the
remuneration policy, the desired levels of and emphasis on particular aspects of ASMLs short and
long-term performance, as well as current compensation and benefits structures and levels
benchmarked against relevant peers. External compensation survey data and, where necessary,
external consultants are used to benchmark ASMLs remuneration levels and structures.
In 2005, the Remuneration Committee held two scheduled regular meetings and various ad hoc
meetings.
Selection and Nomination Committee
ASMLs Selection and Nomination Committee is composed of three members of the Supervisory Board.
The current members of our Selection and Nomination Committee are Jos Westerburgen (chairman), Henk
Bodt and Arthur van der Poel.
The Selection and Nomination Committee assists the Supervisory Board in:
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preparing the selection criteria and
appointment procedures for members of
the Companys Supervisory Board and
Board of Management; |
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periodically evaluating the scope and
composition of the Board of
Management and the Supervisory Board
and proposing the profile of the
Supervisory Board in relation
thereto; |
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periodically evaluating the
functioning of individual members of
the Board of Management and the
Supervisory Board and reporting the
results thereof to the Supervisory
Board; and |
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proposing (re-)appointments of
members of the Board of Management
and the Supervisory Board and
supervising the policy of the Board
of Management in relation to the
selection and appointment criteria
for senior management. |
The Selection and Nomination Committee held two regularly scheduled meetings in 2005. In addition,
the members of the Selection and Nomination Committee met several times on an ad hoc basis to
review recruitment of the new Executive Vice President Operations.
Technology and Strategy Committee
ASMLs Technology and Strategy Committee is composed of four members of the Supervisory Board. The
current members of our Technology and Strategy Committee are Arthur van der Poel (chairman), Peter
Grassmann, Jan Dekker and OB Bilous. In addition, the Technology and Strategy Committee may appoint
one or more advisors from within the Company and/or from outside the Company. The advisors to the
Technology and Strategy Committee may be invited as guests to (parts of) the meetings of the
Committee, but are not entitled to vote in the meetings.
The Technology and Strategy Committee advises the Supervisory Board in relation to the following
responsibilities and may prepare resolutions of the Supervisory Board related thereto:
40
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a) |
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familiarization with and risk assessment and study of potential strategies, required
technical resources, technology roadmaps and product roadmaps; and |
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b) |
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providing advice to the Supervisory Board with respect to matters related thereto. |
The Technology and Strategy Committee holds at least two meetings per year and held three meetings
in 2005.
Disclosure Committee
ASML has a Disclosure Committee to ensure compliance with applicable disclosure requirements
arising under United States and Netherlands law. The Disclosure Committee reports to and assists
our Chief Executive Officer and Chief Financial Officer in the maintenance and evaluation of
disclosure controls and procedures. The Audit Committee is kept informed about the outcome of the
Disclosure Committee meetings. The Disclosure Committee gathers all relevant financial and
non-financial information and assesses materiality, timeliness and necessity for disclosure of such
information. The Disclosure Committee comprises various members of senior management. Furthermore,
members of the Disclosure Committee are in close contact with our external legal counsel and our
external auditor.
During 2005, the Disclosure Committee reviewed our quarterly earnings announcements and met to
review our audited annual consolidated financial statements and other public announcements
containing financial information. In addition, specific meetings were held to assess disclosure
controls and procedures and internal control over financial reporting. In order to assist the
disclosure committee in preparing its advice to our CEO and CFO in their assessment of ASMLs
disclosure controls and procedures and internal control over financial reporting, we have an
Internal Control Committee, comprising three members of the Disclosure Committee.
Variations from Certain Nasdaq Corporate Governance Rules
Nasdaq rules provide that foreign private issuers may follow home country practice in lieu of the
Nasdaq corporate governance standards subject to certain exceptions and except to the extent that
such exemptions would be contrary to US federal securities laws. The practices followed by ASML in
lieu of Nasdaq rules are described below:
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ASML does not follow Nasdaqs quorum requirements applicable to meetings of ordinary
shareholders. In accordance with Dutch law and Dutch generally accepted business practice,
ASMLs Articles of Association provide that there are no quorum requirements generally
applicable to General Meetings of Shareholders. |
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ASML does not follow Nasdaqs requirements regarding the
provision of proxy statements for General Meetings of Shareholders. Dutch law does not have a
regulatory regime for the solicitation of proxies and the solicitation of proxies is not a
generally accepted business practice in The Netherlands. ASML does provide shareholders with
an agenda and other relevant documents for the General Meeting of Shareholders. |
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ASML does not follow Nasdaqs requirement regarding distribution to shareholders of
copies of an annual report containing audited financial statements prior to the Companys Annual
General Meeting of Shareholders. The distribution of annual reports to shareholders is not
required under Dutch corporate law, Dutch securities laws, or by Euronext Amsterdam. Furthermore,
it is generally accepted business practice for Dutch companies not to distribute annual reports.
In part, this is because the Dutch system of bearer shares has made it impractical to keep a
current list of holders of the bearer shares in order to distribute the annual reports. Instead,
we make our annual report available at our corporate head office in the Netherlands (and at the
offices of our Netherlands listing agent as stated in the convening notice for the meeting) as
from the day of convocation of the Annual General Meeting of Shareholders. In addition, we post a
copy of our annual report on our website prior to the Annual General Meeting of Shareholders. |
D. Employees
As of December 31, 2005, we had 5,055 employees in our operations employed primarily in
manufacturing and product development activities at our headquarters in Veldhoven. As of December
31, 2003, and December 31, 2004, the total number of employees in continued operations was 5,059
and 5,071, respectively. In addition, we had approximately 1,000 temporary employees as of December
31, 2005. For a more detailed description of employee information, see Notes 13 and 18 to our
consolidated financial statements, which are incorporated herein by reference. We rely on our
ability to vary the number of temporary employees to respond to fluctuating market demand for our
products.
41
Our future success will depend on our ability to attract, train, retain and motivate highly
qualified employees, who are in great demand. We are particularly reliant for our continued success
on the services of several key employees, including a number of systems development specialists
with advanced university qualifications in engineering, optics and computing.
ASML Netherlands B.V., our operating subsidiary in the Netherlands, has a Works Council, as
required by Netherlands law. A Works Council is a representative body of the employees of a
Netherlands company elected by the employees. The Board of Management of any Netherlands company
that runs an enterprise with a Works Council must seek the non-binding advice of the Works Council
before taking certain decisions with respect to the company, such as those related to a major
restructuring, a change of control, or the appointment or dismissal of a member of the Board of
Management. Other decisions directly involving employment matters that apply either to all
employees, or certain groups of employees, may only be taken with the Works Councils approval.
Such a decision may be taken without the prior approval of the Works Council only with the approval
of the District Court.
A dispute arose in early 2005 between the Company and the Works Council. In January 2005, the Works
Council expressed its view that the establishment of and amendments to bonus plans for management,
in particular, the ASML Senior and Executive Bonus Plan (the 92+ Bonus Plan), should be subject
to the approval of the Works Council. We have always maintained that the Works Council does not
have such a right of approval. In May 2005, the Works Council initiated legal proceedings to
nullify the 92+ Bonus Plan and to confirm its right of approval with respect to the establishment
of and amendments to the 92+ Bonus Plan. On November 8, 2005, the Eindhoven Cantonal Court ruled in
favor of the Works Council and confirmed the nullification of the 92+ Bonus Plan. We have filed an
appeal of this decision with the Court of Appeal in s- Hertogenbosch and expect a decision during
the summer of 2006.
See Note 18 to our consolidated financial statements for a breakdown of our employees by function.
E. Share Ownership
Information with respect to share ownership of members of our Supervisory Board and Board of
Management is included in Item 7 Major Shareholders and Related Party Transactions and Note 17 to
our consolidated financial statements, which are incorporated herein by reference. Information with
respect to the grant of shares and share options to employees is included in Note 13 to our
consolidated financial Statements which is incorporated herein by reference.
Item 7
Major Shareholders and Related Party Transactions
A. Major Shareholders
The following table sets forth the total number of ordinary shares owned by each shareholder whose
beneficial ownership of ordinary shares exceeds 5 percent of the ordinary shares issued and
outstanding, as well as the ordinary shares (including options) owned by the members of the
Supervisory Board and members of the Board of Management (which includes those persons specified in
Item 6 Directors, Senior Management and Employees), as a group, as of December 31, 2005:
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Identity of Person or Group |
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Amount Owned |
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Percent of Class |
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Capital Group International, Inc 1 |
|
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51,528,140 |
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10.6 |
% |
FMR Corp. 2 |
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54,662,612 |
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11.3 |
% |
Capital Research and Management Company 3 |
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50,572,880 |
|
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10.5 |
% |
Members of ASMLs Supervisory Board and
Board of Management, as a group (5 persons) 4 |
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654,660 |
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* |
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* |
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Less than 1 percent.
1 Based solely on the Schedule 13-G/A jointly filed by Capital Group
International, Inc. with the Commission on February 11, 2005. |
|
2 |
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Based solely on the Schedule 13-G/A filed by FMR Corp. with the Commission
on February 14, 2005. |
|
3 |
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Based solely on the Schedule 13-G filed by Capital Research and Management
Company with the Commission on February 11, 2005. |
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4 |
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Four members of our Board of Management own a total of 636,780 options
to purchase ASML shares. Four members of our Board of Management together are also entitled to
conditional performance stock options and conditional performance stock. The ultimately awarded
number of performance stock will be determined in the financial year 2008 and is conditional upon
the achievement of performance targets. See Note 17 to our consolidated financial statements for
information on options held by and conditional performance stock conditionally awarded to members
of our Board of Management on an individual basis. One member of our Board of Management owns
14,880 of our |
42
outstanding shares. One member of the Supervisory Board holds 3,000 of our outstanding shares. None
of the other members of the Supervisory Board hold any of our outstanding shares or options on
shares. Certain members of our Board of Management have deposited their stock options with an
independent fund manager who has authority to exercise these options and dispose of the underlying
shares without instructions from, or consultation with, the respective member of the Board of
Management.
According to SEC filings, (i) Capital Group International, Inc. increased its shareholding
(including as a holder of convertible notes) from 28,455,070 shares as of November 2003 to
51,528,140 shares as of February 2005, (ii) Capital Research and Management Company increased its
shareholding (including as a holder of convertible notes) from 26,807,920 shares as of February
2004 to 50,572,880 as of February 2005 and (iii) FMR Corp. reduced its shareholding (including as a
holder of convertible notes) from 58,304,695 shares as of February 2003 to 54,662,612 shares as of
February 2005.
Our major shareholders do not have voting rights different from other shareholders.
We do not issue share certificates, except for registered New York Shares. For more information see
Item 10.B. Memorandum and Articles of Association.
As of December 31, 2005, our ordinary shares were held by 612 registered holders with a registered
address in the United States. Since certain of our ordinary shares were held by brokers and
nominees, the number of record holders in the United States may not be representative of the number
of beneficial holders or of where the beneficial holders are resident.
Obligations of Shareholders to Disclose Holdings under Netherlands Law
Holders of our shares may be subject to reporting obligations under the Netherlands 1996 Act on
Disclosure of Holdings in Listed Companies (the Major Holdings Act).
The Major Holdings Act applies to any person or entity that acquires or disposes of an interest in
the voting rights and/or the capital of a public limited company incorporated under the laws of the
Netherlands that is officially listed on a stock exchange within the European Union (the EU).
Disclosure is required when, as a result of an acquisition or disposal, the percentage of voting
rights or capital interest acquired or disposed of by a person or an entity reaches, exceeds or
falls below 5, 10, 25, 50 or 66-2/3 percent. With respect to ASML, the Major Holdings Act would
require any person or entity whose interest in the voting rights and/or capital of ASML reached,
exceeded or fell below those percentage interests to notify in writing both ASML and the
Netherlands Authority for the Financial Markets (Autoriteit Financiële Markten, the AFM)
immediately after the acquisition or disposal of the triggering interest in ASMLs share capital.
For the purpose of calculating the percentage of capital interest or voting rights, the following
interests must be taken into account: shares and votes (i) directly held by any person, (ii) held
by such persons subsidiaries, (iii) held by a third party for such persons account and (iv) held
by a third party with whom such person has concluded an oral or written voting agreement. Interests
held jointly by multiple persons are attributed to those persons in accordance with their
entitlement. A holder of a pledge or right of usufruct in respect of shares can also be subject to
these reporting obligations if such person has, or can acquire, the right to vote on the shares or,
in case of depositary receipts, the underlying shares.
For the same purpose, the following instruments qualify as shares and votes respectively: (i)
shares, depositary receipts for shares, contractual rights to acquire shares or depositary receipts
for shares (such as the rights under convertible bonds) and (ii) votes and contractual rights to
acquire votes.
On July 3, 2003, a draft bill to amend the Major Holding Act was submitted to the Second Chamber of
the Netherlands Parliament and is expected to enter into force soon. The provisions of this draft
bill (including its latest amendments) can be summarised as follows:
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the percentage thresholds that trigger a reporting requirement are: 5, 10, 15, 20, 25, 30, 50 and
70 percent; |
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a holder must notify the AFM of the percentages of voting rights
and capital interest held by it if either or both of such percentages
crosses these thresholds (i) immediately, if this is the result of an
acquisition or disposal by it; (ii) within four trading days, if this
is the result of a change in the companys share capital or voting
rights reported in the AFMs public register; |
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persons holding 5% or more in voting rights or capital interest must
notify the AFM of any changes in the composition of their interest
since the previous notification within four weeks after December 31; |
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the following instruments qualify as shares: (i) shares, (ii)
depositary receipts for shares (or negotiable instruments similar to
such receipts)(iii) negotiable instruments for acquiring the
instruments under (i) or (ii) (such as convertible bonds), and (iv)
options for acquiring the instruments under (i) or (ii);
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43
- |
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the following shares and votes qualify as shares and votes held by a
person: those directly held by it; those held by its subsidiaries;
those held by a third party for such persons account; those held by a
third party with whom the person has concluded an oral or written
voting agreement; those temporarily held by a third party against
payment. Shares held by the custodian of an unincorporated investment
fund are deemed to be held by such funds manager. Shares held jointly
by more persons are in principle attributed in accordance with their
entitlement. A person acting as an attorney who has discretion in the
exercise of voting rights is deemed to hold these votes. A holder of a
pledge or right of usufruct in respect of shares is deemed to hold
voting rights if he has, or can acquire, the right to vote on the
shares or, in case of depositary receipts, the underlying shares. |
The AFM keeps a public registry of and publishes all notifications made pursuant to the Major
Holdings Act.
Non-compliance with the reporting obligations under the Major Holdings Act could lead to criminal
fines, administrative fines, imprisonment or other sanctions. In addition, non-compliance with the
reporting obligations under the Major Holdings Act may lead to civil sanctions, including (i)
suspension of the voting rights relating to the shares held by the offender, for a period of
not more than three years, (ii) nullification of any resolution of the General Meeting of
Shareholders of the company to the extent that such resolution would not have been approved if the
votes at the disposal of the person or entity in violation of a duty under the Major Holdings Act
had not been exercised and (iii) a prohibition on the acquisition by the offender of our shares or
the voting on our ordinary shares for a period of not more than five years.
B. Related Party Transactions
There have been no transactions during our most recent fiscal year, nor are there presently any
proposed material transactions, between ASML or any of its subsidiaries, and any significant
shareholder and any director or officer or any relative or spouse thereof. During our most recent
fiscal year, there has been no, and at present there is no, outstanding indebtedness to ASML owed
or owing by any director or officer of ASML or any associate thereof, other than the virtual
financing arrangement with respect to share options described under Note 13 to our consolidated
financial statements.
C. Interests of Experts & Counsel
Not applicable.
Item 8
Financial Information
A. Consolidated Statements and Other Financial Information
Consolidated Statements
See Item 18 Financial Statements.
Legal Proceedings
See Item 4.B. Business Overview and Note 14 to our consolidated financial statements, which is
incorporated herein by reference.
Dividend Policy
ASML has no current intention to pay dividends on its ordinary shares. For more information see
Item 10.B. Memorandum and Articles of Association and Item 10.D. Exchange Controls.
B. Significant Changes
No significant changes have occurred since the date of our consolidated financial statements. See
Item 5.D. Trend Information.
Item 9
The Offer and Listing
A. Listing Details
Our ordinary shares are listed for trading in the form of New York Shares on Nasdaq and in the form
of registered shares (Amsterdam Shares) on the Eurolist by Euronext Amsterdam. The principal
trading market of our ordinary shares is Eurolist by Euronext Amsterdam. For more information see
Item 10.B Memorandum and Articles of Association.
The following table sets forth, for the periods indicated, the high and low closing prices of our
ordinary shares on Nasdaq, as well as on Eurolist by Euronext Amsterdam.
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Nasdaq |
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Euronext Amsterdam |
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US$ |
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|
EUR |
|
|
|
High |
|
|
Low |
|
|
High |
|
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Low |
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Annual Information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001 |
|
|
30.62 |
|
|
|
9.51 |
|
|
|
32.32 |
|
|
|
9.70 |
|
2002 |
|
|
25.80 |
|
|
|
4.95 |
|
|
|
29.79 |
|
|
|
5.13 |
|
2003 |
|
|
20.39 |
|
|
|
6.11 |
|
|
|
17.04 |
|
|
|
5.39 |
|
2004 |
|
|
22.32 |
|
|
|
12.41 |
|
|
|
17.50 |
|
|
|
10.26 |
|
2005 |
|
|
20.13 |
|
|
|
14.44 |
|
|
|
17.12 |
|
|
|
11.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1st quarter 2004 |
|
|
22.32 |
|
|
|
16.48 |
|
|
|
17.50 |
|
|
|
13.38 |
|
2nd quarter 2004 |
|
|
19.37 |
|
|
|
15.16 |
|
|
|
15.93 |
|
|
|
12.68 |
|
3rd quarter 2004 |
|
|
16.85 |
|
|
|
12.41 |
|
|
|
13.90 |
|
|
|
10.36 |
|
4th quarter 2004 |
|
|
16.61 |
|
|
|
12.82 |
|
|
|
12.49 |
|
|
|
10.26 |
|
1st quarter 2005 |
|
|
18.72 |
|
|
|
14.48 |
|
|
|
14.15 |
|
|
|
11.19 |
|
2nd quarter 2005 |
|
|
16.91 |
|
|
|
14.44 |
|
|
|
13.97 |
|
|
|
11.11 |
|
3rd quarter 2005 |
|
|
18.09 |
|
|
|
15.60 |
|
|
|
14.70 |
|
|
|
13.06 |
|
4th quarter 2005 |
|
|
20.13 |
|
|
|
16.29 |
|
|
|
17.12 |
|
|
|
13.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 2005 |
|
|
18.09 |
|
|
|
15.60 |
|
|
|
14.70 |
|
|
|
13.06 |
|
August 2005 |
|
|
17.90 |
|
|
|
16.61 |
|
|
|
14.58 |
|
|
|
13.50 |
|
September 2005 |
|
|
17.57 |
|
|
|
16.07 |
|
|
|
14.24 |
|
|
|
13.18 |
|
October 2005 |
|
|
17.28 |
|
|
|
16.29 |
|
|
|
14.36 |
|
|
|
13.58 |
|
November 2005 |
|
|
19.66 |
|
|
|
16.93 |
|
|
|
16.76 |
|
|
|
13.99 |
|
December 2005 |
|
|
20.13 |
|
|
|
19.52 |
|
|
|
17.12 |
|
|
|
16.46 |
|
January (through January 24), 2006 |
|
|
22.50 |
|
|
|
20.45 |
|
|
|
18.49 |
|
|
|
16.83 |
|
(Source: Bloomberg)
B. Plan of Distribution
Not applicable.
C. Markets
See Item 9.A. Listing Details.
D. Selling Shareholder
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
Item 10
Additional Information
A. Share Capital
Not applicable.
B. Memorandum and Articles of Association
The information required by Item 10.B. is incorporated by reference to ASMLs Current Report on
Form 6-K, filed with the Commission on June 30, 2005.
Current Authorizations to Issue and Repurchase Ordinary Shares
Our Board of Management has the power to issue ordinary shares and preference shares if and to the
extent the Board of Management has been authorized to do so by the General Meeting of Shareholders
(whether by means of a resolution or by an amendment to our Articles of Association). However, the
Supervisory Board and the Meeting of Priority Shareholders must approve any issuance of ordinary
shares or preference shares.
At our annual General Meeting of Shareholders, held on March 24, 2005, the Board of Management was
not granted the authorization to issue shares and/or rights thereto. At our annual General Meeting
of Shareholders to be held on March 23, 2006, our shareholders will be asked to authorize the Board
of Management (subject to the approval of the Supervisory Board) to issue shares and/or rights
thereto through September 23, 2007, representing up to a maximum of 10 percent of our issued share
capital as of the date of authorization (March 23, 2006), plus an additional 10
45
percent of our issued share capital as of the date of authorization (March 23, 2006) that may be
issued in connection with mergers and acquisitions.
Holders of our ordinary shares have a pro rata preemptive right of subscription to any issuance of
ordinary shares for cash, which right may be limited or eliminated. Ordinary shareholders have no
pro rata preemptive right of subscription to any ordinary shares issued for consideration other
than cash or ordinary shares issued to employees. If authorized for this purpose by the General
Meeting of Shareholders (whether by means of a resolution or by an amendment to our Articles of
Association), the Board of Management has the power, with the approval of the Supervisory Board and
the Meeting of Priority Shareholders, to limit or eliminate the preemptive rights of holders of
ordinary shares. A designation may be renewed. At our annual General Meeting of Shareholders, held
on March 24, 2005, the Board of Management was not granted the authorization, subject to the
aforementioned approvals, to limit or eliminate preemptive rights of holders of ordinary shares. At
our annual General Meeting of Shareholders to be held on March 23, 2006, our shareholders will be
asked to grant this authority through September 23, 2007. At this annual General Meeting of
Shareholders, the shareholders will be asked to approve the stock- and option plans for our Board
of Management and for our employees separately. Furthermore, at this annual General Meeting of
Shareholders, the shareholders will be asked to grant authority to the Board of Management to issue
shares or options separately. These authorizations will each be granted for a period of 18 months.
We may repurchase our issued ordinary shares at any time, subject to compliance with the
requirements of Netherlands law and provided the aggregate nominal value of the ordinary shares
held by ASML or a subsidiary at any time amounts to no more than one-tenth of our issued share
capital. Any such purchases are subject to the approval of the Supervisory Board and the
authorization (whether by means of a resolution or by an amendment to our Articles of Association)
of shareholders at our General Meeting of Shareholders, which authorization may not be for more
than 18 months. The Board of Management is currently authorized, subject to Supervisory Board
approval, to repurchase through September 24, 2006 up to a maximum of 10 percent of our issued
share capital as of the date of authorization (March 24, 2005) at a price between the nominal value
of the ordinary shares purchased and 110 percent of the market price of these securities on
Euronext Amsterdam or Nasdaq. At our annual General Meeting of Shareholders to be held on March 23,
2006, our shareholders will be asked to extend this authority through September 23, 2007.
Shareholder Approval for Share and Share Option Arrangements for Board of Management
In 2005, ASML submitted to the General Meeting of Shareholders for approval a proposal regarding
plans to issue shares or rights to acquire shares to members of the Board of Management, in
accordance with the Code. We have not in the past established and do not intend to establish in the
future stock option or purchase plans or other equity compensation arrangements for members of our
Supervisory Board.
Nasdaq rules require shareholder approval of stock option plans available to officers, directors or
employees. However, Nasdaq has granted ASML an exemption from this requirement (foreign private
issuers are no longer required to obtain an exemption, but may follow home country practice in lieu
of Nasdaq corporate governance rules, subject to exceptions). Notwithstanding this exemption, ASML
nevertheless submitted stock option plans available to employees to the General Meeting of
Shareholders in the annual meeting of March 24, 2005.
Cancellation of Priority Shares
On January 18, 2006, we announced our decision to cancel all issued priority shares and to dissolve
the Stichting Prioriteitsaandelen ASML Holding N.V.. The cancellation of the priority shares
requires an amendment to our Articles of Association. The proposal for such amendment will be put
on the agenda for the Annual General Meeting of Shareholders scheduled on March 23, 2006.
C. Material Contracts
Nikon- ASML Cross License Agreement
Scope of License
In connection with a settlement of worldwide patent litigation between Nikon, ASML and Zeiss, on
December 10, 2004, ASML entered into a patent cross-license agreement with Nikon, effective
November 12, 2004, pursuant to which (i) ASML granted Nikon a non-exclusive license to manufacture
and sell lithography equipment under patents owned or otherwise sublicensable by ASML and (ii)
Nikon granted ASML a non-exclusive license to manufacture and sell lithography equipment (other
than optical components) under patents owned or otherwise sublicensable by Nikon. These license
grants cover existing patents, as well as additional patents that issue worldwide before the end of
2009, and are retroactive to the effective application date of each licensed patent. The license
grants exclude patent claims for electron beam or other charged particle beam lithography,
lithography to manufacture flat panel displays or expose large-area substrates other than wafers,
maskless lithography, glass products and special mask technology. Certain Nikon patents related to
immersion lithography designated as excluded Nikon patents are also excluded from the
cross-license, but if Nikon sues
46
ASML, Zeiss or any of their subsidiaries or customers in respect of such patents, ASML has the
right to terminate the license that it has granted to Nikon under the cross-license agreement. In
addition, Nikon and ASML agree not to sue each other based on exploitation of lithography products
under co-owned patents that are not licensable without the consent of the co-owner.
Term of License
The licenses under the agreement are perpetual for patents having an effective application date
before 2003 (Class A Patents) and for all other patents (Class B Patents) will terminate at the
end of 2009. At any time until June 30, 2015, either party has a limited right to designate up to 5
Class B patents (or patents related to lithography issued from 2010 to 2015) of the other party as
Class A patents. Any patents acquired after the date of the agreement are deemed Class B Patents.
Immunity
Under the terms of the settlement, ASML and Nikon have granted each other immunity from patent
suits by the other party from the end of 2009 until December 31, 2014 under patents issuing before
2015. After 2015, either party may sue the other party for activities from 2010 to 2015 under
patents not subject to a license, provided that damages for that period are limited to a reasonable
royalty for that period. Each party also grants to the other partys resellers and customers
immunity from patent suits for use of lithography equipment purchased prior to 2015, provided that
the reseller or customer does not sue or threaten to sue the other party for lithography related
patent infringement. Each party also grants to the other party and its resellers and customers
limited immunity from patent suits for use of special masks and glass products sold before 2015.
Either party may bring suit after 2015 for special mask products sold from 2010 to 2015, provided
that damages are limited to reasonable royalties for that period.
Payments
In connection with the settlement, ASML made an initial payment to Nikon of US$ 60 million
(approximately EUR 49 million) in 2004, a further required payment of US$ 9 million (approximately
EUR 8 million) before November 12, 2005, and is obligated to make additional payments to Nikon of
US$9 million in each of 2006 and 2007. Zeiss made an initial payment to Nikon of US$ 40 million
(approximately EUR 32 million) in 2004, a further required payment of US$ 6 million (approximately
EUR 4 million) in 2005, and is required to make additional payments to Nikon of US$ 6 million in
each of 2006 and 2007. See Item 10.C. Material Contracts.
Termination; Assignment
Nikon may terminate the cross-license agreement if either ASML or Zeiss default on their payment
obligations to Nikon, provided that ASML and Zeiss may cure each others payment default. Either
party may assign its rights under the cross-license agreement in connection with a sale of all or
substantially all of the assets of the business of manufacturing the products covered by the
cross-license agreement.
ASML/Zeiss Sublicense Agreement
Also in connection with a settlement of worldwide patent litigation between Nikon, ASML and Zeiss,
on December 10, 2004, ASML entered into a sublicense agreement with Zeiss SMT AG, effective
November 12, 2004, pursuant to which Zeiss granted ASML a non-exclusive license of all of the
rights it received from Nikon to exploit optical components under the Nikon-Zeiss Patent
Cross-License Agreement. Pursuant to the Nikon-Zeiss Patent Cross-License Agreement, Nikon granted
Zeiss a non-exclusive license to manufacture and sell optical components under patents owned or
otherwise sublicensable by Nikon. No royalties are payable by ASML for the license prior to the
termination of the 1997 Agreement between Carl Zeiss AG and ASML Netherlands B.V. The 1997
Agreement is terminable by either party (i) as of the end of a calendar year, upon 3 years notice,
or (ii) for cause (breach of the agreement by the other party). Upon that termination, ASML is
obligated to begin to pay Zeiss a royalty on sales of certain lithography systems including optical
components, unless that agreement has been unilaterally terminated by Zeiss without cause. If Nikon
sells optical components to ASML but does not pay Zeiss a royalty as provided in the Nikon-Zeiss
Patent Cross-License Agreement, ASML will lose its right to sell stand-alone optical components
under the sublicense agreement.
The sublicense agreement terminates upon termination of the Nikon-Zeiss Patent Cross-License
Agreement or if ASML does not pay royalties owing to Zeiss under the sublicense agreement. ASML may
assign its rights under the sublicense agreement in connection with a sale of all or substantially
all of the assets of its lithography business and Zeiss may transfer its rights under the
sublicense agreement in connection with a sale of all or substantially all of the assets of its
optical components business.
Employment Agreement with Klaus Fuchs
On September 19, 2005, the Company entered into an employment agreement with Klaus Fuchs to be
ASMLs Chief Operating Officer, commencing on November 1,
2005 and terminable by the Company on not less than six months notice and by Mr. Fuchs on not less than
three months notice. The employment agreement has a term of four years, but can be extended with
the consent of both parties. Mr. Fuchs is entitled to receive a payment equal to one years base
salary in the event he is terminated by the Company. The employment agreement contains
confidentiality and non-competition provisions to which Mr. Fuchs is subject.
47
The agreement entitles Mr. Fuchs to a base salary of EUR 400,000 per year, plus an annual cash
bonus of up to 50% of base salary if certain performance targets are met. Pursuant to the
agreement, Mr. Fuchs will receive 22,000 sign-on stock as well as 22,000 sign-on stock options at
the first possible moment of grant and is entitled to receive annually, if certain performance
targets are met, (i) stock options with a value equal to up to 25% of base salary and (ii) stock
with a value equal to up to 25% of base salary. Mr. Fuchs is also entitled to pension benefits
under a defined contribution plan. For additional information on Mr. Fuchs remuneration, see Note
17 to our consolidated financial statements.
Consultancy Agreement with David Chavoustie
Effective December 31, 2005, Mr. Chavoustie retired from our Board of Management. ASML and Mr.
Chavoustie entered into a consultancy agreement, effective January 1, 2006, whereby Mr. Chavoustie
will perform consulting services for ASML, including services relating to certain activities of
ASML in the United States and our operations in Asia. Under the terms of the agreement, ASML will
pay Mr. Chavoustie a fee of $800 per half day segment. The agreement has a term of one year and may
be extended with the consent of both parties.
D. Exchange Controls
There are currently no limitations, either under the laws of the Netherlands or in the Articles of
Association of ASML, to the rights of non-residents to hold or vote ordinary shares. Cash
distributions, if any, payable in euro on Amsterdam registered shares and on ASMLs Amsterdam
shares may be officially transferred from the Netherlands and converted into any other currency
without being subject to any Netherlands legal restrictions. However, for statistical purposes,
such payments and transactions must be reported by ASML to the Netherlands Central Bank.
Furthermore, no payments, including dividend payments, may be made to jurisdictions subject to
certain sanctions, adopted by the government of the Netherlands, implementing resolutions of the
Security Council of the United Nations. Cash distributions, if any, on New York Shares shall be
paid in U.S. dollars, converted at the rate of exchange on Euronext Amsterdam at the close of
business on the date fixed for that purpose by the Board of Management in accordance with the
Articles of Association. ASML has no current intention to pay dividends on its ordinary shares. For
more information see Item 10.B. Memorandum and Articles of Association.
E. Taxation
Netherlands Taxation
The statements below represent a summary of current Netherlands tax laws, regulations and judicial
interpretations thereof. The description is limited to the material tax implications for a holder
of ordinary shares who is not, or is not deemed to be, a resident of the Netherlands for
Netherlands tax purposes (a Non-resident Holder). This description does not address special rules
that may apply to special classes of holders of ordinary shares and should not be read as extending
by implication to matters not specifically referred to herein. As to individual tax consequences,
each investor in ordinary shares should consult his or her tax counsel.
General
The acquisition of ordinary shares by a non-resident of the Netherlands should not be treated as a
taxable event for Netherlands tax purposes. The income consequences in connection with owning and
disposing of our ordinary shares are discussed below.
Substantial Interest
A person that, directly or indirectly, owns 5% or more of our share capital, or holds options to
purchase 5% or more of our share capital, is deemed to have a substantial interest in our shares,
respectively, our options, as applicable. A deemed substantial interest also exists if (part of) a
substantial interest has been disposed of, or is deemed to be disposed of, in a transaction where
no taxable gain has been recognized. Special attribution rules exist in determining the presence of
a substantial interest.
Income Tax Consequences for Individual Non-resident Holders on Owning and Disposing of the
Ordinary Shares
An individual who is a Non-resident Holder will not be subject to Netherlands income tax on
received income in respect of our ordinary shares or capital gains derived from the sale, exchange
or other disposition of our ordinary shares, provided that such
holder:
|
|
does not carry on and has not carried on a business in the Netherlands through a permanent
establishment or a permanent representative to which the ordinary shares are attributable; |
48
|
|
does not hold and has not held a (deemed) substantial interest in our share capital or, in the
event the Non-resident Holder holds or has held a (deemed) substantial interest in our share
capital, such interest is, respectively was, a business asset in the hands of the holder;
|
|
|
|
does not share and has not shared directly (through the beneficial ownership of ordinary shares
or similar securities) in the profits of an enterprise managed and controlled in the Netherlands
which (is deemed to) own(s), respectively (is deemed to have) has owned, our ordinary shares;
|
|
|
|
does not carry out and has not carried out any activities which generate taxable profit or
taxable wages to which the holding of our ordinary shares was connected;
|
|
|
|
does not carry out and has not carried out employment activities in the Netherlands, does not
serve and has not served as a director or board member of any entity resident in the Netherlands,
and does not serve and has not served as a civil servant of a Netherlands public entity with which
the holding of our ordinary shares is or was connected; and
|
|
|
|
is not an individual that has elected to be taxed as a resident of the Netherlands. |
Corporate Income Tax Consequences for Corporate Non-resident Holders
Income derived from ordinary shares or capital gains derived from the sale, exchange or disposition
of ordinary shares by a corporate Non-resident Holder is taxable if:
|
|
the holder carries on a business in the Netherlands through a permanent establishment or a
permanent agent in the Netherlands (Netherlands enterprise) and the ordinary shares are
attributable to this permanent establishment or permanent agent, unless the participation exemption
(discussed below) applies; or
|
|
|
|
the holder has a substantial interest in our share capital, which is not allocable to his
enterprise; or
|
|
|
|
certain assets of the holder are deemed to be treated as a Netherlands enterprise under
Netherlands tax law and the ordinary shares are attributable to this Netherlands enterprise. |
To qualify for the Netherlands participation exemption, the holder must generally hold at least 5%
of our nominal paid-in capital and meet certain other requirements.
Dividend Withholding Tax
In general, a dividend distributed by us in respect of our ordinary shares will be subject to a
withholding tax imposed by the Netherlands at the statutory rate of 25%.
Dividends include:
|
|
dividends in cash and in kind;
|
|
|
|
deemed and constructive dividends; |
|
|
|
consideration for the repurchase or redemption of ordinary
shares (including a purchase by a direct or indirect ASML subsidiary) in excess of qualifying average paid-in capital unless such
repurchase is made for temporary investment purposes or is exempt by law;
|
|
|
stock dividends up to their nominal value (unless distributed out of qualifying paid-in capital);
|
|
|
|
any (partial) repayment of paid-in capital not qualifying as capital for Netherlands dividend
withholding tax purposes; and
|
|
|
|
liquidation proceeds in excess of qualifying average paid-in capital for Netherlands dividend
withholding tax purposes. |
A reduction of Netherlands dividend withholding tax can be obtained if:
|
|
the participation exemption applies and the ordinary shares are attributable to a business
carried out in the Netherlands;
|
|
|
|
the dividends are distributed to a qualifying EU corporate holder satisfying the conditions of
the EU Parent-Subsidiary Directive; or |
|
|
|
the rate is reduced by a tax treaty. |
A Non-resident Holder of ordinary shares can be eligible for a partial or complete exemption or
refund of all or a portion of the above withholding tax under a tax treaty that is in effect
between the Netherlands and the Non-resident Holders country of residence. The Netherlands has
concluded such treaties with the United States, Canada, Switzerland, Japan, most European Union
member states, as well as many other countries. Under the Treaty between the United States of
America and the Netherlands for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with Respect to Taxes on Income (the Tax Treaty), dividends paid by us to a Non-resident
Holder that is a resident of the United States as defined in the Tax Treaty (other than an exempt
organization or exempt pension trust, as discussed below) are generally eligible for a reduction of
the 25% Netherlands withholding tax to 15% or, in the case of certain U.S. corporate shareholders
owning at least 10% of our voting power, to 5%, provided that it does not have an enterprise or an
interest in an enterprise that is, in whole or in part, carried on through a permanent
establishment or permanent representative in the Netherlands to which the dividends are
attributable. The Tax Treaty provides for a complete exemption from tax on dividends received by
exempt pension trusts and exempt organizations, as defined therein. Except in the case of exempt
organizations, the reduced dividend withholding tax rate (or exemption from withholding) can be
applied at the source upon payment of the dividends, provided that the proper forms have been filed
in advance of the payment. Exempt organizations
49
remain subject to the statutory withholding rate of 25% and are required to file for a refund of
such withholding.
A Non-resident Holder may not claim the benefits of the Tax Treaty unless (i) it is a resident of
the United States as defined therein, or (ii) it is deemed to be a resident on the basis of the
provisions of article 24(4) of the Tax Treaty, and (iii) its entitlement to those benefits is not
limited by the provisions of article 26 (limitation on benefits) of the Tax Treaty.
In this respect it is noted that the United States and the Netherlands have agreed on a protocol to
the Tax Treaty. It provides for (among others) a 0% dividend withholding tax rate on dividends,
provided certain requirements are met. In addition, above mentioned article 26 (limitation on
benefits) has been adjusted. Some requirements to the various tests mentioned in article 26 will
become more severe and others will be moderated.
Dividend Stripping Rules
Under Netherlands tax legislation regarding anti-dividend stripping, no exemption from, or refund
of, Netherlands dividend withholding tax is granted if the recipient of dividends paid by us is not
considered the beneficial owner of such dividends.
Gift or Inheritance Taxes
Netherlands gift or inheritance taxes will not be levied on the transfer of ordinary shares by way
of gift, or upon the death of a Non-resident Holder, unless:
(1) the transfer is construed as an inheritance or as a gift made by or on behalf of a person who,
at the time of the gift or death, is deemed to be, resident of the Netherlands; or
(2) the ordinary shares are attributable to an enterprise or part thereof that is carried on
through a permanent establishment or a permanent representative in the Netherlands.
For purposes of Netherlands gift and inheritance tax, an individual of Netherlands nationality is
deemed to be a resident of the Netherlands if he has been a resident thereof at any time during the
ten years preceding the time of the gift or death. For purposes of Netherlands gift tax, a person
not possessing Netherlands nationality is deemed to be a resident of the Netherlands if he has
resided therein at any time in the twelve months preceding the gift.
Value Added Tax
No Netherlands value added tax is imposed on dividends in respect of our ordinary shares or on the
transfer of our shares.
Residence
A Non-resident Holder will not become resident, or be deemed to be resident, in the Netherlands
solely as a result of holding our ordinary shares or of the execution, performance, delivery and/or
enforcement of rights in respect of our ordinary shares.
United States Taxation
The following is a discussion of the material U.S. federal income tax consequences relating to the
acquisition, ownership and disposition of ordinary shares by a U.S. Holder (as defined below). This
discussion deals only with ordinary shares held as capital assets and does not deal with the tax
consequences applicable to all categories of investors, some of which (such as tax-exempt entities,
passive foreign investment companies, banks, broker-dealers, investors owning directly, indirectly
or constructively 10% or more of our outstanding voting shares, investors who hold ordinary shares
as part of hedging or conversion transactions and investors whose functional currency is not the
U.S. dollar) may be subject to special rules. In addition, the discussion does not address any
alternative minimum tax or any state, local or non-United States tax consequences. The following
discussion is based on U.S. tax laws, and judicial and administrative interpretations thereof as in
effect on the date hereof, all of which are subject to change, potentially retroactively.
This discussion is based on the Internal Revenue Code of 1986, as amended to the date hereof,
final, temporary and proposed Treasury Department regulations promulgated, and administrative and
judicial interpretations thereof, changes to any of which subsequent to the date hereof, possibly
with retroactive effect, may affect the tax consequences described herein. In addition, there can
be no assurance that the Internal Revenue Service will not challenge one or more of the tax
consequences described herein, and we have not obtained, nor do we intend to obtain, a ruling from
the Internal Revenue Service or an opinion of counsel with respect to the U.S. federal income tax
consequences of acquiring or holding shares. Prospective purchasers of ordinary shares are advised
to consult their tax advisers with respect to their particular circumstances and with respect to
the effects of U.S. federal, state, local or non-U.S. tax laws to which they may be subject.
As used herein, the term U.S. Holder means a beneficial owner of ordinary shares that for U.S.
federal income tax purposes is:
50
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|
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an individual citizen or resident of the United States; |
|
|
|
|
a corporation or other entity treated as a corporation for U.S. federal income tax
purposes created or organized in or under the laws of the United States or of any
political subdivision thereof; |
|
|
|
|
an estate of which the income is subject to U.S. federal income taxation regardless of
its source; |
|
|
|
|
a trust whose administration is subject to the primary supervision of a court within
the United States and which has one or more U.S. persons who have the authority to control
all of its substantial decisions. |
If an entity treated as a partnership for U.S. federal income tax purposes owns ordinary shares,
the U.S. federal income tax treatment of a partner in such partnership will generally depend upon
the status of the partner and the activities of the partnership. A partnership that owns ordinary
shares and the partners in such partnership should consult their tax advisors about the U.S.
federal income tax consequences of holding and disposing of the ordinary shares.
Taxation of Dividends
U.S. Holders will include in gross income as foreign-source dividend income the gross amount of any
distribution (before reduction for Netherlands withholding taxes) ASML makes out of its current or
accumulated earnings and profits (as determined for United States federal income tax purposes) when
the distribution is actually or constructively received by the U.S. Holder. Distributions will not
be eligible for the dividends-received deduction generally allowed to United States corporations in
respect of dividends received from other United States corporations. The amount of the dividend
distribution includible in income of a U.S. Holder should be the U.S. dollar value of the foreign
currency (e.g. euro) paid, determined by the spot rate of exchange on the date of the distribution,
regardless of whether the payment is in fact converted into U.S. dollars. Generally, any gain or
loss resulting from currency exchange fluctuations during the period from the date the dividend
payment is includible in income to the date such payment is converted into U.S. dollars will be
treated as ordinary income or loss. Such gain or loss will generally be income from sources within
the United States for U.S. foreign tax credit purposes. Distributions in excess of current and
accumulated earnings and profits, as determined for United States federal income tax purposes, will
be treated as a non-taxable return of capital to the extent of the U.S. Holders basis in the
ordinary shares and thereafter as taxable capital gain. ASML does not maintain calculations of its
earnings and profits under United States federal income tax principles.
Subject to limitations provided in the U.S. Internal Revenue Code, a U.S. Holder may generally
deduct from its United States federal taxable income, or credit against its United States federal
income tax liability, the amount of any Netherlands withholding taxes. However, Netherlands
withholding tax may be deducted only if the U.S. Holder does not claim a credit for any Netherlands
or other non-U.S. taxes paid or accrued in that year. In addition, Netherlands dividend withholding
taxes will likely not be creditable against the U.S. Holders United States tax liability to the
extent ASML is not required to pay over the amount withheld to the Netherlands Tax Administration.
Currently, a Netherlands corporation that receives dividends from qualifying non-Netherlands
subsidiaries may credit source country tax withheld from those dividends against Netherlands
withholding tax imposed on a dividend paid by a Netherlands corporation, up to a maximum of 3% of
the dividend paid by the Netherlands corporation. The credit reduces the amount of dividend
withholding that ASML is required to pay to the Netherlands Tax Administration but does not reduce
the amount of tax ASML is required to withhold from dividends.
Recently enacted U.S. tax legislation (the 2003 Tax Act) reduces to 15% the maximum tax rate for
certain dividends received by individuals through taxable years beginning on or before December 31,
2008, so long as the stock has been held for more than 60 days during the 120 day period beginning
60 days before the ex-dividend date. Dividends received from qualified foreign corporations
generally qualify for the reduced rate. A non-U.S. corporation (other than a foreign personal
holding company, foreign investment company, or passive foreign investment company) generally will
be considered to be a qualified foreign corporation if (i) the shares of the non-U.S. corporation
are readily tradable on an established securities market in the United States or (ii) the non-U.S.
corporation is eligible with respect to substantially all of its income for the benefits of a
comprehensive income tax treaty with the United States which contains an exchange of information
program. The Tax Treaty has been identified as a qualifying treaty. Individual U.S. Holders should
consult their tax advisors regarding the impact of the provisions of the 2003 Tax Act on their
particular situations.
Taxation on Sale or Other Disposition of Ordinary Shares
Upon a sale or other disposition of ordinary shares, a U.S. Holder will generally recognize capital
gain or loss for U.S. federal income tax purposes in an amount equal to the difference between the
amount realized, if paid in U.S. dollars, or the U.S. dollar value of the amount realized
(determined at the spot rate on the settlement
51
date of the sale) if proceeds are paid in currency other than the U.S. dollar, as the case may be,
and the U.S. Holders tax basis (determined in U.S. dollars) in such ordinary shares. Generally,
the capital gain or loss will be long-term capital gain or loss if the holding period of the U.S.
Holder in the ordinary shares exceeds one year at the time of the sale or other disposition. The
deductibility of capital losses is subject to limitations for U.S. federal income tax purposes.
Gain or loss from the sale or other disposition of ordinary shares generally will be treated as
U.S. source income or loss for U.S. foreign tax credit purposes. Generally, any gain or loss
resulting from currency fluctuations during the period between the date of the sale of the ordinary
shares and the date the sale proceeds are converted into U.S. dollars will be treated as ordinary
income or loss from sources within the United States. Each U.S. Holder should consult its tax
advisor with regard to the translation rules of its adjusted basis and the amount realized upon a
sale or other disposition of its ordinary shares if purchased in, or sold or disposed of for, a
currency other than U.S. dollar.
Information Reporting and Backup Withholding
Information returns may be filed with the Internal Revenue Service (IRS) in connection with
payments on the ordinary shares or proceeds from a sale, redemption or other disposition of the
ordinary shares. A backup withholding tax may apply to these payments if the beneficial owner
fails to provide a correct taxpayer identification number to the paying agent and to comply with
certain certification procedures or otherwise establish an exemption from backup withholding. Any
amounts withheld under the backup withholding rules will be refunded (or credited against the
beneficial owners U.S. federal income tax liability, if any) provided that the required
information is furnished to the IRS.
The discussion set forth above is included for general information only and may not be applicable
depending upon a holders particular situation. Holders should consult their tax advisors with
respect to the tax consequences to them of the purchase, ownership and disposition of shares
including the tax consequences under state, local and other tax laws and the possible effects of
changes in U.S. federal and other tax laws.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to certain of the reporting requirements of the U.S. Securities Exchange Act of 1934
(the Exchange Act). As a foreign private issuer, we are exempt from the rules under the
Exchange Act prescribing certain disclosure and procedural requirements for proxy solicitations,
and our officers, directors and principal shareholders are exempt from the reporting and
short-swing profit recovery provisions contained in Section 16 of the Exchange Act, with respect
to their purchases and sales of shares. In addition, we are not required to file reports and
financial statements with the Commission as frequently or as promptly as U.S. companies whose
securities are registered under the Exchange Act. However, we are required to file with the
Commission, within six months after the end of each fiscal year, an annual report on Form 20-F
containing financial statements audited by an independent accounting firm. We publish unaudited
interim financial information after the end of each quarter. We furnish this quarterly financial
information to the Commission under cover of a Form 6-K.
You may read and copy any document we file with the Commission at its public reference facilities
at 450 Fifth Street, N.W., Washington, DC 20549, Woolworth Building, 233 Broadway, New York, New
York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511.
You may also obtain copies of the documents at prescribed rates by writing to the Public Reference
Section of the Commission at 450 Fifth Street, N.W., Washington DC 20549. The Commission also
maintains a website that contains reports and other information regarding registrants that are
required to file electronically with the Commission. The address of this website is
http://www.sec.gov. Please call the Commission at 1-800-SEC-0330 for further information on the
operation of the public reference facilities.
I. Subsidiary Information
See Item 4.C. Organizational Structure.
Item 11
Quantitative and Qualitative Disclosures About Market Risk
We are subject to market risks including changes in foreign exchange rates and interest rates. In
order to hedge the risks of changes in foreign exchange rates and interest rates, we use derivative
instruments. None of these transactions are entered into for trading purposes.
52
Foreign exchange risk
We operate globally and are thus exposed to foreign exchange risk arising from volatility in
currency exchange rates.
We price most of our product sales in euro, however a portion of our sales, cost of sales and
expenses are denominated in U.S. dollars, and we expect this will continue to be so for the
foreseeable future. We hedge material foreign exchange transaction risk exposure, such as sales
transactions, forecasted purchase cash flows, accounts receivable and accounts payable. This
exposure is mainly hedged with financial instruments such as foreign exchange forward contracts and
foreign exchange options. We closely monitor the effectiveness of our outstanding hedge contracts
throughout the life of the hedges. The majority of financial instruments that we use to hedge
foreign exchange risk have a duration of less than one year. As of December 31, 2005, we anticipate
EUR 9.9 million of other comprehensive income to represent the total anticipated loss to be charged
to sales and EUR 1.2 million to represent the total anticipated gain to be released to cost of
sales over the next 12 months as the forecasted sale and purchase transactions occur.
Since we have subsidiaries outside the euro-zone, the eurodenominated value of our shareholders
equity is also exposed to fluctuations in exchange rates. Equity changes caused by movements in
foreign exchange rates are shown as a translation difference in our consolidated financial
statements. We use, from time to time, foreign currency-denominated loans or forward contracts to
hedge material translation exposure arising from foreign net investments.
Interest rate risk
Our exposure to the market risk of changes in interest rates relates primarily to our debt
obligations and our cash balance. Interest rate swaps that we use to hedge the fair value of fixed
loan coupons payable are designated as fair value hedges, with changes in fair value recorded under
interest income and expense in our statement of operations. The accumulated change in fair value is
intended to offset the change in the fair value of the underlying fixed loan coupons, which is
recorded accordingly. Interest rate swaps that we use to hedge changes in the variability of future
interest receipts are designated as cash flow hedges. The critical terms of the hedging instruments
are the same as those for the underlying assets. Accordingly, all changes in fair value of these
derivative instruments are recorded as other comprehensive income. The accumulated changes in fair
value of the derivatives are intended to offset changes in future interest cash flows on the
assets. The hedging relationship between interest rate swaps and hedged fixed loan coupons is
highly effective. See Notes 1, 4 and 11 to our consolidated financial statements, which are
incorporated herein by reference.
Credit risk
Financial instruments that potentially subject ASML to significant concentrations of credit risk
consist principally of cash and cash equivalents, trade accounts receivable and derivative
financial instruments used in hedging activities.
Financial instruments contain an element of risk of the counterparties being unable to meet their
obligations. This financial credit risk is monitored and minimized per type of financial instrument
by limiting ASMLs counterparties to a sufficient number of major financial institutions and
issuers of commercial paper. ASML does not expect the counterparties to default given their high
credit quality.
ASMLs customers consist of integrated circuit manufacturers located throughout the world. ASML
performs ongoing credit evaluations of its customers financial condition and generally requires no
collateral to secure accounts receivable, ASML maintains an allowance reserve for potentially
uncollectible accounts receivable based on its assessment of the collectibility of accounts
receivable. ASML regularly reviews the allowance by considering factors such as historical payment
experience, credit quality, age of the accounts receivable balances, and current economic
conditions that may affect a customers ability to pay. In addition, ASML utilizes letters of
credit to mitigate credit risk when considered appropriate.
Sensitivity analysis derivative financial instruments
The Company uses foreign exchange derivatives to manage its currency risk and interest rate swaps
to manage its interest rate risk.
The following table summarizes the Companys derivative financial instruments, their market values
and their sensitivity to an instantaneous 10% decrease of the euro against other currencies and an
instantaneous 1% non-favorable increase in interest rates from their levels of December 31, 2004
and 2005 respectively, with all other variables held constant.
53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value change |
|
|
|
|
|
|
|
|
|
|
|
1% non- |
|
|
10% weakening of |
|
|
|
|
|
|
|
|
|
|
|
favorable increase |
|
|
euro |
|
|
|
Notional Amount 2 |
|
|
Fair Value |
|
|
in interest rate |
|
|
currency |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
As of December 31, 2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts 1 |
|
|
82,722 |
|
|
|
11,547 |
|
|
|
N/A |
|
|
|
(9,441 |
) |
Currency options |
|
|
78,882 |
|
|
|
8,803 |
|
|
|
N/A |
|
|
|
(7,696 |
) |
Interest rate swaps |
|
|
847,431 |
|
|
|
1,978 |
|
|
|
(10,407 |
) |
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward contracts 1 |
|
|
93,260 |
|
|
|
(6,508 |
) |
|
|
N/A |
|
|
|
(8,942 |
) |
Currency options |
|
|
(29,843 |
) |
|
|
(1,369 |
) |
|
|
N/A |
|
|
|
3,002 |
|
Interest rate swaps |
|
|
917,395 |
|
|
|
(4,896 |
) |
|
|
(3,283 |
) |
|
|
(500 |
) |
(Source: Bloomberg)
|
|
|
1 |
|
Includes forward contracts on U.S. dollars, Hong Kong dollars, British
Pounds, Israeli Shekel, Japanese Yen, Singapore dollars and Swiss Francs. |
|
2 |
|
Net amount of forward and option contracts assigned as a hedge to sales and
purchase transactions, to monetary assets and liabilities and to net investments in foreign
operations. |
The fair value of forward contracts (used for hedging purposes) is the estimated amount that
a bank would receive or pay to terminate the forward contracts at the reporting date, taking into
account the current interest rates, current exchange rates and current creditworthiness of the
counterparties.
The fair value of currency options (used for hedging purposes) is the estimated amount that a bank
would receive or pay to terminate the option agreements at the reporting date, taking into account
the current interest rates, current exchange rates, volatility and current creditworthiness of the
counterparties.
The fair value of interest rate swaps (used for hedging purposes) is the estimated amount that a
bank would receive or pay to terminate the swap agreements at the reporting date, taking into
account the current interest rates and current creditworthiness of the counterparties.
Item 12
Description of Securities Other Than Equity Securities
Not applicable.
54
Part II
Item 13
Defaults, Dividend Arrearages and Delinquencies
None.
Item 14
Material Modifications to the Rights of Security Holders and Use of Proceeds
None.
Item 15
Controls and Procedures
Evaluation of Disclosure controls and Procedures
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our
disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Exchange Act) as of December 31, 2005 (the Evaluation Date). Based on such evaluation, those
officers have concluded that, as of the Evaluation Date, our disclosure controls and procedures are
effective in alerting them on a timely basis to material information relating to ASML (including
its consolidated subsidiaries) required to be included in our periodic filings under the Exchange
Act.
Changes in Internal Controls over Financial Reporting
During the year ended December 31, 2005 there have not been any changes in our internal controls
over financial reporting that have materially affected, or are reasonably likely to materially
affect, our internal controls over financial reporting.
Item 16
A. Audit Committee Financial Expert
Our Supervisory Board has determined that effective March 18, 2004, Mr. Fritz Fröhlich qualifies as
the Audit Committee Financial Expert.
ASMLs Code on Ethical Business Conduct
In 2001, ASML adopted its Principles of Ethical Business Conduct, which contain ASMLs ethical
principles in relation to various subjects. These Principles have been developed into day-to-day
guidelines (the Internal Guidelines on Ethical Business Conduct). The Internal Guidelines on
Ethical Business Conduct apply to ASML employees worldwide, including ASMLs Supervisory Board and
Board of Management.
In January 2005, ASML adopted an amended version of its Principles of Ethical Business Conduct and
Internal Guidelines on Ethical Business Conduct. In connection with these amendments, ASML also
amended the Complaints Procedure with regard to violations of the Internal Guidelines on Ethical
Business Conduct and adopted a Whistleblowers Procedure for the receipt, retention and treatment
of complaints regarding accounting, internal controls and auditing matters and the confidential,
anonymous submission of complaints by employees regarding questionable accounting and auditing
matters. The main reasons for these amendments and adoption of the Whistleblowers Procedure were
the coming into force of the Code and developments in Nasdaq and SEC rules.
Our Principles of Ethical Business Conduct and Internal Guidelines on Ethical Business Conduct are
posted on our website.
The Internal Guidelines on Ethical Business Conduct contain, among others, written standards that
are reasonably designed to deter wrongdoing and to promote:
|
|
|
honest and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional relationships; |
|
|
|
|
full, fair, accurate, timely, and understandable disclosure in reports and documents
that ASML files with, or submits to, the SEC and in other public communications made by
ASML; |
|
|
|
|
compliance with applicable governmental laws, rules and regulations; |
|
|
|
|
prompt internal reporting of violations on the Internal Guidelines on Ethical Business
Conduct to an appropriate person or persons identified in these guidelines; and |
|
|
|
|
accountability for adherence to the guidelines. |
55
C. Principal Accountant Fees and Services
Deloitte Accountants B.V. has served as our independent public accountants for each of the years
ended in the three-year period ended December 31, 2005. The following table sets forth the
aggregate fees for professional audit services and other services rendered by Deloitte Accountants
B.V. in 2005 and 2004.
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
|
20041 |
|
|
20051 |
|
(in thousands) |
|
|
EUR |
|
|
EUR |
|
|
|
Audit Fees |
|
|
1,014 |
|
|
|
1,333 |
|
Audit-related Fee |
|
|
125 |
|
|
|
92 |
|
Tax Fees |
|
|
738 |
|
|
|
448 |
|
|
|
|
Total |
|
|
1,877 |
|
|
|
1,873 |
|
|
|
|
1 |
|
All fee amounts exclude VAT. |
Audit fees
Audit fees primarily relate to the audit of our annual financial statements set forth in our Annual
Report on Form 20-F, agreed upon procedures work on our quarterly financial results, services
related to statutory and regulatory filings of ASML Holding N.V. and its subsidiaries and services
in connection with accounting consultations on U.S. GAAP.
Audit-related fees
Audit-related fees mainly comprise services in connection with consultations on implementing the
requirements of Section 404 of the Sarbanes-Oxley Act and services in connection with accounting
consultations on IFRS.
Tax fees
Tax Fees can be detailed as follows:
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
|
20041 |
|
|
20051 |
|
(in thousands) |
|
|
EUR |
|
|
EUR |
|
|
|
Corporate Income Tax compliance services |
|
|
287 |
|
|
|
185 |
|
Tax assistance for expatriate employees |
|
|
253 |
|
|
|
186 |
|
Other tax advisory and compliance |
|
|
198 |
|
|
|
77 |
|
|
|
|
Total |
|
|
738 |
|
|
|
448 |
|
|
|
|
1 |
|
All fee amounts exclude VAT. |
The Audit Committee has approved the external audit plan and related audit fees for the year
2005. The Audit Committee has adopted a policy regarding audit and non-audit services, in
consultation with Deloitte Accountants B.V. This policy ensures the independence of our auditors by
expressly setting forth all services that the auditors may not perform and reinforcing the
principle of independence regardless of the type of work performed. Certain non-audit services,
such as tax-related services and acquisition advisory, are permitted. The Audit Committee
pre-approves all audit and non-audit services not specifically prohibited under this policy and
reviews the annual external audit plan and any subsequent engagements.
D. Exemptions from the Listing Standards for Audit Committees
Not applicable.
E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Not applicable.
56
Part III
Item 17
Financial Statements
Not applicable.
Item 18
Financial Statements
In response to this item, the Company incorporates herein by reference the consolidated financial
statements of the Company set forth on pages F-2 through F-37 hereto.
Item 19
Exhibits
|
|
|
Exhibit No. |
|
Description |
1
|
|
Articles of Association of ASML Holding N.V. (English translation)
(Incorporated by reference to Amendment No. 7 to the Registrants Registration
Statement on Form 8-A/A, filed with the Commission on June 30, 2005 ) |
|
2.1
|
|
Paying Agent, Conversion Agent and Registrar Agreement between ASML
Holding N.V. and the Bank of New York relating to the Registrants 5.75% Convertible
Subordinated Notes due 2006 (Incorporated by reference to Exhibit 2.3. of the
Registrants Annual Report on Form 20-F for the year ended December 31, 2001) |
|
2.2
|
|
Paying Agent, Conversion Agent and Registrar Agreement between ASML
Holding N.V. and the Bank of New York relating to the Registrants 5.50 percent
Convertible Subordinated Notes due 2010 (Incorporated by reference to the
Registrants Annual Report on Form 20-F for the fiscal year ended December 31, 2003) |
|
4.1
|
|
Agreement between ASML Lithography B.V. and Carl Zeiss, dated March 17,
2000 (Incorporated by reference to the Registrants Annual Report on Form 20-F for
the fiscal year ended December 31, 2000) # |
|
4.2
|
|
Agreement between ASML Holding N.V. and Carl Zeiss, dated October 24,
2003 (Incorporated by reference to the Registrants Annual Report on Form 20-F for
the year ended December 31, 2003) # |
|
4.3
|
|
Form of Indemnity Agreement between ASML Holding N.V. and members of its Board
of Management (Incorporated by reference to the Registrants Annual Report on Form
20-F for the year ended December 31, 2003) |
|
4.4
|
|
Form of Indemnity Agreement between ASML Holding N.V. and members of its
Supervisory Board (Incorporated by reference to the Registrants Annual Report on
Form 20-F for the year ended December 31, 2003) |
|
4.5
|
|
Employment Agreement between ASML Holding N.V. and Klaus Fuchs* |
|
4.6
|
|
Employment Agreement between ASML Holding N.V. and Eric Meurice
(Incorporated by reference to the Registrants Annual Report on Form 20-F for the
fiscal year ended December 31, 2004) |
|
4.7
|
|
Form of Employment Agreement for members of the Board of Management
(Incorporated by reference to the Registrants Annual Report on Form 20-F for the
fiscal year ended December 31, 2003) |
|
4.8
|
|
ASML New Hires and Incentive Stock Option Plan For Management (Version
2003) (Incorporated by reference to exhibit 4.4 to the Registrants Statement on
Form S-8, filed with the Commission on September 2, 2003) (File No. 333-109154) |
|
4.9
|
|
Nikon-ASML Patent Cross License Agreement, dated December 10, 2004,
between ASML Holding N.V. and Nikon Corporation (Incorporated by reference to the
Registrants Annual Report on Form 20-F for the fiscal year ended December 31,
2004) # |
|
4.10
|
|
ASML/Zeiss Sublicense Agreement, 2004, dated December 10, 2004, between Carl
Zeiss SMT AG and ASML Holding N.V. (Incorporated by reference to the Registrants
Annual Report on Form 20-F for the fiscal year ended December 31, 2004) # |
|
4.12
|
|
ASML Option Plan for Management of ASML Holding Group Companies (Incorporated
by reference to the Registrants Registration Statement on Form S-8 filed with the
Commission on June 30, 2005 (file No. 333-126340)) |
|
4.13
|
|
Consultancy Agreement between ASML
Holding N.V. and David Chavoustie * |
|
8.1
|
|
List of Material Subsidiaries* |
|
12.1
|
|
Certification of CEO and CFO Pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934* |
|
13.1
|
|
Certification of CEO and CFO Pursuant to Rule 13a-14(b) of the Securities
Exchange Act of 1934 and 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002* |
57
|
|
|
Exhibit No. |
|
Description |
15.1
|
|
Consent of Deloitte Accountants B.V.* |
|
|
|
* |
|
Filed at the Commission herewith |
|
# |
|
Certain information omitted pursuant to a request for confidential treatment filed separately
with the Securities and Exchange Commission |
58
Signatures
ASML Holding N.V. hereby certifies that it meets all of the requirements for filing on Form 20-F
and that it has duly caused and authorized the undersigned to sign this annual report on its
behalf.
ASML Holding N.V.
(Registrant)
|
/s/ Eric Meurice
President, Chief Executive Officer and Chairman of the Board of Management
Dated: January 27, 2006 |
|
/s/ Peter T.F.M. Wennink
Executive Vice President, Chief Financial Officer and Member of the Board of Management
|
Dated: January 27, 2006 |
59
Index to Financial Statements
F-1
Consolidated Statements of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Notes |
|
Year ended December 31 |
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands, except per share data) |
EUR |
|
|
EUR |
|
|
EUR |
|
|
|
|
Net system sales |
|
|
1,279,282 |
|
|
|
2,174,908 |
|
|
|
2,227,678 |
|
|
|
Net service and field option sales |
|
|
263,455 |
|
|
|
290,469 |
|
|
|
301,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net sales |
|
|
1,542,737 |
|
|
|
2,465,377 |
|
|
|
2,528,967 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of system sales |
|
|
999,003 |
|
|
|
1,372,056 |
|
|
|
1,366,026 |
|
|
|
Cost of service and field option sales |
|
|
174,952 |
|
|
|
187,682 |
|
|
|
188,746 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
Total cost of sales |
|
|
1,173,955 |
|
|
|
1,559,738 |
|
|
|
1,554,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on sales |
|
|
368,782 |
|
|
|
905,639 |
|
|
|
974,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development costs |
|
|
305,839 |
|
|
|
352,920 |
|
|
|
347,901 |
|
|
|
Research and development credits |
|
|
(19,119 |
) |
|
|
(21,961 |
) |
|
|
(24,027 |
) |
|
|
Selling, general and administrative costs |
|
|
212,609 |
|
|
|
201,629 |
|
|
|
201,204 |
|
3 |
|
Restructuring charges (credits) |
|
|
24,485 |
|
|
|
(5,862 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss) |
|
|
(155,032 |
) |
|
|
378,913 |
|
|
|
449,117 |
|
|
|
Interest income 1 |
|
|
25,413 |
|
|
|
27,998 |
|
|
|
38,429 |
|
|
|
Interest expense 1 |
|
|
(54,562 |
) |
|
|
(44,071 |
) |
|
|
(52,523 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes |
|
|
(184,181 |
) |
|
|
362,840 |
|
|
|
435,023 |
|
15 |
|
(Provision for) benefit from income taxes |
|
|
59,675 |
|
|
|
(127,380 |
) |
|
|
(123,559 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continuing operations |
|
|
(124,506 |
) |
|
|
235,460 |
|
|
|
311,464 |
|
2 |
|
Loss from discontinued operations before income taxes |
|
|
(59,026 |
) |
|
|
0 |
|
|
|
0 |
|
15 |
|
Benefit from income taxes |
|
|
23,316 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from discontinued operations |
|
|
(35,710 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
(160,216 |
) |
|
|
235,460 |
|
|
|
311,464 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) from continuing operations per ordinary share |
|
|
(0.26 |
) |
|
|
0.49 |
|
|
|
0.64 |
|
|
|
Basic net income (loss) from discontinued operations per ordinary share |
|
|
(0.07 |
) |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
Basic net income (loss) per ordinary share |
|
|
(0.33 |
) |
|
|
0.49 |
|
|
|
0.64 |
|
|
|
Diluted net income (loss) from continuing operations per ordinary share |
|
|
(0.26 |
) |
|
|
0.49 |
|
|
|
0.64 |
|
|
|
Diluted net income (loss) from discontinued operations per ordinary share |
|
|
(0.07 |
) |
|
|
0.00 |
|
|
|
0.00 |
|
|
|
Diluted net income (loss) per ordinary share |
|
|
(0.33 |
) |
|
|
0.49 |
|
|
|
0.64 |
|
|
|
Number of ordinary shares used in computing per share amounts (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
482,240 |
|
|
|
483,380 |
|
|
|
484,103 |
|
|
|
Diluted |
|
|
482,240 |
|
|
|
484,661 |
|
|
|
542,979 |
|
|
|
|
1 |
|
Reflects netting of intercompany cashpooling activities. |
F - 2
Consolidated Statements of Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Net income (loss) |
|
|
(160,216 |
) |
|
|
235,460 |
|
|
|
311,464 |
|
Foreign currency translation, net of taxes |
|
|
(12,318 |
) |
|
|
(21,832 |
) |
|
|
25,389 |
|
Gain (loss) on derivative instruments |
|
|
(7,158 |
) |
|
|
16,736 |
|
|
|
(38,365 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
|
(179,692 |
) |
|
|
230,364 |
|
|
|
298,488 |
|
Consolidated Balance Sheets
|
|
|
|
|
|
|
|
|
|
Notes |
|
As of December 31 |
2004 |
2005 |
|
|
(in thousands, except share and per share data) |
EUR |
EUR |
|
|
|
Assets |
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
1,228,130 |
|
1,904,609 |
5 |
|
Accounts receivable, net |
|
|
503,153 |
|
302,572 |
6 |
|
Inventories, net |
|
|
717,688 |
|
777,200 |
15 |
|
Deferred tax assets short term |
|
|
54,554 |
|
95,636 |
7 |
|
Other current assets |
|
|
175,792 |
|
125,802 |
2 |
|
Assets from discontinued operations |
|
|
2,695 |
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
2,682,012 |
|
3,205,819 |
|
|
|
|
|
|
|
|
|
|
15 |
|
Deferred tax assets |
|
|
201,100 |
|
206,884 |
7 |
|
Other assets |
|
|
25,145 |
|
39,796 |
|
|
Intangible assets, net |
|
|
31,818 |
|
24,943 |
9 |
|
Property, plant and equipment, net |
|
|
303,691 |
|
278,581 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
|
3,243,766 |
|
3,756,023 |
|
|
|
|
|
|
|
|
|
|
Liabilities
and Shareholders Equity |
|
|
|
|
|
|
|
Accounts payable |
|
|
343,228 |
|
343,962 |
3,10 |
|
Accrued liabilities and other |
|
|
453,831 |
|
985,621 |
15 |
|
Deferred tax liabilities short term |
|
|
1,332 |
|
390 |
15 |
|
Current tax liabilities |
|
|
10,037 |
|
90,010 |
2 |
|
Liabilities from discontinued operations |
|
|
4,713 |
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
813,141 |
|
1,419,983 |
|
|
|
|
|
|
|
|
|
|
15 |
|
Deferred tax liabilities |
|
|
200,717 |
|
224,219 |
12,13 |
|
Other deferred liabilities |
|
|
20,973 |
|
17,426 |
11 |
|
Convertible subordinated debt |
|
|
802,810 |
|
380,238 |
11 |
|
Other long term debt |
|
|
14,523 |
|
2,320 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,852,164 |
|
2,044,186 |
|
|
|
|
|
|
|
|
|
|
12,14 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
Cumulative Preference Shares, EUR 0.02 nominal value; 900,000,000 shares authorized; |
|
|
|
|
|
|
|
none outstanding as of December 31, 2004 and 2005 |
|
|
0 |
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
Priority Shares, EUR 0.02 nominal value; 23,100 shares authorized, issued and outstanding as of
December 31, 2004 and 2005 |
|
|
1 |
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
Ordinary Shares, EUR 0.02 nominal value; 900,000,000 shares authorized 483,676,483 shares |
|
|
|
|
|
|
|
issued and outstanding as of December 31, 2004 and 484,670,183 as of December 31, 2005 |
|
|
9,674 |
|
9,693 |
|
|
Share premium |
|
|
895,836 |
|
917,564 |
|
|
Retained earnings |
|
|
351,570 |
|
663,034 |
|
|
Accumulated other comprehensive income |
|
|
134,521 |
|
121,545 |
|
20 |
|
Total shareholders equity |
|
|
1,391,602 |
|
1,711,837 |
Total
liabilities and shareholders equity |
|
|
3,243,766 |
|
3,756,023 |
F - 3
Consolidated Statements of Shareholders Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares |
|
|
Shares |
|
|
APIC/ |
|
|
Retained |
|
|
Accumulated |
|
|
|
|
|
|
Number |
|
|
Amount |
|
|
Share |
|
|
Earnings |
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium |
|
|
|
|
|
|
Comprehensive |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income |
|
|
Total |
|
(in thousands) |
|
|
|
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Balance at January 1, 2003 |
|
|
482,182 |
|
|
|
9,644 |
|
|
|
870,453 |
|
|
|
276,326 |
|
|
|
159,093 |
|
|
|
1,315,516 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(160,216 |
) |
|
|
|
|
|
|
(160,216 |
) |
Foreign Currency Translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,318 |
) |
|
|
(12,318 |
) |
Gain (loss) on derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,158 |
) |
|
|
(7,158 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Shares |
|
|
332 |
|
|
|
7 |
|
|
|
5,376 |
|
|
|
|
|
|
|
|
|
|
|
5,383 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003 |
|
|
482,514 |
|
|
|
9,651 |
|
|
|
875,829 |
|
|
|
116,110 |
|
|
|
139,617 |
|
|
|
1,141,207 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235,460 |
|
|
|
|
|
|
|
235,460 |
|
Foreign Currency Translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21,832 |
) |
|
|
(21,832 |
) |
Gain (loss) on derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,736 |
|
|
|
16,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Shares |
|
|
1,162 |
|
|
|
24 |
|
|
|
20,007 |
|
|
|
|
|
|
|
|
|
|
|
20,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
483,676 |
|
|
|
9,675 |
|
|
|
895,836 |
|
|
|
351,570 |
|
|
|
134,521 |
|
|
|
1,391,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
311,464 |
|
|
|
|
|
|
|
311,464 |
|
Tax benefit from stock options |
|
|
|
|
|
|
|
|
|
|
5,919 |
|
|
|
|
|
|
|
|
|
|
|
5,919 |
|
Foreign Currency Translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25,389 |
|
|
|
25,389 |
|
Gain (loss) on derivative instruments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(38,365 |
) |
|
|
(38,365 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Shares |
|
|
994 |
|
|
|
19 |
|
|
|
15,809 |
|
|
|
|
|
|
|
|
|
|
|
15,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005 |
|
|
484,670 |
|
|
|
9,694 |
|
|
|
917,564 |
|
|
|
663,034 |
|
|
|
121,545 |
|
|
|
1,711,837 |
|
F - 4
Consolidated Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Cash Flows from Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) from continued operations |
|
|
(124,506 |
) |
|
|
235,460 |
|
|
|
311,464 |
|
Adjustments to reconcile net income to net cash
flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
144,800 |
|
|
|
90,215 |
|
|
|
90,531 |
|
Impairment charges |
|
|
12,100 |
|
|
|
2,929 |
|
|
|
8,350 |
|
Allowance for doubtful debts |
|
|
9,113 |
|
|
|
3,085 |
|
|
|
1,871 |
|
Allowance for obsolete inventory |
|
|
32,431 |
|
|
|
34,336 |
|
|
|
11,811 |
|
Deferred income taxes |
|
|
(79,577 |
) |
|
|
114,701 |
|
|
|
17,830 |
|
Changes in assets and liabilities that provided (used) cash: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
211,627 |
|
|
|
(192,819 |
) |
|
|
203,488 |
|
Inventories |
|
|
118,617 |
|
|
|
(149,215 |
) |
|
|
(41,397 |
) |
Other assets |
|
|
44,945 |
|
|
|
1,127 |
|
|
|
(20,088 |
) |
Accrued liabilities |
|
|
(8,948 |
) |
|
|
(5,507 |
) |
|
|
46,272 |
|
Accounts payable |
|
|
7,231 |
|
|
|
121,998 |
|
|
|
3,406 |
|
Income taxes payable |
|
|
164,826 |
|
|
|
837 |
|
|
|
79,973 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities from continuing operations |
|
|
532,659 |
|
|
|
257,147 |
|
|
|
713,511 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities from discontinued operations |
|
|
12,736 |
|
|
|
(5,880 |
) |
|
|
(2,018 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities from total operations |
|
|
545,395 |
|
|
|
251,267 |
|
|
|
711,493 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
(48,567 |
) |
|
|
(74,979 |
) |
|
|
(72,660 |
) |
Proceeds from sale of property, plant and equipment |
|
|
2,638 |
|
|
|
15,137 |
|
|
|
13,235 |
|
Purchase of intangible assets |
|
|
(3,099 |
) |
|
|
(556 |
) |
|
|
(1,378 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities from continuing operations |
|
|
(49,028 |
) |
|
|
(60,398 |
) |
|
|
(60,803 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities from discontinued operations |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities from total operations |
|
|
(49,028 |
) |
|
|
(60,398 |
) |
|
|
(60,803 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of convertible subordinated notes |
|
|
380,000 |
|
|
|
0 |
|
|
|
0 |
|
Payment of underwriting commission |
|
|
(8,550 |
) |
|
|
0 |
|
|
|
0 |
|
Net proceeds from issuance of shares and stock options |
|
|
6,360 |
|
|
|
20,031 |
|
|
|
15,828 |
|
Redemption and/or repayment of debt |
|
|
(445,966 |
) |
|
|
(1,160 |
) |
|
|
(12,949 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities from continuing operations |
|
|
(68,156 |
) |
|
|
18,871 |
|
|
|
2,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities from discontinued operations |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities from total operations |
|
|
(68,156 |
) |
|
|
18,871 |
|
|
|
2,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash flows |
|
|
428,211 |
|
|
|
209,740 |
|
|
|
653,569 |
|
Effect of changes in exchange rates on cash |
|
|
(69,165 |
) |
|
|
(9,416 |
) |
|
|
22,910 |
|
|
F - 5
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Net increase in cash and cash equivalents |
|
|
359,046 |
|
|
|
200,324 |
|
|
|
676,479 |
|
Cash and cash equivalents at beginning of the year |
|
|
668,760 |
|
|
|
1,027,806 |
|
|
|
1,228,130 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the year |
|
|
1,027,806 |
|
|
|
1,228,130 |
|
|
|
1,904,609 |
|
Supplemental Disclosures of Cash Flow Information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for: |
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
|
|
48,980 |
|
|
|
45,866 |
|
|
|
45,141 |
|
Taxes |
|
|
11,974 |
|
|
|
7,430 |
|
|
|
15,335 |
|
Supplemental non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Conversion of Bonds into 536, 0 and 0 ordinary shares respectively in 2003, 2004 and 2005 |
|
|
16 |
|
|
|
0 |
|
|
|
0 |
|
F - 6
Notes to the Consolidated Financial Statements
1. Summary of significant accounting policies
The accompanying consolidated financial statements include the Financial Statements of ASML Holding
N.V. Veldhoven, the Netherlands, and its consolidated subsidiaries (together referred to as ASML
or the Company). ASML is a worldwide operating company engaged in the development, production,
marketing, sale and servicing of advanced semiconductor equipment systems, mainly consisting of
lithography systems. ASMLs principal operations are in the Netherlands, the United States and
Asia.
ASML follows accounting principles generally accepted in the United States of America (U.S.
GAAP). ASMLs reporting currency is the euro. The accompanying consolidated financial statements
are stated in thousands of euro (EUR) unless otherwise indicated.
Principles of consolidation
The consolidated financial statements include the accounts of ASML Holding N.V. and all of its
majority-owned subsidiaries. All intercompany profits, balances and transactions have been
eliminated in the consolidation. The Companys management has made reclassifications to prior
periods to conform with current year presentation of net system sales and net services and field
option sales. In prior years annual report, field option sales were presented under net product
sales.
Use of estimates
The preparation of ASMLs consolidated financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities on the balance sheet dates and the
reported amounts of revenue and expense during the reported periods. Actual results could differ
from those estimates.
Foreign currency translation
The financial information for subsidiaries outside the euro-zone is generally measured using local
currencies as the functional currency. The financial statements of those foreign subsidiaries are
translated into euro in the preparation of ASMLs consolidated financial statements. Assets and
liabilities are translated into euro at the exchange rate in effect on the respective balance sheet
dates. Income and expenses are translated into euro based on the average exchange rate for the
corresponding period. The resulting translation adjustments are recorded directly in shareholders
equity. Currency differences on inter-company loans that have the nature of a long-term investment
are also accounted for directly in shareholders equity.
Derivative financial instruments
The Company principally uses derivative foreign currency hedging instruments for the management of
foreign currency risks. In accordance with Statement of Financial Accounting Standards (SFAS) No.
133 Accounting for Derivative Instruments and Hedging Activities and SFAS No. 138 Accounting for
Certain Derivative Instruments and Certain Hedging Activities an amendment of SFAS No. 133, the
Company measures all derivative foreign currency hedging instruments based on fair values derived
from market prices of the instruments. The Company adopts hedge accounting for all hedges that are
highly effective in offsetting the identified hedged risks as required by the SFAS No. 133
effectiveness criteria.
On the date the derivative contract is entered into, ASML designates the derivative as either a
hedge of the fair value of a recognized asset or liability in non-functional currencies (fair
value hedge), or a hedge of cash flows related to sales transactions or purchase transactions in
non-functional currencies (cash flow hedge), or a hedge of the foreign currency exposure of a net
investment in a foreign operation. ASML formally documents all relationships between hedging
instruments and hedged items, as well as its risk-management objective and strategy for undertaking
various hedge transactions. ASML also formally assesses, both at the hedges inception and on an
ongoing basis, whether the derivatives that are used in hedging transactions are highly effective
in offsetting changes in fair values or cash flows of hedged items. When it is determined that a
derivative is not highly effective as a hedge or that it has ceased to be a highly effective hedge,
ASML discontinues hedge accounting prospectively. Changes in the fair value of a derivative that is
designated and qualifies as a fair-value hedge, along with the loss or gain on the hedged asset or
liability that is attributable to the hedged risk, are recorded in the statement of operations.
Changes in the fair value of a derivative that is designated and qualifies as a cash flow hedge are
recorded in other comprehensive income, until underlying hedged transaction is recognized in the
statement of operations. In the event that the underlying hedge transaction does not occur, or it
becomes probable that it will not occur, the gain or loss on the related cash flow hedge is
immediately released from accumulated other comprehensive income and included in the statement of
operations. Changes in the hedge of the foreign currency exposure of a net investment in a foreign
operation are recorded in other comprehensive income.
F - 7
Interest rate swaps that are being used to hedge changes in the variability of future interest
receipts are designated as cash flow hedges. The critical terms of the hedging instruments are the
same as those for the underlying assets. Accordingly, all changes in fair value of these derivative
instruments are recorded as other comprehensive income. The accumulated changes in fair value of
the derivatives are intended to offset changes in future interest cash flows on the assets.
The maximum length of time of cash flow hedges is the time elapsed from the moment the exposure is
generated until the actual settlement.
Interest rate swaps that are being used to hedge the fair value of fixed loan coupons payable are
designated as fair value hedges. The change in fair value is intended to offset the change in the
fair value of the underlying fixed loan coupons, which is recorded accordingly.
The Company records any ineffective portion of foreign currency hedging instruments in sales or
cost of sales in the statement of operations. Ineffectiveness of hedging instruments had a positive
impact of EUR 0 million, EUR 0.3 million and EUR 0 million in 2003, 2004 and 2005, respectively.
The ineffective portion of interest rate swaps is recorded in interest income (expense). The
Company did not have benefits or costs due to ineffectiveness of interest rate swaps in 2003, 2004
and 2005.
Cash and cash equivalents
Cash and cash equivalents consist primarily of highly liquid investments, such as bank deposits,
commercial paper and Money Market Funds, with insignificant interest rate risk and remaining
maturities of three months or less at the date of acquisition.
Inventories
Inventories are stated at the lower of cost (first-in, first-out method) or market value. Cost
includes net prices paid for materials purchased, charges for freight and customs duties,
production labor cost and factory overhead. Allowances are made for slow moving, obsolete or
unsaleable inventory.
Intangible assets
Intangible assets include acquired intellectual property rights that are valued at cost or
estimated fair value and are amortized on a straight-line basis over the term of the rights ranging
from 3 to 10 years.
Property, plant and equipment
Property, plant and equipment are stated at cost, less accumulated depreciation and any accumulated
impairment losses. As of December 31, 2005 no interest cost has been capitalized. Depreciation is
calculated using the straight-line method based on the estimated useful lives of the related
assets. In the case of leasehold improvements, the estimated useful lives of the related assets do
not exceed the remaining term of the corresponding lease. The following table presents the assigned
economic lives of ASMLs property, plant and equipment:
|
|
|
Category |
Assigned economic life |
Buildings and constructions
|
|
5 40 years |
Machinery and equipment
|
|
2 5 years |
Furniture, fixtures and other equipment
|
|
3 5 years |
Leasehold improvements
|
|
5 10 years |
Certain internal and external costs associated with the purchase and/or development of internally
used software are capitalized when both the preliminary project stage is completed and management
has authorized further funding for the project, which it has deemed probable to be completed and to
be usable for the intended function. These costs are amortized on a straight-line basis over the
period of related benefit, which ranges primarily from two to five years.
Evaluation of long-lived assets for impairment
The Company evaluates its long-lived assets, which include property, plant and equipment and
intangible assets, for impairment whenever events or changes in circumstances indicate that the
carrying amount of those assets may not be recoverable. Recoverability of these assets is measured
by a comparison of the carrying amount of the asset to future undiscounted net cash flows expected
to be generated by the asset. If those assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets exceeds the fair
value of the asset. Assets held for sale are reported at the lower of the carrying amount or fair
value less the cost to sell.
F - 8
Revenue recognition
ASML recognizes revenue when all four revenue recognition criteria are met: persuasive evidence of
an arrangement exists; delivery has occurred or services have been rendered; sellers price to
buyer is fixed or determinable; and collectibility is reasonably assured. At ASML, this policy
generally results in revenue recognition from the sale of a system upon shipment and the revenue
from the installation of a system upon completion of that installation at the customer site. Each
system undergoes, prior to shipment, a Factory Acceptance Test in ASMLs clean room facilities,
effectively replicating the operating conditions that will be present on the customers site, in
order to verify whether the system will meet its standard specifications and any additional
technical and performance criteria agreed with the customer. A system is shipped, and revenue
recognized, only after all specifications are met and customer sign-off is received or waived.
Although each systems performance is re-tested upon installation at the customers site, ASML has
never failed to successfully complete installation of a system at a customer premises.
Commencing at the end of 2000, ASML departed from its standard revenue recognition policy in
connection with the introduction of its TWINSCAN family of lithography systems. Although each
TWINSCAN system successfully completed a Factory Acceptance Test prior to shipment, management
considered the TWINSCAN to constitute new technology for which it did not have sufficient
evidence to conclude that (i) installation at the customer site would occur consistently within a
pre-determined time period comparable to ASMLs other systems; and (ii) upon installation, the
system would perform within the specifications for which customer sign-off had been obtained in the
pre-shipment Factory Acceptance Test. Consequently, ASML initially deferred all revenue with
respect to each TWINSCAN system until installation and acceptance of the system at the customers
premises had been completed. By the end of 2002, however, ASML had successfully shipped and
installed a total of 70 TWINSCAN systems, which provided management with sufficient evidence to
conclude that installation of TWINSCAN systems would occur consistently within a predetermined time
period and that the performance of these systems would not reasonably be different from that
exhibited in the pre-shipment Factory Acceptance Test. As a result, at the end of 2002, ASML
commenced recognizing revenues from TWINSCAN systems upon shipment. Therefore, no revenue was
deferred pending installation of a TWINSCAN system (or any other ASML system) after 2002.
As ASMLs systems are based largely on two product platforms that permit incremental, modular
upgrades, the introduction of genuinely new technology occurs infrequently, and has occurred on
only one occasion since the release of Staff Accounting Bulletin 101 in December 1999.
ASML anticipates that, in connection with future introductions of new technology, it will initially
defer revenue recognition until completion of installation and acceptance of the new technology at
customer premises. This deferral would continue until ASML could conclude that installation of the
technology in question would occur consistently within a predetermined time period and that the
performance of the new technology would not reasonably be different from that exhibited in the
pre-shipment Factory Acceptance Test. Any such deferral of revenues, however, could have a material
effect on ASMLs results of operations for the fiscal period in which the deferral occurred and on
the succeeding fiscal period.
ASML has no significant repurchase commitments in its sales terms and conditions. From time to
time, however, the Company repurchases systems that it has manufactured and sold and, following
refurbishment, resells those systems to other customers. This repurchase decision is driven by
market demand expressed by other customers and not by explicit or implicit contractual arrangements
relating to the initial sale. The Company considers reasonable offers from any vendor, including
customers, to repurchase used systems so that it can refurbish, resell and install these systems as
part of its normal business operations. Once repurchased, the repurchase price of the used system
is recorded in work-in-process inventory during the period it is being refurbished, following which
the refurbished system is reflected in finished products inventory until it is sold to the
customer.
For arrangements containing multiple elements, the revenue relating to the undelivered elements is
deferred at estimated fair value until delivery of the deferred elements. The fair value of
installation services provided to customers is initially deferred and is recognized when the
installation is completed. The fair value is determined by vendor specific objective evidence
(VSOE) and/or third party evidence. VSOE is determined based upon the prices that ASML charges
for installation and comparable services (such as relocating a system to another customer site) on
a stand-alone basis, which are subject to normal price negotiations. Prices that ASML charges on a
stand-alone basis are also in line with prices charged by other vendors, although the number of
third party installers is decreasing.
Sales from service contracts are recognized when performed. Revenue from prepaid service contracts
is recognized over the life of the contract.
F - 9
ASML offers customers discounts in the normal course of sales negotiations. These discounts are
directly deducted from the gross sales price at the moment of revenue recognition. These discounts
do not relate to future purchases or trade-ins with the exception of volume discounts. From time to
time, ASML offers volume discounts to a limited number of customers. These discounts depend on the
number of systems shipped per calendar year. The related amount is recorded as a reduction in
revenue at time of shipment. Generally, there are no other credits or adjustments recognized at
shipment. From time to time, ASML offers free or discounted products or services in
connection with a current revenue transaction, which are earned by the customer at a future date
only if the customer completes a specified cumulative level of revenue transactions. As the value
of these free product or services is insignificant in relation to the value of the transactions
necessary to earn these free products or services, a liability is recorded for the estimated cost
of the free products or services.
Accounting for Shipping and Handling Fees and Costs
ASML bills the customer for, and recognizes as revenue, any charges for shipping and handling
costs. The related costs are recognized as cost of sales.
Cost of sales
Costs of product sales comprise direct product costs such as materials, labor, cost of warranty,
depreciation, shipping and handling costs and related overhead costs. Repayments of certain
technical development credits, which are calculated as a percentage of sales, are also charged to
cost of product sales (see Research and development costs and credits, below). ASML accrues for
the estimated cost of the warranty on its systems, which includes the cost of labor and parts
necessary to repair systems during the warranty period. The amounts recorded in the warranty
accrual are estimated based on actual historical expenses incurred and on estimated probable future
expenses related to current sales. Actual warranty costs are charged against the accrued warranty
reserve. Costs of service sales comprise direct service costs such as materials, labor,
depreciation and overhead costs.
Restructuring
ASML applies the criteria defined in SFAS No. 146, Accounting for Costs Associated with Exit or
Disposal Activities and SFAS No. 112, Employers Accounting for Postemployment Benefits, in
order to determine when a liability for restructuring or exit costs should be recognized. With
respect to employee termination costs, the Company applies SFAS No. 146 (effective since January 1,
2003) in the case of benefit arrangements that, in substance, do not constitute an ongoing benefit
arrangement. SFAS No. 112 is applied when termination benefits are provided under an ongoing
benefit arrangement. SFAS No. 146 establishes that a liability for a cost associated with an exit
or disposal activity shall be recognized and measured initially at its fair value in the period in
which the liability is incurred; that is, when a detailed plan exists, has been committed to by
management and communicated to employees. SFAS No. 112 establishes that a liability for termination
benefits provided under an ongoing benefit arrangement covered by SFAS No. 112 is recognized when
the likelihood of future settlement is probable and can be reasonably estimated.
Other exit costs include purchase and other commitments to be settled or fulfilled. Related costs
are estimated based on expected settlement fees and committed payments, taking into account future
potential benefits, if any, from those commitments.
The allocation of restructuring expenses to either cost of sales or restructuring expenses is
determined by reference to the workforce to which the restructuring expenses relate. Restructuring
expenses relating to the Companys manufacturing and service workforce are allocated to cost of
sales, while restructuring expenses relating to research and development and selling, general and
administrative activities are presented as restructuring charges. Restructuring credits are also
recorded in the same line of the statement of operations as used when the original expenses were
initially recognized.
Research and development costs and credits
Costs relating to research and development are charged to operating expense as incurred. ASML
receives subsidies and other credits only from governmental institutes. These subsidies and other
governmental credits to cover research and development costs relating to approved projects are
recorded as research and development credits in the period when such costs occur.
Income taxes
The asset and liability method is used in accounting for income taxes. Under this method, deferred
tax assets and liabilities are recognized for the tax effect of incurred net operating losses and
for tax consequences attributable to differences between the balance sheet carrying amounts of
existing assets and liabilities and their respective tax bases. If it is more likely than not that
the carrying amounts of deferred tax assets will not be realized, a valuation allowance will be
recorded to reduce the carrying amounts of those assets.
F - 10
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in the results of operations in the period that includes the enactment date.
Contingencies and litigation
As of December 31, 2003, 2004 and 2005, ASML was party to various legal proceedings generally
incidental to its business, as disclosed in Note 14 to the consolidated statements. In connection
with these proceedings and claims, ASMLs management evaluated, based on the relevant facts and
legal principles, the likelihood of an unfavorable outcome and whether the amount of the loss could
be reasonably estimated. In each case, management determined that either a loss was not probable or
was not reasonably estimable. As a result, no estimated losses were recorded as a charge to its
statement of operations in 2003, 2004 or 2005. Significant subjective judgments were required in
these evaluations, including judgments regarding the validity of asserted claims and the likely
outcome of legal and administrative proceedings. The outcome of these proceedings, however, is
subject to a number of factors beyond ASMLs control, most notably the uncertainty associated with
predicting decisions by courts and administrative agencies. In addition, estimates of the potential
costs associated with legal 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, ASML may agree to settle
or to terminate a claim or proceeding in which it believes it would ultimately prevail where it
believes that doing so, when taken together with other relevant commercial considerations, is more
cost-effective than engaging in an expensive and protracted litigation, the outcome of which is
uncertain.
Stock options
ASML applies Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees, and related interpretations in accounting for its stock option plans. SFAS No. 123,
Accounting for Stock-Based Compensation, amended by SFAS No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure allows companies to elect to recognize the fair value of
the stock options granted to employees as an expense, or to account for stock option plans using
the intrinsic value method under APB Opinion No. 25 and provide pro forma disclosure of the impact
of the fair value method on net income and earnings per share. Beginning in the first fiscal
quarter of 2006, ASML will comply with SFAS No. 123(R), as discussed further in newly adopted
accounting pronouncements.
Under the provisions of APB Opinion No. 25, no significant compensation expense was recorded for
ASMLs stock-based compensation plans for the years ended December 31, 2003, 2004 and 2005. Had
compensation cost been determined based upon the fair value at the grant date for awards under the
plan consistent with the methodology prescribed under SFAS No. 148, ASMLs net income (loss) and
calculation for net income (loss) per ordinary share would have been as follows (net of related tax
effects):
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands, except per share data) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
|
(160,216 |
) |
|
|
235,460 |
|
|
|
311,464 |
|
Compensation expenses |
|
|
(17,696 |
) |
|
|
(12,437 |
) |
|
|
(10,022 |
) |
Pro forma |
|
|
(177,912 |
) |
|
|
223,023 |
|
|
|
301,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income (loss) per ordinary share |
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
|
(0.33 |
) |
|
|
0.49 |
|
|
|
0.64 |
|
Pro forma |
|
|
(0.37 |
) |
|
|
0.46 |
|
|
|
0.62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net income (loss) per ordinary share |
|
|
|
|
|
|
|
|
|
|
|
|
As reported |
|
|
(0.33 |
) |
|
|
0.49 |
|
|
|
0.64 |
|
Pro forma |
|
|
(0.37 |
) |
|
|
0.46 |
|
|
|
0.62 |
|
The estimated weighted average fair value of options granted during 2003, 2004 and 2005 was EUR
6.66, EUR 7.35 and EUR 6.61, respectively, on the date of grant using the Black-Scholes
option-pricing model, with the following assumptions:
- |
|
for 2003: no dividend yield, no assumed forfeiture rate,
volatility of 85.2 percent, a
risk-free interest rate of 3.60 percent and an expected life of
two years after the vesting period; |
|
- |
|
for 2004: no dividend yield, no assumed forfeiture rate, a weighted average volatility of
68.3 percent, a weighted risk-free interest rate of 3.65 percent and an expected life of two
years after the vesting period; |
F - 11
- |
|
for 2005: no dividend yield, no assumed forfeiture rate, a weighted average volatility of
65.6 percent, a weighted risk-free interest rate of 3.10 percent and an expected life of two
years after the vesting period. |
Net income (loss) per ordinary share
Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average
ordinary shares outstanding for that period. Diluted net income (loss) per share reflects the
potential dilution that could occur if options issued under ASMLs stock compensation plan were
exercised, and if ASMLs convertible notes were converted, unless the exercise of the stock options
or conversion of the convertible notes would have an anti-dilutive effect. The dilutive effect is
calculated using the if-converted method. Following this method, our convertible bonds are
considered dilutive in 2005 and anti-dilutive in 2004. As a result of the losses incurred by the
Company in 2003, there is no difference between basic and diluted earnings in 2003 because the
assumed conversion of ASMLs convertible notes and exercise of stock options would have been
anti-dilutive.
A summary of the basic and diluted weighted average number of shares is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 (in thousands) |
|
2003 |
|
|
2004 |
|
|
2005 |
|
|
Basic weighted average shares outstanding |
|
|
482,240 |
|
|
|
483,380 |
|
|
|
484,103 |
|
Diluted weighted average shares outstanding |
|
|
482,240 |
|
|
|
484,661 |
|
|
|
542,979 |
|
Excluded from the diluted weighted average share outstanding calculation are cumulative preference
shares contingently issuable to the preference share foundation, since they represent a different
class of stock than the ordinary shares. See further discussion in Note 20.
Comprehensive income
Comprehensive income consists of net income (loss) and other comprehensive income (loss). Other
comprehensive income (loss) refers to revenues, expenses, gains and losses that are not included in
net income, but recorded directly in shareholders equity. For the years ended December 31, 2003,
2004 and 2005, comprehensive income consists of net income (loss), unrealized gains and losses on
derivative financial instruments and foreign currency translation adjustments.
Segment disclosure
Prior to 2002, ASML reported in two business segments, Lithography and Track & Thermal. As ASML
decided in 2002 to terminate the manufacturing activities of its Track business and to divest its
Thermal business, they are presented as discontinued operations and no longer disclosed as a
separate segment. ASML operates in three general geographic areas. See Note 16.
Newly adopted accounting pronouncements
In December 2004, the Financial Accounting Standards Board (FASB) issued a revision of FASB
statement No. 123, Accounting for Stock-Based Compensation (SFAS No. 123(R)). This statement
supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS No. 123(R) addresses the accounting for share-based payment
transactions in which a company receives employee services in exchange for either equity
instruments of the company or liabilities that are based on the fair value of the companys equity
instruments or that may be settled by the issuance of such equity instruments. SFAS No. 123(R)
eliminates the ability to account for share-based compensation transactions using the intrinsic
method that ASML currently uses and generally requires that such transactions be accounted for
using a fair-value"-based method and recognized as expense in our consolidated statement of
operations. In January 2005, the SEC issued Staff Accounting Bulletin No. 107, which provides
supplemental implementation guidance for SFAS No. 123(R). In April 2005, the SEC extended the
compliance requirement date of SFAS No. 123(R), with the result that this requirement will be
effective for ASML beginning with the first fiscal quarter of 2006. The Company expects that the
adoption of SFAS No. 123(R) will have a material impact on its results of operations. However,
uncertainties, including the Companys future stock-based compensation strategy, stock price
volatility, selection of stock option-pricing model, estimated forfeitures and employee stock
option exercise behavior, make it difficult to determine whether the stock-based compensation
expense that the Company will incur in future periods will be similar to the SFAS No. 123 pro forma
expense disclosed in Note 1.
In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS No.
154) which replaces Accounting Principles Board Opinions No. 20 Accounting Changes and SFAS No.
3, Reporting Accounting Changes in Interim Financial Statements An Amendment of APB Opinion No.
28. SFAS No. 154 provides guidance on the accounting for and reporting of accounting changes and
error corrections. It establishes retrospective application, or the earliest practicable date, as
the required method for reporting a change in accounting principle
and restatement with respect to the reporting of a correction of an error. SFAS No. 154 is effective
for accounting changes and corrections of errors made in fiscal years beginning after December 15,
2005.
F - 12
In June 2005, the FASB issued a FASB Staff Position (FSP) interpreting FASB Statement 143,
Accounting for Asset Retirement Obligations, specifically FSP 143-1, Accounting for Electronic
Equipment Waste Obligations (FSP 143-1). FSP 143-1 addresses the accounting for obligations
associated with Directive 2002/96/EC, Waste Electrical and Electronic Equipment, which was adopted
by the European Union (EU). The FSP provides guidance on how to account for the effects of the
Directive but only with respect to historical waste associated with products placed on the market
on or before August 13, 2005. FSP 143-1 is effective the later of the first reporting period ending
after June 8, 2005, or the date of the adoption of the law by the applicable EU-member country. The
adoption of FSP 143-1 did not have a material impact on our results of operations or financial
condition.
In June 2005, the EITF reached a consensus on Issue No. 05-06, Determining the Amortization Period
for Leasehold Improvements (EITF No. 05-06). EITF No. 05-06 provides guidance for determining
the amortization period used for leasehold improvements acquired in a business combination or
purchased after the inception of a lease, collectively referred to as subsequently acquired
leasehold improvements. EITF No. 05-06 provides that the amortization period used for the
subsequently acquired leasehold improvements to be the lesser of (a) the subsequently acquired
leasehold improvements useful lives, or (b) a period that reflects renewals that are reasonably
assured upon the acquisition or the purchase. EITF No. 05-06 is effective on a prospective basis
for subsequently acquired leasehold improvements purchased or acquired in periods beginning after
the date of the FASBs ratification, which was on June 29, 2005. ASML does not believe that the
adoption of EITF No. 05-06 will have a material impact on its consolidated results of
operations.
2. Discontinued operations
On December 18, 2002 ASML announced the proposed sale of its Thermal business and the termination
of its manufacturing activities in the Track business. Both discontinued businesses met the
criteria of SFAS No. 144 and have been classified accordingly.
In December 2002 the Company reviewed its long-lived assets used in the Thermal business for
potential impairment and recorded no impairment charges. During 2003, ASMLs management again
reviewed its long-lived assets for impairment as the Company entered into negotiations with several
potential buyers and accordingly recorded pre-tax impairment charges of EUR 16.0 million. In
October 2003, the Company completed the sale of its Thermal business to a privately held company
formed by VantagePoint Venture Partners. At the time of the sale, no further gain or loss was
realized. The net loss of the Thermal business amounted to EUR 32.3 million in 2003.
The termination of the Track business resulted in an exit plan that included workforce reductions,
fixed asset impairments and inventory write-offs due to discontinued product lines. The exit plan
included the disposal of remaining assets related to the Track business. In 2002, ASML decided to
continue to service its existing customers for whom ASML has warranty or other service obligations.
Consequently, customer support related to the Track business was not included in discontinued
operations for 2002. In June 2003, ASML sold certain of its fixed assets and inventories related to
its Track business to Rite Track. No gain or loss was realized on the sale. The net loss of the
Track business amounted to EUR 3.4 million in 2003. The net loss in 2003 relates mainly to
impairment charges recorded on a building in the United States, previously used by the Companys
Track business. This impairment was determined on the difference between the buildings estimated
fair value and its carrying value.
The tax effects arising from asset impairment costs, employee termination costs, inventory
write-off and losses from discontinued operations mostly reside and will remain with ASML U.S.
group companies. These losses can be offset against future profits from continuing operations of
these U.S. group companies.
As of December 31, 2005, ASML has completed the discontinuation of the Track business and the
divesture of the Thermal business.
Summarized results of operations for discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Track |
|
|
2,514 |
|
|
|
0 |
|
|
|
0 |
|
Thermal |
|
|
38,198 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
40,712 |
|
|
|
0 |
|
|
|
0 |
|
F - 13
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Loss from discontinued operations,
net of taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Track loss from operations |
|
|
(1,456 |
) |
|
|
0 |
|
|
|
0 |
|
Track exit costs |
|
|
(1,944 |
) |
|
|
0 |
|
|
|
0 |
|
Thermal loss from operations |
|
|
(21,906 |
) |
|
|
0 |
|
|
|
0 |
|
Thermal exit costs |
|
|
(10,404 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
Total |
|
|
(35,710 |
) |
|
|
0 |
|
|
|
0 |
|
Estimated exit costs related to our Track business amounted EUR 2 million for the year ended
December 31, 2003 comprising fixed asset impairment charges of EUR 3 million and tax benefits of
EUR 1 million. Our exit from the Track business was substantially completed by the end of 2003 with
limited changes from prior year estimates.
Summarized assets and liabilities from discontinued operations are as follows:
|
|
|
|
|
|
|
|
|
As of December 31 |
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
Assets |
|
|
|
|
|
|
|
|
Tangible fixed assets |
|
|
2,695 |
|
|
|
0 |
|
Total Assets |
|
|
2,695 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Accrued liabilities |
|
|
4,713 |
|
|
|
0 |
|
Total Liabilities |
|
|
4,713 |
|
|
|
0 |
|
ASML organizes its financing activity at the corporate level and does not allocate funding to
individual net assets identified as assets from discontinued operations.
3. Restructuring
Restructuring
Plan 2001
On October 16, 2001, as a consequence of the downturn in the semiconductor industry, ASML announced
cost reductions and a restructuring plan (Restructuring plan 2001) which resulted in the
consolidation of manufacturing facilities and discontinuance of certain product lines related to
SVG that overlapped with products of ASML. Adjustments to the Restructuring plan 2001, amounting to
EUR 1.4 million, were recognized in 2003, and are classified as cost of sales (the same line as
where the initial charges were recorded). These adjustments related mainly to more favorable
settlement agreements with vendors of purchase commitments than the Company had estimated. As of
December 31, 2005, this plan has been fully effectuated.
Restructuring Plan 2002
In response to the semiconductor industrys continuing downturn and a corresponding decrease in
demand for ASMLs products and services, on December 18, 2002, ASML announced measures to contain
costs for its lithography business, including customer support, and thereby lower its break-even
point (Restructuring plan 2002). The Restructuring plan 2002 did not impact any processes or
products.
The Company also announced workforce reductions of approximately 700 positions worldwide. The
related lay-off costs were recorded in 2003 since the final details on the plan had not been
finally determined by December 31, 2002. With respect to these reductions, ASML recorded in 2003
restructuring charges totaling EUR 6.9 million, of which EUR 4.1 million was reflected in cost of
sales and EUR 2.8 million was reflected in restructuring charges. As of December 31, 2003, this
plan had been fully effectuated.
Restructuring Plan 2003
The worldwide slowdown in the semiconductor industry continued into 2003 and, on July 16, 2003,
ASML announced further workforce reductions of approximately 550 positions worldwide, of which the
majority was planned for the Netherlands (Restructuring plan 2003). During 2003, ASML recorded a
provision of EUR 15.3 million as an ongoing benefit arrangement, of which EUR 3.9 million was
included in cost of sales and EUR 11.4 million was included in restructuring costs. The amount of
the provision was based upon the severance arrangements as agreed with our Works Council in the
Netherlands for the workforce reductions included in ASMLs Restructuring Plan 2002. The estimated
initial annual cost savings were EUR 47 million. ASMLs Board of Management and ASMLs Dutch Works
Council then commenced a joint study on implementing these workforce reductions in the Netherlands,
which delayed the reductions until the beginning of 2004. Thereafter, in response to a sharp
improvement in market conditions during 2004, the Company decreased the reductions to approximately
300 positions worldwide, of which 150 were contract employees with
limited rights upon termination.
As a result, ASML recorded a restructuring credit of EUR
12.1 million, EUR 3.8 million of which was recorded in cost of sales and EUR 8.3 million of which was recorded under
restructuring expenses. The Companys payments associated with these workforce reductions were EUR
0.5 million in 2005 and EUR 2.5 million in 2004 and ASMLs initially anticipated cost savings were
reduced to approximately EUR 24 million.
F - 14
Also during 2003, ASML recorded restructuring costs of approximately EUR 6.8 million relating to
the consolidation of its office and warehouse facilities at the headquarters in Veldhoven as the
Company ceased using certain of its facilities. The facility exit charges included estimated future
obligations for non-cancelable lease payments and the impairment of property and equipment
(primarily leasehold improvements) for which there are insufficient cash flows to support the
carrying cost. During 2004, ASML recorded adjustments to the related restructuring provision due to
postponed commencement dates of sublease agreements and higher exit costs than originally
estimated. This resulted in an additional charge of EUR 3.5 million, EUR 1.1 million of which was
recorded in cost of sales and EUR 2.5 million of which was recorded under restructuring charges.
The Restructuring plan 2003 did not impact any processes or products. As of December 31, 2005, this
plan has been substantially effectuated.
Tabular
Disclosures of Restructuring
The restructuring charges and adjustments recorded during 2003, 2004 and 2005, totaling EUR 29
million, EUR (9) million and EUR 0 million, respectively, consist of the amounts set forth in
detail in the following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Inventory and other asset write-offs 1 |
|
|
1,810 |
|
|
|
0 |
|
|
|
0 |
|
Building Closure cost 2 |
|
|
6,833 |
|
|
|
0 |
|
|
|
0 |
|
Severance Payments 2 |
|
|
22,182 |
|
|
|
0 |
|
|
|
0 |
|
Adjustments to prior year plans 2 |
|
|
(1,673 |
) |
|
|
(8,556 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total restructuring charges |
|
|
29,152 |
|
|
|
(8,556 |
) |
|
|
0 |
|
|
|
|
1 |
|
These restructuring charges are directly posted to the related assets |
|
2 |
|
These restructuring charges correspond to additions and adjustments in
ASMLs restructuring provision. |
All of the foregoing restructuring charges are recorded in ASMLs statements of operations either
in cost of sales or in restructuring charges, as summarized in the following table for the years
ended December 31, 2003, 2004 and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Cost of sales |
|
|
4,667 |
|
|
|
(2,694 |
) |
|
|
0 |
|
Restructuring Charges |
|
|
24,485 |
|
|
|
(5,862 |
) |
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
29,152 |
|
|
|
(8,556 |
) |
|
|
0 |
|
The following table summarizes, per restructuring plan, the movement in the restructuring provision
for the three years ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring plan announced in |
|
2001 |
|
|
2002 |
|
|
2003 |
|
|
Total |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Balance as of December 31, 2002 |
|
|
11,826 |
|
|
|
0 |
|
|
|
0 |
|
|
|
11,826 |
|
Additions |
|
|
0 |
|
|
|
6,911 |
|
|
|
22,104 |
|
|
|
29,015 |
|
Utilization of the year |
|
|
(6,086 |
) |
|
|
(6,906 |
) |
|
|
(2,100 |
) |
|
|
(15,092 |
) |
Adjustments |
|
|
(1,440 |
) |
|
|
0 |
|
|
|
(233 |
) |
|
|
(1,673 |
) |
Effect of foreign currency translation |
|
|
(1,506 |
) |
|
|
(5 |
) |
|
|
0 |
|
|
|
(1,511 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003 |
|
|
2,794 |
|
|
|
0 |
|
|
|
19,771 |
|
|
|
22,565 |
|
Utilization of the year |
|
|
(2,323 |
) |
|
|
0 |
|
|
|
(7,774 |
) |
|
|
(10,097 |
) |
Adjustments |
|
|
0 |
|
|
|
0 |
|
|
|
(8,556 |
) |
|
|
(8,556 |
) |
Effect of foreign currency translation |
|
|
114 |
|
|
|
0 |
|
|
|
0 |
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004 |
|
|
585 |
|
|
|
0 |
|
|
|
3,441 |
|
|
|
4,026 |
|
Utilization of the year |
|
|
(637 |
) |
|
|
0 |
|
|
|
(1,122 |
) |
|
|
(1,759 |
) |
Adjustments |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Effect of foreign currency translation |
|
|
52 |
|
|
|
0 |
|
|
|
0 |
|
|
|
52 |
|
|
|
Balance as of December 31, 2005 |
|
|
0 |
|
|
|
0 |
|
|
|
2,319 |
|
|
|
2,319 |
|
F-15
The following table summarizes, per category, the movement in the restructuring provision for the
three years ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase |
|
|
Building |
|
|
Severance |
|
|
Total |
|
Category |
|
commitments |
|
|
closure costs |
|
|
payments |
|
|
|
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Balance as of December 31, 2002 |
|
|
10,026 |
|
|
|
1,800 |
|
|
|
0 |
|
|
|
11,826 |
|
Additions |
|
|
0 |
|
|
|
6,833 |
|
|
|
22,182 |
|
|
|
29,015 |
|
Utilization of the year |
|
|
(4,711 |
) |
|
|
(3,475 |
) |
|
|
(6,906 |
) |
|
|
(15,092 |
) |
Adjustments |
|
|
(3,326 |
) |
|
|
1,653 |
|
|
|
0 |
|
|
|
(1,673 |
) |
Effect of foreign currency translation |
|
|
(1,111 |
) |
|
|
(395 |
) |
|
|
(5 |
) |
|
|
(1,511 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003 |
|
|
878 |
|
|
|
6,416 |
|
|
|
15,271 |
|
|
|
22,565 |
|
Utilization of the year |
|
|
(914 |
) |
|
|
(6,705 |
) |
|
|
(2,478 |
) |
|
|
(10,097 |
) |
Adjustments |
|
|
0 |
|
|
|
3,546 |
|
|
|
(12,102 |
) |
|
|
(8,556 |
) |
Effect of foreign currency translation |
|
|
36 |
|
|
|
78 |
|
|
|
0 |
|
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004 |
|
|
0 |
|
|
|
3,335 |
|
|
|
691 |
|
|
|
4,026 |
|
Utilization of the year |
|
|
0 |
|
|
|
(1,289 |
) |
|
|
(470 |
) |
|
|
(1,759 |
) |
Adjustments |
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
Effect of foreign currency translation |
|
|
0 |
|
|
|
52 |
|
|
|
0 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2005 |
|
|
0 |
|
|
|
2,098 |
|
|
|
221 |
|
|
|
2,319 |
|
ASMLs net cash outflows in 2003, 2004 and 2005 for exit plans were EUR 15.1 million, EUR 10.1
million and EUR 1.8 million, respectively. At the end of 2003, the Company anticipated that the
entire restructuring provision, amounting to EUR 22.6 million, would be expended in cash. The
amount of cost savings expected in periods following implementation of the above-mentioned
restructuring plans relate primarily to reduction in workforce and
was estimated in the aggregate at EUR 156 million on an annual basis in continuing operations.
4. Market risk and derivatives
Market risk represents the risk of a change in the value of a financial instrument, derivative or
non derivative, caused by fluctuations in currency exchange rates and interest rates. The Company
addresses market risk in accordance with established policies and thereby enters into various
derivative transactions. No such transactions are entered into for trading purposes.
Foreign currency management
The Company uses the euro as its invoicing currency in order to limit the exposure to foreign
currency movements. Exceptions may occur on a customer by customer basis. To the extent that
invoicing is done in a currency other than the euro, the Company is exposed to foreign currency
risk.
It is the Companys policy to hedge material transaction exposures, such as sales transactions,
forecasted cash flows from purchases and accounts receivable/accounts payable. The Company hedges
these exposures through the use of foreign exchange options and forward contracts. The use of a mix
of foreign exchange options and forwards is aimed at reflecting the likelihood of the transactions
occurring. The effectiveness
of all outstanding hedge contracts is monitored closely throughout the life of the hedges.
During the twelve months ended December 31, 2005, no gain or loss was recognized in cost of sales
relating to ineffective hedges. As of December 31, 2005, EUR 9.9 million of other comprehensive
income represents the total anticipated loss to be charged to sales, and EUR 1.2 million is the
total anticipated gain to be released to cost of sales over the next twelve months as the
forecasted revenue and purchase transactions occur.
It is the Companys policy to hedge material remeasurement exposures. These net exposures from
certain monetary assets and liabilities in non-functional currencies are hedged with forward
contracts.
F-16
It is the Companys policy to manage material translation exposures resulting predominantly from
ASMLs U.S. dollar net investments. Throughout 2004 and 2005 a proportion of ASMLs USD 575 million
5.75 percent Convertible Subordinated Notes due 2006 was assigned to hedge certain of the Companys
U.S. dollar net investments. The related foreign currency translation amounts (gross of taxes)
included in cumulative translation adjustment for the years ended December 31, 2004 and 2005 were
EUR 10.8 million gain and EUR 28.2 million loss, respectively.
As from December 2005 onwards, a forward contract was assigned to hedge these U.S. dollar net
investments.
Interest
rate management
The Company has both assets and liabilities that bear interest, which expose the Company to
fluctuations in the prevailing market rate of interest. The Company uses interest rate swaps to
align the interest typical terms of interest bearing assets with the interest typical terms of
interest bearing liabilities. The Company still retains residual financial statement exposure risk
to the extent that the asset and liability positions do not fully offset. It is the Companys
policy to enter into interest rate swaps to hedge this residual exposure. For this purpose, the
Company uses interest rate swaps, both to hedge changes in market value of fixed loan coupons
payable due to changes in interest rates as well as to hedge the variability of future interest
receipts as a result of changes in market interest rates.
Financial
instruments as of December 31, 2005
The Company uses foreign exchange derivatives to manage its currency risk and interest rate swaps
to manage its interest rate risk. The following table summarizes the estimated fair values of the
Companys financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31 |
|
2004 |
|
|
|
|
|
|
2005 |
|
|
|
|
|
} |
|
|
|
Notional |
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
Amount 2 |
|
|
Fair Value |
|
|
Amount 2 |
|
|
Fair Value |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Forward contracts1 |
|
|
82,722 |
|
|
|
11,547 |
|
|
|
93,260 |
|
|
|
(6,508 |
) |
Currency options |
|
|
78,882 |
|
|
|
8,803 |
|
|
|
(29,843 |
) |
|
|
(1,369 |
) |
Interest rate swaps |
|
|
847,431 |
|
|
|
1,978 |
|
|
|
917,395 |
|
|
|
(4,896 |
) |
(Source: Bloomberg)
|
|
|
1 |
|
Includes forward contracts on U.S. dollars, Hong Kong dollars, British
Pounds, Israeli Shekel, Japanese Yen, Singapore dollars and Swiss Francs. |
|
2 |
|
Net amount of forward and option contracts assigned as a hedge to sales and
purchase transactions, to monetary assets and liabilities and to net investments in foreign
operations. |
The fair value of forward contracts (used for hedging purposes) is the estimated amount that
a bank would receive or pay to terminate the forward contracts at the reporting date, taking into
account current interest rates, current exchange rates and the current creditworthiness of the
counterparties.
The fair value of currency options (used for hedging purposes) is the estimated amount that a bank
would receive or pay to terminate the option agreements at the reporting date, taking into account
current interest rates, current exchange rates, volatility and the current creditworthiness of the
counterparties.
The fair value of interest rate swaps (used for hedging purposes) is the estimated amount that a
bank would receive or pay to terminate the swap agreements at the reporting date, taking into
account current interest rates and the current creditworthiness of the counterparties.
Credit
risk
Financial instruments that potentially subject ASML to significant concentrations of credit risk
consist principally of cash
and cash equivalents, trade accounts receivable and derivative financial instruments used in
hedging activities.
Financial instruments contain an element of risk of the counterparties being unable to meet their
obligations. This financial credit risk is monitored and minimized per type of financial instrument
by limiting ASMLs counterparties to a sufficient number of major financial institutions and
issuers of commercial paper. ASML does not expect the counterparties to default given their high
credit quality.
ASMLs customers consist of integrated circuit manufacturers located throughout the world. ASML
performs ongoing credit evaluations of its customers financial condition and generally requires no
collateral to secure accounts receivable, ASML maintains an allowance reserve for potentially
uncollectible accounts receivable based on its assessment of the collectibility of accounts
receivable. ASML regularly reviews the
F-17
allowance by considering factors such as historical payment
experience, credit quality, age of the accounts receivable balances, and current economic
conditions that may affect a customers ability to pay. In addition, ASML utilizes letters of
credit to mitigate credit risk when considered appropriate.
5. Accounts receivable
Accounts receivable consist of the following:
|
|
|
|
|
|
|
|
|
As of December 31 |
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
Gross accounts receivable |
|
|
507,970 |
|
|
|
306,847 |
|
Allowance for doubtful debts |
|
|
(4,817 |
) |
|
|
(4,275 |
) |
|
|
|
|
|
|
|
|
|
|
Net accounts receivable |
|
|
503,153 |
|
|
|
302,572 |
|
A summary of activity in the allowance for doubtful debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Balance at beginning of year |
|
|
(324 |
) |
|
|
(6,196 |
) |
|
|
(4,817 |
) |
Utilization of the provision |
|
|
3,241 |
|
|
|
4,464 |
|
|
|
2,413 |
|
Addition of the year 1 |
|
|
(9,113 |
) |
|
|
(3,085 |
) |
|
|
(1,871 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
(6,196 |
) |
|
|
(4,817 |
) |
|
|
(4,275 |
) |
|
|
|
1 |
|
Addition of the year is recorded in cost of sales. |
6. Inventories
Inventories consist of the following:
|
|
|
|
|
|
|
|
|
As of December 31 |
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
Raw materials |
|
|
180,936 |
|
|
|
163,817 |
|
Work-in-process |
|
|
416,480 |
|
|
|
482,801 |
|
Finished products |
|
|
283,338 |
|
|
|
246,774 |
|
|
Total
inventories, gross |
|
|
880,754 |
|
|
|
893,392 |
|
Allowance for obsolescence and/or
lower market value |
|
|
(163,066 |
) |
|
|
(116,192 |
) |
|
|
|
|
|
|
|
|
|
|
Total inventories, net |
|
|
717,688 |
|
|
|
777,200 |
|
A summary of activity in the allowance for obsolescence is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Balance at beginning of year |
|
|
(285,264 |
) |
|
|
(213,622 |
) |
|
|
(163,066 |
) |
Addition of the year1 |
|
|
(32,431 |
) |
|
|
(34,336 |
) |
|
|
(11,811 |
) |
Effect of exchange rates |
|
|
22,976 |
|
|
|
5,280 |
|
|
|
(8,461 |
) |
Utilization of the provision |
|
|
81,097 |
|
|
|
79,612 |
|
|
|
67,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
|
(213,622 |
) |
|
|
(163,066 |
) |
|
|
(116,192 |
) |
|
|
|
1 |
|
Addition of the year is recorded in cost of sales. |
The decrease in allowance for obsolescence mainly reflects actual scrapping of obsolete
inventory and increased focus on
supply chain and inventory control management.
7. Other assets
Other non-current assets consist of the following:
F-18
|
|
|
|
|
|
|
|
|
As of December 31 |
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
Compensation plan assets1 |
|
|
7,672 |
|
|
|
9,605 |
|
Prepaid expenses |
|
|
12,028 |
|
|
|
7,923 |
|
Subordinated loan granted to lessor
in respect of Veldhoven headquarters2 |
|
|
5,445 |
|
|
|
5,445 |
|
Loan to Micronic 3 |
|
|
0 |
|
|
|
13,000 |
|
Other |
|
|
0 |
|
|
|
3,823 |
|
|
|
|
|
|
|
|
|
|
|
Total other long-term assets |
|
|
25,145 |
|
|
|
39,796 |
|
|
|
|
1 |
|
For further details on compensation plan refer to Note 13. |
|
2 |
|
For further details on loan granted to lessor in respect of Veldhoven headquarters
refer to Note 12. |
|
3 |
|
Pursuant to a license agreement between Micronic and ASML, ASML has paid to Micronic
in 2005 an amount of EUR 20 million, of which EUR 13,000 is non-current. |
Other current assets consist of the following:
|
|
|
|
|
|
|
|
|
As of December 31 |
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
Advance payments to Zeiss |
|
|
72,375 |
|
|
|
44,402 |
|
VAT |
|
|
38,464 |
|
|
|
27,047 |
|
Loan to Micronic 1 |
|
|
0 |
|
|
|
7,000 |
|
Prepaid expenses |
|
|
22,703 |
|
|
|
16,583 |
|
Other |
|
|
42,250 |
|
|
|
30,770 |
|
|
|
|
|
|
|
|
|
|
|
Total other current assets |
|
|
175,792 |
|
|
|
125,802 |
|
|
|
|
1 |
|
Pursuant to a license agreement between Micronic and ASML, ASML has paid to
Micronic in 2005 an amount of EUR 20 million, of which EUR 7,000 is current. |
Zeiss is the Companys sole supplier of lenses and, from time to time, receives non-interest
advance payments from the Company that assist in financing Zeiss work in progress and thereby
secure lens deliveries to the Company. Amounts owed under these advance payments are repaid through
lens deliveries. The Company does not maintain a loss allowance against these advances, but
periodically monitors
Zeiss financial condition to confirm that no provision is necessary.
8. Intangible assets
Pursuant to agreements executed on December 10, 2004 (effective November 12, 2004), ASML, Zeiss and
Nikon agreed to settle all pending worldwide patent litigation between the companies. The
settlement included a cross-license of patents related to lithography equipment used to manufacture
semiconductor devices and payments to Nikon by ASML and Zeiss. In connection with the settlement,
ASML made an initial payment to Nikon of US$ 60 million (approximately EUR 49 million) in 2004, a
further payment of US$ 9 million (approximately EUR 8 million) in 2005 and is obligated to make
additional payments to Nikon of US$9 million (approximately EUR 8 million) in each of 2006 and
2007. An amount of EUR 49 million pertains to past conduct was expensed as research and development
expenses in ASMLs statement of operations for the year ended December 31, 2004. The remaining
value, in an amount of EUR 21 million has been capitalized under intangible assets and is amortized
over a period of 5 years under cost of sales.
|
|
|
|
|
|
|
|
|
As of December 31 |
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
Cost
|
|
|
|
|
|
|
|
|
Balance, January 1 |
|
|
23,574 |
|
|
|
45,717 |
|
Additions |
|
|
22,143 |
|
|
|
1,378 |
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31 |
|
|
45,717 |
|
|
|
47,095 |
|
|
|
|
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
Balance, January 1 |
|
|
8,984 |
|
|
|
13,899 |
|
Amortization |
|
|
4,915 |
|
|
|
8,253 |
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31 |
|
|
13,899 |
|
|
|
22,152 |
|
|
|
|
|
|
|
|
|
|
Net book value, December 31 |
|
|
31,818 |
|
|
|
24,943 |
|
F-19
Estimated amortization expenses relating to intangible assets for the next five years are as
follows:
|
|
|
|
|
2006: |
|
|
6,983 |
|
2007: |
|
|
6,758 |
|
2008: |
|
|
6,536 |
|
2009: |
|
|
4,459 |
|
2010: |
|
|
207 |
|
Thereafter: |
|
|
0 |
|
9. Property, plant and equipment
Property, plant and equipment consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Buildings |
|
|
Machinery |
|
|
|
|
|
|
Furniture, |
|
|
|
|
|
|
and |
|
|
and |
|
|
Leasehold |
|
|
fixtures and other |
|
|
|
|
|
|
constructions |
|
|
equipment |
|
|
improvements |
|
|
equipment |
|
|
Total |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1 |
|
|
140,310 |
|
|
|
446,699 |
|
|
|
106,650 |
|
|
|
182,371 |
|
|
|
876,030 |
|
Additions |
|
|
1,510 |
|
|
|
30,289 |
|
|
|
15,314 |
|
|
|
31,358 |
|
|
|
78,471 |
|
Disposals |
|
|
(24,644 |
) |
|
|
(67,064 |
) |
|
|
(666 |
) |
|
|
(10,016 |
) |
|
|
(102,390 |
) |
Effect of exchange rates |
|
|
9,775 |
|
|
|
23,900 |
|
|
|
731 |
|
|
|
3,821 |
|
|
|
38,227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005 |
|
|
126,951 |
|
|
|
433,824 |
|
|
|
122,029 |
|
|
|
207,534 |
|
|
|
890,338 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated depreciation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, January 1 |
|
|
59,022 |
|
|
|
323,079 |
|
|
|
60,814 |
|
|
|
129,424 |
|
|
|
572,339 |
|
Depreciation2 |
|
|
4,141 |
|
|
|
48,311 |
|
|
|
10,754 |
|
|
|
23,317 |
|
|
|
86,523 |
|
Disposals |
|
|
(16,668 |
) |
|
|
(46,682 |
) |
|
|
(221 |
) |
|
|
(8,546 |
) |
|
|
(72,117 |
) |
Effect of exchange rates |
|
|
4,892 |
|
|
|
16,794 |
|
|
|
461 |
|
|
|
2,864 |
|
|
|
25,011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
December 31, 2005 |
|
|
51,387 |
|
|
|
341,503 |
|
|
|
71,808 |
|
|
|
147,059 |
|
|
|
611,757 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Book Value 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004 |
|
|
81,288 |
|
|
|
123,620 |
|
|
|
45,836 |
|
|
|
52,947 |
|
|
|
303,691 |
|
December 31, 2005 |
|
|
75,564 |
|
|
|
92,321 |
|
|
|
50,221 |
|
|
|
60,475 |
|
|
|
278,581 |
|
|
|
|
|
1 |
|
Includes as of December 31, 2005 and 2004 assets under construction, respectively,
for buildings and constructions of EUR1,390 and EUR 1,336, machinery & equipment of EUR 1,855 and
EUR 2,592, leasehold improvements of EUR 4,473 and EUR 5,914 and furniture, fixtures and other
equipment of EUR 9,805 and EUR 18,653.
|
|
2 |
|
Includes impairment charges for machinery and equipment
of EUR 8,350 |
The majority of the Companys disposals relate to machinery and equipment, primarily
consisting of demonstration systems and training systems. These systems are similar to the ones
ASML sells
in its ordinary course of business. They are capitalized under fixed assets because they are held
and, at the time they are placed in service, expected to be used for a period longer than one year.
These systems are recorded at cost and depreciated over their useful life. From the moment these
assets are no longer held for use but intended for sale, they are reclassified from fixed assets to
inventory at the lower of their carrying value or fair market value. The cost of sales for these
systems includes this value and the additional costs of refurbishing (materials and labor). When
sold, the proceeds and cost of these systems are recorded as revenue and cost of sales,
respectively, identical to the treatment of other sales transactions.
During 2005 and 2004, the Company recorded impairment charges of EUR 8.4 million (EUR 1.7 million
in research and development expenses and EUR 6.7 million in cost of sales) and EUR 2.9 million (in
cost of sales), respectively, on machinery and equipment, for which there are insufficient cash
flows to support the carrying cost. The impairment charges were determined based on the difference
between the assets estimated fair value and their carrying value.
10. Accrued liabilities and other
Accrued liabilities and other consist of the following:
F-20
|
|
|
|
|
|
|
|
|
As of December 31 |
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
Deferred revenue |
|
|
87,107 |
|
|
|
159,410 |
|
Warranty |
|
|
19,660 |
|
|
|
24,625 |
|
Materials and costs to be paid |
|
|
79,097 |
|
|
|
92,971 |
|
Current portion of long term debt |
|
|
7,723 |
|
|
|
496,353 |
|
Advances from customers |
|
|
141,516 |
|
|
|
99,303 |
|
Personnel related items |
|
|
83,296 |
|
|
|
82,215 |
|
Investment credits |
|
|
1,450 |
|
|
|
1,356 |
|
Restructuring |
|
|
4,026 |
|
|
|
2,319 |
|
Other |
|
|
29,956 |
|
|
|
27,069 |
|
|
|
|
|
|
|
|
|
|
|
Total accrued liabilities and other |
|
|
453,831 |
|
|
|
985,621 |
|
Advances from customers consist of down payments made by customers prior to shipment for systems
included in ASMLs current product portfolio or systems currently under development.
The Company provides standard warranty coverage on its systems for twelve months, providing labor
and parts necessary to repair systems during the warranty period. The estimated warranty costs are
accounted for by accruing these costs for each system upon recognition of the system sale. The
estimated warranty cost is based on historical product performance, expected results from
improvement programs and field expenses. Based upon historical service records, the Company
calculates the charge of average service hours and parts per system to determine the estimated
warranty charge and updates these estimated charges periodically. Changes in product warranty
liabilities for the years 2004 and 2005 are as follows:
|
|
|
|
|
|
|
|
|
As of December 31 |
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
Balance, January 1 |
|
|
15,496 |
|
|
|
19,660 |
|
Additions |
|
|
27,357 |
|
|
|
33,435 |
|
Usage |
|
|
(20,508 |
) |
|
|
(29,804 |
) |
Effect of exchange rates |
|
|
(2,685 |
) |
|
|
1,334 |
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31 |
|
|
19,660 |
|
|
|
24,625 |
|
11.
Convertible subordinated notes and other borrowing
arrangements
The Companys obligations to make principal repayments under convertible subordinated notes and
other borrowing arrangements as of December 31, 2005, for the next five years and thereafter,
assuming no conversions of the Companys convertible notes occur and excluding the fair value of
interest rate swaps used to hedge the fair value and excluding
interest expense, are as follows:
|
|
|
|
|
2006 |
|
|
488,723 |
|
2007 |
|
|
707 |
|
2008 |
|
|
511 |
|
2009 |
|
|
511 |
|
2010 |
|
|
380,511 |
|
Thereafter |
|
|
80 |
|
|
|
|
|
|
|
Total |
|
|
871,043 |
|
Convertible
subordinated notes
The following table summarizes the Companys outstanding convertible notes as of December 31, 2005
and 2004, including fair value of interest rate swaps used to hedge the fair value of the
underlying fixed loan coupon:
|
|
|
|
|
|
|
|
|
As of December 31 |
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
5.75
percent convertible notes |
|
|
|
|
|
|
|
|
Notional amount |
|
|
421,431 |
|
|
|
487,497 |
|
Fair value interest rate swaps |
|
|
0 |
|
|
|
0 |
|
Total |
|
|
421,431 |
|
|
|
487,497 |
|
|
|
|
|
|
|
|
|
|
|
5.50
percent convertible notes |
|
|
|
|
|
|
|
|
Notional amount |
|
|
380,000 |
|
|
|
380,000 |
|
F-21
|
|
|
|
|
|
|
|
|
As of December 31 |
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
Fair value interest rate swaps |
|
|
1,379 |
|
|
|
238 |
|
Total |
|
|
381,379 |
|
|
|
380,238 |
|
|
|
|
|
|
|
|
|
|
|
Total
convertible notes |
|
|
802,810 |
|
|
|
867,735 |
|
In October 2001, ASML completed an offering of US$ 575 million principal
amount of its 5.75 percent Convertible Subordinated Notes due October 15, 2006, with interest
payable semi-annually on April 15 and October 15 of each year, commencing on April 15, 2002. The
notes are convertible into 30,814,576 ordinary shares at US$ 18.66 (EUR 15.82) per share at any
time prior to maturity. At any time on or after October 22, 2004, the notes are redeemable at the
option of ASML, in whole or in part, at 100 percent of its principal amount, together with accrued
interest, provided that the Companys shares close above 130 percent of the conversion price for
twenty trading days out of a thirty-day period. During 2005 none of the notes were converted into
ordinary shares.
In May 2003, ASML completed an offering of EUR 380 million principal amount of its 5.50 percent
Convertible Subordinated Notes due 2010, with interest payable annually on May 15 of each year,
commencing on May 15, 2004. The notes are convertible into an aggregate of 26,573,426 ordinary
shares at a conversion price of EUR 14.30 per share at any time prior to maturity. Unless
previously converted, the notes are redeemable at 100% of its principal amount on May 15, 2010. The
notes are redeemable at the option of ASML, in whole or in part, at any time on or after May 27,
2006, provided that ASMLs shares close above 150% of the conversion price for twenty trading days
out of a thirty-day period.
The Company uses interest rate swaps to hedge the risk from interest rate fluctuations. As of
December 31, 2005 and 2004, deferred interest rate swap proceeds amounting to, respectively, EUR
0.2 million and EUR 1.4 million have been recorded in the balance sheet as an addition to the
Companys outstanding Convertible Subordinated Notes.
The following table summarizes the estimated fair values of ASMLs Convertible Subordinated Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004 |
|
|
|
|
|
|
2005 |
|
|
|
|
|
|
Notional |
|
|
|
|
|
|
Notional |
|
|
|
|
As of December 31 |
|
Amount |
|
|
Fair Value |
|
|
Amount |
|
|
Fair Value |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
5.75
percent convertible notes |
|
|
421,431 |
|
|
|
478,594 |
|
|
|
487,497 |
|
|
|
559,587 |
|
5.50
percent convertible notes |
|
|
380,000 |
|
|
|
465,245 |
|
|
|
380,000 |
|
|
|
510,891 |
|
(Source: Bloomberg)
The fair value of the Companys long-term debt is estimated based on the quoted market prices
as of December 31, 2004 and December 31, 2005, respectively.
Other
financial debt
In February 1997, the Company received a US$ 6.5 million (EUR 5.5 million) loan from the
Connecticut Development Authority. The loan has a ten-year term, bears interest at 8.25 percent,
and is secured by the Companys U.S. facility in Wilton, Connecticut. At December 31, 2005, the
Companys outstanding debt with respect to this loan amounted to US$ 1.1 million (EUR 0.9 million).
The Company assumed three yen-denominated loans (which were granted in 1999) in
connection with its merger with SVG. Approximately EUR 2.6 million (JPY 361 million) is outstanding
at December 31, 2005, which loan is secured by land and buildings in Japan, is payable in monthly
installments through the year 2011, bearing interest at 2.5 percent. In July 2005, the Company
repaid two of the assumed loans, amounting to approximately EUR 11.8 million.
Lines
of credit
At December 31, 2005, the Company had available credit facilities for a total of EUR 400 million
(2004, EUR 400 million), all of which expire in November 2009.
No amounts were outstanding under these credit facilities at the end of 2005 and 2004. The credit
facilities contain certain restrictive covenants, including a requirement that the Company
maintains a minimum financial condition ratio, calculated in accordance with a contractually agreed
formula. ASML was in compliance with these covenants at December 31, 2004 and 2005. ASML does not
currently anticipate any difficulty in continuing to meet these covenant requirements.
F-22
Outstanding amounts under these credit facilities will bear interest at the European Interbank
Offered Rate (EURIBOR) or the London Interbank Offered Rate (LIBOR) plus a margin that is dependent
on the Companys liquidity position.
12.
Commitments, contingencies and guarantees
The Company has various contractual obligations, some of which are required to be recorded as
liabilities in the Companys consolidated financial statements, including long- and short-term
debt. Others, namely operating lease commitments and purchase obligations, are generally not
required to be recognized as liabilities on the Companys balance sheet but are required to be
disclosed.
Lease
Commitments and Variable Interests
The Company leases equipment and buildings under various operating leases. Operating leases are
charged to expense on a straight-line basis. See Tabular Disclosure of Contractual Obligations
below.
In December 2003, the FASB issued FIN 46R, Consolidation of Variable Interest Entities. Under FIN
46R, an enterprise must consolidate a variable interest entity if that enterprise has a variable
interest (or combination of variable interests) that will absorb a majority of the entitys
expected losses if they occur, receive a majority of the entitys expected residual returns if they
occur, or both.
In 2003, ASML moved to its current Veldhoven headquarters. The Company is leasing these
headquarters for a period of 15 years from an entity (the lessor)
that was incorporated by a syndicate of 3 banks (shareholders) solely for the purpose of leasing
this building. The lessors shareholders equity amounts to EUR 1.9 million. Furthermore the
shareholders each granted a loan of EUR 11.6 million and a fourth bank granted a loan of EUR 12.3
million. ASML provided the lessor with a subordinated loan of EUR 5.4 million and has a purchase
option that is exercisable either at the end of the lease in 2018, at a pre-determined price of EUR
24.5 million, or during the lease at the book value of the assets. The total assets of the lessor
entity amounted to approximately EUR 54 million at inception of the lease.
ASML believes that it holds a variable interest in this entity and that the entity is a variable
interest entity (VIE) because it is subject to consolidation in accordance with the provisions of
paragraph 5 of FIN 46(R). The total equity investment at risk is approximately 3.6 percent of the
lessors total assets and is not considered and cannot be demonstrated, qualitatively or
quantitatively, to be sufficient to permit the lessor to finance its activities without additional
subordinated financial support provided by any parties, including the shareholders.
ASML determined that it is not appropriate to consolidate the VIE as it is not the primary
beneficiary. To make this determination, the expected losses and expected residual returns of the
lessor
were allocated to each variable interest holder based on their contractual right to absorb expected
losses and residual returns. The analysis of expected losses and expected residual returns involved
determining the expected negative and positive variability in the fair value of the lessors net
assets exclusive of variable interests through various cash flow scenarios based upon the expected
market value of the lessors net assets. Based on this analysis, ASML determined that other
variable interest holders will absorb the majority of the lessors expected losses, and as a
result, ASML is not the primary beneficiary.
ASMLs maximum exposure to the lessors expected losses is estimated to be approximately EUR 5.4
million.
Purchase
Obligations
The Company enters into purchase commitments with vendors in the ordinary course of business to
ensure a smooth and continuous supply chain for key components. Purchase obligations include medium
to long-term purchase agreements. These contracts differ and may include certain restrictive
clauses. Any identified losses that result from purchase commitments that are forfeited are
provided for in the Companys financial statements. As of December 31, 2005, the Company had
purchase commitments for a total amount of approximately EUR 676 million, reflecting its backlog
level at the end of 2005. In its negotiations
with suppliers the Company continuously seeks to align its purchase commitments with its business
objectives.
See Tabular Disclosure of Contractual Obligations below.
Other
Off-Balance Sheet Arrangements
The Company has certain additional commitments and contingencies that are not recorded on its
balance sheet but may result in future cash requirements. In addition to operating lease
commitments and purchase obligations, these off-balance sheet arrangements consist of product
warranties.
From time to time the Company provides guarantees to third parties in connection with transactions
entered into by its subsidiaries in the ordinary course of business.
F-23
Tabular
Disclosure of Contractual Obligations
The Companys contractual obligations with respect to long term debt, operating lease obligations,
purchase obligations and other deferred liabilities as of December 31, 2005 can be summarized as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
After 5 |
|
|
|
|
|
|
|
1 year |
|
|
years |
|
|
years |
|
|
years |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Long Term Debt, including interest expense1 |
|
|
1,003,796 |
|
|
|
537,764 |
|
|
|
43,101 |
|
|
|
422,851 |
|
|
|
80 |
|
Operating Lease Obligations |
|
|
213,878 |
|
|
|
33,032 |
|
|
|
53,657 |
|
|
|
39,707 |
|
|
|
87,482 |
|
Purchase Obligations |
|
|
676,007 |
|
|
|
672,424 |
|
|
|
3,583 |
|
|
|
0 |
|
|
|
0 |
|
Other Liabilities2 |
|
|
18,341, |
|
|
|
7,630 |
|
|
|
10,711 |
|
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Contractual Obligations |
|
|
1,912,022 |
|
|
|
1,250,850 |
|
|
|
111,052 |
|
|
|
462,558 |
|
|
|
87,562 |
|
|
|
|
1 |
|
We refer to Note 11 for the amounts excluding interest
expense. |
2 |
|
Other liabilities relate mainly to the additional payments to Nikon due in 2006 and
2007 with respect to a cross-license of patents related to lithography equipment. |
Operating lease obligations include leases of equipment and facilities. Rental expense was
EUR 53 million, EUR 48 million and EUR 47 million for the years ended December 31, 2003, 2004 and
2005, respectively.
Several operating leases for our buildings contain purchase options, exercisable at the option of
the Company at the end of the lease, and in some cases, during the term of the lease. The amounts
to be paid if ASML should exercise these purchase options at the end of the lease can be summarized
as of December 31, 2005 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Less than |
|
|
1-3 |
|
|
3-5 |
|
|
After 5 |
|
|
|
|
|
|
|
1 year |
|
|
years |
|
|
years |
|
|
years |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Purchase options |
|
|
61,363 |
|
|
|
0 |
|
|
|
3,358 |
|
|
|
2,269 |
|
|
|
55,736 |
|
13.
Employee benefits
In February 1997, SVG adopted a non-qualified deferred compensation plan that allowed a select
group of management and highly compensated employees and directors to defer a portion of their
salary, bonus and commissions. The plan allowed SVG to credit additional amounts to participants
account balances, depending on the amount of the employees contribution, up to a maximum of 5
percent of an employees annual salary and bonus. In addition, interest is credited to the
participants
account balances at 120 percent of the average Moodys corporate bond rate. For calendar years
2003, 2004 and 2005, participants accounts were credited at 8.50 percent, 7.57 percent and 7.04
percent, respectively. SVGs contributions and related interest became 100 percent vested in May
2001 with the merger of SVG and ASML. During fiscal years 2003, 2004 and 2005, the expense incurred
under this plan was EUR 0.9 million, EUR 0.4 million and EUR 0.4 million, respectively. As of
December 31, 2004 and 2005, the Companys liability under the deferred compensation plan was EUR 5
million and EUR 5 million, respectively.
In July 2002, ASML adopted a non-qualified deferred compensation plan for its U.S. employees that
allows a select group of management or highly compensated employees to defer a portion of their
salary, bonus, and other benefits. The plan allows ASML to credit additional amounts to the
participants account balances. The participants invest their funds between the investments
available in the plan. Participants elect to receive their funds in future periods after the
earlier of their employment termination or their withdrawal election, at least 5 years after
deferral. There were minor plan expenses in 2005. On December 31, 2004 and 2005, the Companys
liability under the deferred compensation plan was EUR 3 million and EUR 3 million, respectively.
Pension
plans
ASML maintains various pension plans covering substantially all of its employees. The Companys
approximately 2,600 employees in the Netherlands participate in a multi-employer union plan
(Bedrijfstakpensioenfonds Metalektro) determined in accordance with the collective bargaining
agreements effective for the industry in which ASML operates. This multi-employer plan spans
approximately 1,400 companies and 145,000 workers. 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 Pensions and Savings Act), a multi-employer union plan must be monitored against
specific criteria, including the coverage ratio of the plans
assets to its obligations. This
coverage ratio must exceed 100% for the total plan. Every company participating in a Dutch
multi-employer 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 pension rights of
each employee are based upon the employees average salary during employment. ASMLs net periodic
pension cost for this multi-employer plan for any fiscal period is the amount of the required
contribution for that period. ASML also participates in several defined contribution pension plans,
with ASMLs expenses for these plans equaling the
contributions made in the relevant fiscal period.
F-24
The Companys pension costs for all employees for the three years ended December 31, 2005 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Pension plan based on multi-employer union plan |
|
|
16,514 |
|
|
|
17,747 |
|
|
|
20,143 |
|
Pension plans based on defined contribution |
|
|
6,636 |
|
|
|
8,103 |
|
|
|
7,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
23,150 |
|
|
|
25,850 |
|
|
|
27,397 |
|
Bonus
plan
ASML has a performance-related bonus plan for senior management, who are not members of the Board
of Management. Under this plan, the bonus amount is dependant on the actual performance on
corporate, departmental and personal targets. The bonus for senior management can range between 0
percent and 70 percent, or 0 percent and 40 percent of their annual salary, depending upon their
seniority. The performance targets for 2005 were set per half year of which the first half year
amount is paid out in the second half of 2005 and the second half year amount is expected to be
paid out in the first quarter of 2006. The Companys bonus expenses for all participants under this
plan were:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Bonus expenses |
|
|
6,495 |
|
|
|
7,481 |
|
|
|
8,555 |
|
The second half-year 2005 bonus is accrued for in the statement of operations for the
year ended December 31, 2005 and expected to be paid in the first quarter of 2006.
A dispute arose in early 2005 between the Company and the Works Council. In January 2005, the Works
Council expressed its view that the establishment of and amendments to bonus plans for management,
in particular, the ASML Senior and Executive Bonus Plan (the 92+ Bonus Plan), should be subject
to the approval of the Works Council. The Company has always maintained that the Works Council does
not have such a right of approval. In May 2005, the Works Council initiated legal proceedings to
nullify the 92+ Bonus Plan and to confirm its right of approval with respect to the establishment
of and amendments to the 92+ Bonus Plan. On November 8, 2005, the Eindhoven Cantonal Court ruled in
favor of the Works Council and confirmed the nullification of the 92+ Bonus Plan. The Company has
filed an appeal of this decision with the Court of Appeal in s-Hertogenbosch and expects a
decision during the summer of 2006.
Profit-sharing plan
ASML has a profit-sharing plan covering all employees, who are not members of the Board of
Management or senior management. Under the plan, eligible employees receive an annual
profit-sharing bonus, based on a percentage of net income relative to sales ranging from 0 to 20
percent of annual salary. The profit-sharing percentage for the years 2003, 2004 and 2005 was 0
percent, 5 percent and 8 percent,
respectively. This profit-sharing bonus is accrued for in the statement of operations for the year
ended December 31, 2005 for an amount of EUR 19.1 million, expected to be paid in the first quarter
of 2006.
Stock options
The Company has adopted various stock option plans for its employees. Each year, the Board of
Management determines, by category of ASML personnel, the total available number of stock options
that can be granted in that year. The determination is subject to the approval of the Supervisory
Board and the holders of priority shares of the Company. Options granted under ASMLs stock option
plans have fixed exercise prices equal to the closing price of the Companys ordinary shares on
Euronext on the applicable grant dates. Granted stock options generally vest over a three-year
period with any unexercised stock options expiring ten years after the grant date.
The following tables have not been restated for discontinued operations:
F-25
Stock option transactions are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Weighted average |
|
|
|
shares |
|
|
exercise price per share (EUR) |
|
|
Outstanding, December 31, 2002 |
|
|
23,876,448 |
|
|
|
25.13 |
|
Granted |
|
|
2,516,980 |
|
|
|
9.66 |
|
Exercised |
|
|
(335,977 |
) |
|
|
10.98 |
|
Forfeited |
|
|
(1,486,427 |
) |
|
|
21.82 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2003 |
|
|
24,571,024 |
|
|
|
24.58 |
|
Granted |
|
|
2,485,782 |
|
|
|
12.35 |
|
Exercised |
|
|
(875,530 |
) |
|
|
9.76 |
|
Forfeited |
|
|
(561,282 |
) |
|
|
17.73 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2004 |
|
|
25,619,994 |
|
|
|
23.19 |
|
Granted |
|
|
2,515,089 |
|
|
|
11.52 |
|
Exercised |
|
|
(991,700 |
) |
|
|
11.68 |
|
Forfeited |
|
|
(1,522,674 |
) |
|
|
15.04 |
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2005 |
|
|
25,620,709 |
|
|
|
23.16 |
|
Exercisable, December 31, 2005 |
|
|
18,251,813 |
|
|
|
28.06 |
|
Exercisable, December 31, 2004 |
|
|
19,568,177 |
|
|
|
26.65 |
|
Exercisable, December 31, 2003 |
|
|
15,494,969 |
|
|
|
23.99 |
|
Information with respect to stock options outstanding at December 31, 2005 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
Weighted |
|
Options |
|
|
|
|
|
|
|
|
|
average |
|
|
average |
|
outstanding |
|
Number |
|
|
Number |
|
|
remaining |
|
|
exercise price |
|
Range of exercise |
|
outstanding |
|
|
exercisable |
|
|
contractual |
|
|
of outstanding |
|
prices (EUR) |
|
December 31, 2005 |
|
|
December 31, 2005 |
|
|
life (years) |
|
|
options (EUR) |
|
|
5.29 - 7.94 |
|
|
511,988 |
|
|
|
80,568 |
|
|
|
6.37 |
|
|
|
7.37 |
|
8.17 - 12.26 |
|
|
8,812,416 |
|
|
|
2,152,594 |
|
|
|
7.08 |
|
|
|
11.26 |
|
12.75 - 19.13 |
|
|
2,592,352 |
|
|
|
2,314,698 |
|
|
|
3.29 |
|
|
|
15.60 |
|
19.45 - 29.18 |
|
|
4,821,922 |
|
|
|
4,821,922 |
|
|
|
2.03 |
|
|
|
20.60 |
|
29.65 - 44.48 |
|
|
4,987,538 |
|
|
|
4,987,538 |
|
|
|
1.09 |
|
|
|
34.38 |
|
45.02 - 67.53 |
|
|
3,894,493 |
|
|
|
3,894,493 |
|
|
|
6.07 |
|
|
|
46.02 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
25,620,709 |
|
|
|
18,251,813 |
|
|
|
4.41 |
|
|
|
23.16 |
|
Stock Option Extension Plans
In 2002, employees were offered an extension of the option period for options granted in 1997 up to
and including 2000. For the years 1997 up to and including 1999, this extension is either until
October 21, 2008, or October 21, 2005. For 2000, the option period is extended until 2012.
Employees who accepted the extension became subject to additional exercise periods in respect of
their options. At the modification date, there was no intrinsic value of the modified award because
the exercise price under each plan still exceeded ASMLs stock price on the modification date. As a
result, these stock option extensions did not result in recognition of any compensation expense in
accordance with APB Opinion No. 25 and related interpretations.
Financing of stock option plans
Stock option plans that were issued before 2001 were constructed with a virtual financing
arrangement whereby ASML loaned the tax value of the options granted to employees and members of
the Board of Management subject to the Netherlands tax-regime. The loans issued under this
arrangement are repayable to ASML on the exercise date of the respective option, provided that the
option was actually exercised. If the options expire unexercised, the loans are forgiven.
14. Legal Contingencies
ASML is party to various legal proceedings generally incidental to its business. Since late 2001,
ASML was a party to a series of litigation and administrative proceedings in which Nikon alleges
ASMLs infringement of Nikon patents relating to photolithography. Pursuant to agreements executed
on December 10, 2004 (effective November 12, 2004), ASML and Nikon settled these claims as
discussed below. ASML also faces exposure from other actual or potential claims and legal
proceedings.
F-26
In addition, ASML customers may be subject to claims of infringement from third parties alleging
that the ASML equipment used by those customers in the manufacture of semiconductor products,
and/or the methods relating to use of the ASML equipment, infringes one or more patents issued to
those third parties. If these claims were successful, ASML could be required to indemnify such
customers for some or all of any losses incurred or damages assessed against them as a result of
that infringement.
The Company accrues for legal costs related to litigation in its statement of operations at the
time when the related legal services are actually provided to ASML.
Patent litigation with Nikon
From 2001 through late 2004, ASML was a party to a series of civil litigations and administrative
proceedings in which Nikon alleged ASMLs infringement of Nikon patents relating to
photolithography. ASML in turn filed claims against Nikon.
Pursuant to agreements executed on December 10, 2004 (effective November 12, 2004), ASML, Zeiss and
Nikon agreed to settle all pending worldwide patent litigation between the companies. The
settlement included an agreement to dismiss all pending patent litigation between the companies, an
exchange of releases, a cross-license of patents related to lithography equipment used to
manufacture semiconductor devices and payments to Nikon by ASML and Zeiss. In connection with the
settlement, ASML made an initial payment to Nikon of US$ 60 million (approximately EUR 49 million)
in 2004, a further required payment of US$ 9 million (approximately EUR 8 million) before November
12, 2005, and is obligated to make additional payments to Nikon of US$9 million each in 2006 and
2007. Zeiss made an initial payment to Nikon of US$ 40 million (approximately EUR 32 million) in
2004, a further required payment of US$ 6 million (approximately EUR 4 million) in 2005, and is
required to make additional payments to Nikon of US$ 6 million in each of 2006 and 2007.
Ultratech case U.S.
In May 2000, Ultratech Stepper, Inc. (Ultratech) filed a lawsuit against ASML that is proceeding
in the United States District Court for the Northern District of California. Ultratech alleges that
ASML is infringing Ultratechs rights under a United States patent in connection with its
manufacture and commercialization in the U.S. of advanced photolithography equipment embodying
technology that, in particular, is used in Step & Scan equipment. Ultratechs complaint seeks
injunctive relief prohibiting future sales and damages for past sales of this equipment. Ultratech
may also seek prejudgment interest. Ultratechs complaint also seeks enhanced damages based on
alleged willful infringement. If the jury finds that ASML willfully infringed the patent, the court
has the discretion to award three times the damages.
In August 2002, the Court granted ASMLs motion for summary judgment of non-infringement, after
which Ultratech appealed this judgment to the United States Court of Appeals for the Federal
Circuit. On March 30, 2004, the Federal Circuit reversed the District Courts grant of summary
judgment and remanded the case to the District Court for determination of infringement under the
Federal Circuits new construction of one of the terms of the asserted patent.
Ultratechs patent infringement claims were tried before a jury in Oakland, California, in May and
June of 2005. On June 21, 2005 the jury unanimously determined that each of the claims of
Ultratechs patent that Ultratech asserted against ASML was invalid, and thus ASML was not liable
for patent infringement, notwithstanding the jurys finding that each of these claims was infringed
by ASML and certain of its customers. The Court entered judgment in favor of ASML following receipt
of the jury verdict.
Ultratech has filed motions with the Court seeking to overturn the jurys finding that the asserted
claims of its patent are invalid or, in the alternative, seeking a new trial. ASML has also filed
motions seeking to overturn the jurys finding that the asserted claims of Ultratechs patent are
infringed by ASML, and to establish additional bases for the invalidity of the asserted claims of
Ultratechs patent. The Court has not yet ruled on any of these motions. In the event the Court
overturns the jurys finding that the asserted claims of Ultratechs patent are invalid, that the
Court orders a new trial and ASML is found to infringe valid claims of Ultratechs patent in the
new trial, or that an appellate court overturns the jurys verdict in favor of ASML on appeal, it
could result in a damages award and substantially restrict or prohibit ASMLs sales in the United
States, which in turn could have a material adverse effect on the Companys financial position and
results of operations.
15. Income taxes
Income tax expense (benefit) from continuing and discontinued operations is set forth below:
F-27
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Income tax expense (benefit) from continuing operations |
|
|
(59,675 |
) |
|
|
127,380 |
|
|
|
123,559 |
|
Income tax expense (benefit) from discontinued operations |
|
|
(23,316 |
) |
|
|
0 |
|
|
|
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit) |
|
|
(82,991 |
) |
|
|
127,380 |
|
|
|
123,559 |
|
The amounts below include tax effects that arose from the Companys discontinued operations but
that reside and will remain with ASML group companies on a continuing basis.
The components of income before income taxes are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Domestic |
|
|
(288,370 |
) |
|
|
216,790 |
|
|
|
256,874 |
|
Foreign |
|
|
45,163 |
|
|
|
146,050 |
|
|
|
178,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(243,207 |
) |
|
|
362,840 |
|
|
|
435,023 |
|
The Netherlands domestic statutory tax rate amounted to 31.5 percent in 2005 and 34.5 percent in
2004. The reconciliation between the provision for income taxes shown in the consolidated statement
of operations, based on the effective tax rate, and expense based on the domestic tax rate, is as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Income tax expense based on domestic rate1 |
|
|
(83,906 |
) |
|
|
125,180 |
|
|
|
137,032 |
|
Change in statutory tax rate 2 |
|
|
0 |
|
|
|
14,544 |
|
|
|
(2,056 |
) |
Different tax rates 3 |
|
|
(6,568 |
) |
|
|
(24,477 |
) |
|
|
(19,478 |
) |
Other credits and non-taxable items 4 |
|
|
7,483 |
|
|
|
12,133 |
|
|
|
8,061 |
|
|
Provision for income taxes shown
in the statement of operations |
|
|
(82,991 |
) |
|
|
127,380 |
|
|
|
123,559 |
|
|
|
|
1 |
|
Income tax expense based on domestic rate reflects the tax expense that would have
been applicable if all of ASMLs income were derived from the Companys Dutch operations.
|
|
2 |
|
At the end of 2004, the Netherlands Government has enacted a tax rate reduction. As a
result of this law change the Netherlands statutory tax rate was planned to be reduced in steps to
30 percent through 2007. This led to a remeasurement of the Companys deferred tax assets and
liabilities, resulting in a one time increase in the tax charge of EUR 15 million in 2004. At the
end of 2005, the Netherlands Government enacted a further tax rate reduction to 29.6 percent in
2006 and 29.1 percent in 2007. This led to an additional remeasurement of the Companys deferred
tax assets and liabilities, resulting in a one time tax benefit of EUR 2 million in 2005, as ASML
has a net deferred tax liability position in the Netherlands tax jurisdiction.
|
|
3 |
|
ASMLs results are not solely realized in the Netherlands but also in other countries
where different tax rates are applicable. Different tax rates reflects the adjustment necessary to
give effect to the differing tax rates applicable in these non-Dutch jurisdictions.
|
|
4 |
|
Other credits and non-taxable items reflect the impact on statutory rates of permanent
non-deductible and non- taxable items such as non-deductible taxes and dues, non-deductible
interest expense, and non-deductible meals and entertainment, as well as the impact of various tax
credits on the Companys provision for income taxes.
|
ASMLs provision for income taxes consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
2003 |
|
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
2,307 |
|
|
|
1,318 |
|
|
|
2,216 |
|
Foreign |
|
|
17,094 |
|
|
|
6,375 |
|
|
|
4,517 |
|
Deferred |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
|
(99,426 |
) |
|
|
96,053 |
|
|
|
68,954 |
|
Foreign |
|
|
(2,966 |
) |
|
|
23,634 |
|
|
|
47,872 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
(82,991 |
) |
|
|
127,380 |
|
|
|
123,559 |
|
F-28
Deferred tax assets (liabilities) consist of the following:
|
|
|
|
|
|
|
|
|
As of December 31 |
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
Tax effect carry-forward losses |
|
|
184,448 |
|
|
|
134,220 |
|
Inventories |
|
|
22,830 |
|
|
|
13,167 |
|
Temporary depreciation investments |
|
|
(133,262 |
) |
|
|
(50,781 |
) |
Other temporary differences |
|
|
(20,411 |
) |
|
|
(18,695 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
53,605 |
|
|
|
77,911 |
|
The main components of the deferred tax position related to inventories are deferred tax on
eliminated intercompany profit in inventories (EUR 23.0 million), temporary differences on timing
of inventory provisions (EUR 22.4 million) and temporary differences on inventory valuation (EUR
(32.2) million).
Temporary differences on timing of inventory provisions result from tax laws that defer deduction
for an inventory provision until the moment the related inventory is actually disposed of or
scrapped, rather than when the provision is recorded for accounting purposes. Temporary differences
on inventory valuation result from tax laws that allow the allocation of direct cost rather than
full cost to work-in-progress and finished product inventories, while the difference between direct
costs and full costs are currently tax deductible.
Deferred tax assets (liabilities) are classified in the consolidated financial statements as
follows:
|
|
|
|
|
|
|
|
|
As of December 31 |
|
2004 |
|
|
2005 |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
Deferred tax assets current |
|
|
54,554 |
|
|
|
95,636 |
|
Deferred tax assets non-current |
|
|
201,100 |
|
|
|
206,884 |
|
Deferred tax liabilities current |
|
|
(1,332 |
) |
|
|
(390 |
) |
Deferred tax liabilities non-current |
|
|
(200,717 |
) |
|
|
(224,219 |
) |
|
|
|
|
|
|
|
|
|
|
Total |
|
|
53,605 |
|
|
|
77,911 |
|
Deferred tax assets result predominantly from net operating loss carry-forwards incurred mainly in
the U.S. and the Netherlands. Net operating losses qualified as tax losses under Dutch tax laws
incurred by Netherlands group companies can in general be offset for an indefinite period against
future taxable profits. Net operating losses qualified as tax losses under U.S. federal tax laws
incurred by U.S. group companies can in general be offset against future profits realized in the 20
years following the year in which the losses are incurred. The Companys ability to carry forward
its U.S. federal tax losses in existence at December 31, 2005 will expire in the period 2021
through 2023. Net operating losses qualified as tax losses under U.S. state tax laws incurred by
U.S. group companies can in general be offset against future profits realized in the 5 to 20 years
following the year in which the losses are incurred. The period of net operating loss carry forward
for U.S. state tax purposes depends on the state in which the tax loss arose. The Companys ability
to carry forward U.S. state tax losses in existence at December 31, 2005 will expire in the period
2006 through 2023. The total amount of losses carried forward as of December 31, 2005 is EUR 370
million tax basis or EUR 134 million tax effect, which resides completely with ASML US Inc. Based
on its analysis, management believes that it is more likely than not that all U.S. qualified tax
losses will be offset by future taxable income before the Companys ability to utilize those losses
expires. This analysis takes into account the Companys projected future taxable income from
operations, possible tax planning alternatives available to the Company, and a realignment of group
assets that the Company effected during the period 2001 through 2003 and that included the transfer
of certain tangible and intangible assets of ASML US Inc. to ASML Netherlands B.V. The value of the
assets transferred results in an additional income stream to ASML US, Inc., which the Companys
management believes will, more likely than not, be sufficient to absorb the net operating losses
that ASML US Inc. has incurred, prior to the expiry of those losses. In order to determine with
certainty the tax consequences and value of this asset transfer, in 2002 ASML requested a bilateral
advance pricing agreement (APA) from the US and Netherlands tax authorities. Since December 2002,
ASMLs management has held numerous meetings with representatives of those authorities. The most
recent meeting with the U.S. and Netherlands tax authorities took place in December 2005. Based on
these meetings, and feedback from both these authorities, ASML is confident that ASMLs APA request
will be successful. The specific timing for completion of the APA remains in the control of those
tax authorities.
Pursuant to Netherlands tax laws, ASML has temporarily depreciated part of its investment in its
U.S. group companies. This depreciation has been deducted from the taxable base in The Netherlands.
The depreciation resulted in a temporary tax refund of EUR 152 million. This temporary depreciation
must be added back on a straight-line basis to the taxable base in the period 2006 through 2010. As
of December 31, 2005, the remaining net tax effect of this repayment obligation amounted to EUR 131
million,
F-29
of which EUR 51 million is recorded as a long-term deferred tax liability and EUR 80
million as a current tax liability in the Companys financial statements.
ASML is subject to tax audits in the various tax jurisdictions it operates in. During such audits,
local tax authorities may challenge the positions taken by ASML. Although the outcome of these
audits is uncertain, management believes that its positions are defensible.
16. Segment disclosure
Segment information has been prepared in accordance with SFAS No. 131. Disclosures about Segments
of an Enterprise and Related Information.
ASML operates in one reportable segment for the development, manufacture, marketing and servicing
of lithography equipment.
Since the beginning of 2005, ASMLs management reporting includes net system sales figures of its
product lines: 300 millimeter new systems, 200 millimeter new systems and used systems. Net sales
for these product lines in 2005 were as follows:
|
|
|
|
|
Year ended December 31 |
|
2005 |
|
(in thousands) |
|
EUR |
|
|
300
millimeter new systems |
|
|
1,932,976 |
|
200
millimeter new systems |
|
|
179,228 |
|
used systems |
|
|
115,474 |
|
|
|
|
|
|
|
Total net system sales |
|
|
2,227,678 |
|
For geographical reporting, net sales are attributed to the geographic location in which the
customers facilities are located. Identifiable assets are attributed to the geographic location in
which they are located. Net sales and identifiable assets by geographic region were as follows:
|
|
|
|
|
|
|
|
|
Year ended December 31 |
|
Net sales |
|
|
Identifiable assets |
|
(in thousands) |
|
EUR |
|
|
EUR |
|
|
2003 |
|
|
|
|
|
|
|
|
Korea |
|
|
401,157 |
|
|
|
15,871 |
|
Taiwan |
|
|
189,004 |
|
|
|
39,845 |
|
Rest of Asia |
|
|
172,223 |
|
|
|
555,761 |
|
Europe |
|
|
220,190 |
|
|
|
1,712,552 |
|
United States |
|
|
560,163 |
|
|
|
524,656 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,542,737 |
|
|
|
2,848,685 |
|
|
2004
|
|
|
|
|
|
|
|
|
Korea |
|
|
472,112 |
|
|
|
11,460 |
|
Taiwan |
|
|
658,765 |
|
|
|
19,344 |
|
Rest of Asia |
|
|
534,039 |
|
|
|
706,709 |
|
Europe |
|
|
304,051 |
|
|
|
2,016,066 |
|
United States |
|
|
496,410 |
|
|
|
455,674 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,465,377 |
|
|
|
3,209,253 |
|
|
2005
|
|
|
|
|
|
|
|
|
Korea |
|
|
877,681 |
|
|
|
12,839 |
|
Taiwan |
|
|
457,942 |
|
|
|
14,013 |
|
Rest of Asia |
|
|
368,301 |
|
|
|
769,274 |
|
Europe |
|
|
217,944 |
|
|
|
2,498,299 |
|
United States |
|
|
607,099 |
|
|
|
436,655 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,528,967 |
|
|
|
3,731,080 |
|
In 2005, sales to one customer accounted for EUR 609 million or 24 percent of net sales. In 2004,
sales to one customer accounted for EUR 434 million, or 18 percent of net sales. In 2003, sales to
one customer accounted for EUR 314 million or 20 percent
F-30
of net sales. ASMLs three largest
customers accounted for 49 percent of accounts receivable at December 31, 2005, compared to 38
percent at December 31, 2004.
17. Board of Management and Supervisory Board remuneration
Board of Management
The remuneration of the members of the Board of Management is determined by the Supervisory Board
on the advice of the Remuneration Committee of the Supervisory Board. The 2004 remuneration policy
was approved by the General Meeting of Shareholders of March 18, 2004. ASMLs aim with the
remuneration policy is to continue to attract, reward and retain qualified and seasoned industry
professionals in an international labor market. The remuneration structure and levels are
determined by referencing to the appropriate local top executive pay market practices by
benchmarking positions on the basis of job size. The total remuneration consists of base salary, a
short-term performance cash bonus and performance stock options, long-term performance stock and
benefits. As per January 1, 2005 all members of the Board of Management, being Messrs. Wennink, van
den Brink and Chavoustie transferred to the 2004 Remuneration Policy. Mr Meurices remuneration
package was already in line with this policy. Furthermore, Mr. Fuchs employment offer and contract
were drafted observing this policy.
Base salary, short-term performance cash bonus
The remuneration in euros of the members of the Board of Management was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
2004 |
|
|
2005 |
|
Year ended December 31 |
|
EUR |
|
|
EUR |
|
|
EUR |
|
|
Salaries |
|
|
1,912,966 |
|
|
|
2,176,085 |
|
|
|
1,860,359 |
|