20-F




United States
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, 2015
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)
Craig DeYoung
Telephone: +1 480 696 2762
E-mail: craig.deyoung@asml.com
2650 W Geronimo Place
Chandler, AZ 85224, USA
(Name, Telephone, E-mail, and / or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class             Name of each exchange on which registered
Ordinary Shares                 The NASDAQ Stock Market LLC
    (nominal value EUR 0.09 per share)
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
(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 issuer’s classes of
capital or common stock as of the close of the period covered by the annual report.
427,986,682 Ordinary Shares
(nominal value EUR 0.09 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 (x) No ( )
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 ( ) No (x)
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 (x) No ( )
Indicate by check mark whether the registrant has submitted electronically
and posted on its corporate web site, if any, every Interactive
Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes (x) No ( )
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer (x) Accelerated filer ( ) Non-accelerated filer ( )
Indicate by check mark which basis of accounting the registrant has used to prepare
the financial statements included in this filing:
U.S. GAAP (x) International Financial Reporting Standards as issued by the
International Accounting Standards Board ( ) Other ( )
If "Other" has been checked in response to the previous question, indicate by checkmark
which financial statement item the registrant has elected to follow.
Item 17 ( ) Item 18 ( )
If this is an annual report, indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act)
Yes ( ) No (x)
Name and address of person authorized to receive notices and communications
from the Securities and Exchange Commission:
James A. McDonald
Skadden, Arps, Slate, Meagher & Flom (UK) LLP
40 Bank Street, Canary Wharf London E14 5DS England


ASML ANNUAL REPORT 2015




ASML ANNUAL REPORT 2015



                                            



                                            









Form 20-F



Contents
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


ASML ANNUAL REPORT 2015

 
 
 
 
Item 11 Quantitative and Qualitative Disclosures About Risk
 
 
 
 
Item 12 Description of Securities Other than Equity Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Definitions


ASML ANNUAL REPORT 2015




ASML ANNUAL REPORT 2015

Part I

Special Note Regarding Forward-Looking Statements
In addition to historical information, this Annual Report 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. They appear in a number of places throughout this Annual Report and include statements with respect to our outlook, expected customer demand in specified market segments, expected trends, systems backlog and bookings, IC unit demand, expected financial results, including expected sales levels, gross margin, SG&A and R&D expenses, other income, expected tax rate, expected capital expenditures, annual revenue and EPS opportunity and potential, expected shipments of tools, productivity of our tools and systems, including EUV productivity targets and goals, and system performance, including EUV system performance (such as endurance and availability of EUV systems ), the development of EUV technology, the number of EUV systems expected to be shipped and recognized in revenue and timing of shipment and revenue recognition, dividend policy and proposed dividend and plans to repurchase shares.
These forward-looking statements are not historical facts, but rather are based on current expectations, estimates, assumptions and projections about the business and our future financial results and readers should not place undue reliance on them. Forward-looking statements do not guarantee future performance, and 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". These forward-looking statements are made only as of the date of this Annual Report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.
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".
On May 30, 2013, we acquired 100 percent of the issued share capital of Cymer. Financial information presented in our Annual Report includes Cymer from May 30, 2013 onwards.
A summary of all abbreviations, technical terms and definitions (of capitalized terms) used in this Annual Report is set forth on pages D-1 through D-5.


ASML ANNUAL REPORT 2015    1



Five-Year Financial Summary
Year ended December 31
2011

2012

2013

2014

2015

(in thousands, except per share data)
EUR

EUR

EUR

EUR

EUR

 
 
 
 
 
 
Consolidated Statements of Operations data
 
 
 
 
 
Net sales
5,651,035

4,731,555

5,245,326

5,856,277

6,287,375

Cost of sales
(3,201,645
)
(2,726,298
)
(3,068,064
)
(3,259,903
)
(3,391,631
)
 
 
 
 
 
 
Gross profit
2,449,390

2,005,257

2,177,262

2,596,374

2,895,744

Other income
—

—

64,456

81,006

83,200

Research and development costs
(590,270
)
(589,182
)
(882,029
)
(1,074,035
)
(1,068,077
)
Selling, general and administrative costs
(217,904
)
(259,301
)
(311,741
)
(321,110
)
(345,732
)
 
 
 
 
 
 
Income from operations
1,641,216

1,156,774

1,047,948

1,282,235

1,565,135

Interest and other, net
7,419

(6,196
)
(24,471
)
(8,600
)
(16,515
)
 
 
 
 
 
 
Income before income taxes
1,648,635

1,150,578

1,023,477

1,273,635

1,548,620

Provision for income taxes
(181,675
)
(4,262
)
(7,987
)
(76,995
)
(161,446
)
 
 
 
 
 
 
Net income
1,466,960

1,146,316

1,015,490

1,196,640

1,387,174

 
 
 
 
 
 
Earnings per share data
 
 
 
 
 
Basic net income per ordinary share
3.45

2.70

2.36

2.74

3.22

Diluted net income per ordinary share 1
3.42

2.68

2.34

2.72

3.21

 
 
 
 
 
 
Number of ordinary shares used in computing per share amounts (in thousands)
 
 
 
 
 
Basic
425,618

424,096

429,770

437,142

430,639

Diluted 1
429,053

426,986

433,446

439,693

432,644

 
1.
The calculation of diluted net income per ordinary share assumes the exercise of options issued under our stock option plans and the issuance of shares under our share plans for periods in which exercises or issuances would have a dilutive effect. The calculation of diluted net income per ordinary share does not assume exercise of such options or issuance of shares when such exercises or issuance would be anti-dilutive.


ASML ANNUAL REPORT 2015    2



Five-Year Financial Summary
As of and for the year ended December 31
2011

 
2012

 
2013

 
2014

 
2015

(in thousands)
EUR

 
EUR

 
EUR

 
EUR

 
EUR

 
 
 
 
 
 
 
 
 
 
Consolidated Balance Sheets data
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
2,731,782

 
1,767,596

 
2,330,694

 
2,419,487

 
2,458,717

Short-term investments
—

 
930,005

 
679,884

 
334,864

 
950,000

Working capital 1
3,473,767

 
3,745,559

 
4,156,917

 
4,257,335

 
4,600,529

Total assets
7,260,815

 
7,410,478

 
11,513,730

 
12,203,945

 
13,295,031

Long-term debt 2
736,368

 
759,490

 
1,074,570

 
1,154,137

 
1,129,685

Shareholders’ equity
3,444,154

 
4,066,893

 
6,922,427

 
7,512,590

 
8,388,831

Share capital
38,354

 
37,470

 
40,092

 
39,426

 
38,786

Consolidated Statements of Cash Flows data
 
 
 
 
 
 
 
 
 
Depreciation and amortization 3
165,185

 
186,620

 
228,775

 
254,644

 
296,884

Impairment
12,272

 
3,234

 
13,057

 
10,528

 
2,287

Net cash provided by operating activities
2,070,440

 
703,478

 
1,054,173

 
1,025,206

 
2,025,580

Purchase of property, plant and equipment 4
(300,898
)
 
(171,878
)
 
(210,804
)
 
(358,280
)
 
(371,770
)
Purchase of available for sale securities
—

 
(1,379,997
)
 
(904,856
)
 
(504,756
)
 
(950,000
)
Maturity of available for sale securities
—

 
449,992

 
1,195,031

 
849,776

 
334,864

Cash used for derivative financial instruments
—

 
—

 
—

 
—

 
(171,899
)
Acquisition of subsidiary (net of cash acquired)
—

 
(10,292
)
 
(443,712
)
5 
—

 
—

Net cash used in investing activities
(300,898
)
 
(1,119,833
)
 
(368,341
)
 
(16,212
)
 
(1,159,913
)
Dividend paid
(172,645
)
 
(188,892
)
 
(216,085
)
 
(267,962
)
 
(302,310
)
Purchase of treasury shares
(700,452
)
 
(535,373
)
 
(300,000
)
 
(700,000
)
 
(564,887
)
Net proceeds from issuance of shares
34,084

 
3,907,666

6 
31,822

 
39,679

 
33,230

Net proceeds from issuance of notes
—

 
—

 
740,445

7 
—

 
—

Repurchase of notes
—

 
—

 
(368,303
)
8 
—

 
—

Capital repayment
—

 
(3,728,324
)
9 
—

 
—

 
—

Deposits from customers
(150,000
)
 
—

 
—

 
—

 
—

Net cash used in financing activities
(991,561
)
 
(545,583
)
 
(113,111
)
 
(928,439
)
 
(833,946
)
Net increase (decrease) in cash and cash equivalents
781,948

 
(964,186
)
 
563,098

 
88,793

 
39,230

 
 
 
 
 
 
 
 
 
 
1.
Working capital is calculated as the difference between total current assets and total current liabilities.
2.
Long term debt includes the current portion of long term debt.
3.
In 2015, depreciation and amortization includes EUR 243.0 million of depreciation of property, plant and equipment (2014: EUR 209.5 million, 2013: EUR 197.1 million, 2012: EUR 179.3 million and 2011: EUR 158.0 million), EUR 51.2 million of amortization of intangible assets (2014: EUR 43.9 million, 2013: EUR 27.6 million, 2012: EUR 6.1 million and 2011: EUR 5.3 million) and EUR 2.7 million of amortization of underwriting commissions related to bonds and credit facility (2014: EUR 1.2 million, 2013: EUR 4.1 million, 2012: EUR 1.2 million and 2011: EUR 1.9 million).
4.
In 2015, an amount of EUR 91.0 million (2014: EUR 95.5 million, 2013: EUR 115.9 million, 2012: EUR 204.8 million, 2011: EUR 300.5 million) of the additions in property, plant and equipment relates to non-cash transfers from inventory. Since the transfers between inventory and property, plant and equipment are non-cash events, these are not reflected in the Consolidated Statements of Cash Flows data. For further details see Note 12 to the Financial Statements.
5.
In addition to the cash paid in relation to the acquisition of Cymer, we issued 36,464,576 shares for an amount of EUR 2,346.7 million (non-cash event) as part of the consideration paid.
6.
Net proceeds from issuance of shares include an amount of EUR 3,853.9 million related to the share issuances in connection to the CCIP. See Note 27 to the Financial Statements.
7.
Net proceeds from issuance of notes relate to the total cash proceeds of EUR 740.4 million (net of incurred transaction costs) from the issuance of our EUR 750 million 3.375 percent senior notes due 2023.
8.
Repurchase of notes relates to the net cash outflows of EUR 368.3 million for the partial repurchase of our EUR 600 million 5.75 percent senior notes due 2017 including the partial unwinding of the related interest rate swaps.
9.
The capital repayment was made in connection with the synthetic buyback relating to the CCIP. The difference of EUR 125.6 million between the capital repayment of EUR 3,728.3 million and the net proceeds from issuance of shares of EUR 3,853.9 million in the CCIP relates to the capital repayment on ASML’s treasury shares which was part of the synthetic share buyback in November 2012.



ASML ANNUAL REPORT 2015    3



Five-Year Financial Summary
As of and for the year ended December 31
2011

 
2012

 
2013

 
2014

 
2015

 
 
 
 
 
 
 
 
 
 
 
 
Ratios and other data
 
 
 
 
 
 
 
 
 
 
Gross profit as a percentage of net sales
43.3

 
42.4

 
41.5

 
44.3

 
46.1

 
Income from operations as a percentage of net sales
29.0

 
24.4

 
20.0

 
21.9

 
24.9

 
Net income as a percentage of net sales
26.0

 
24.2

 
19.4

 
20.4

 
22.1

 
Shareholders’ equity as a percentage of total assets
47.4

 
54.9

 
60.1

 
61.6

 
63.1

 
Income taxes as a percentage of income before income taxes
11.0

 
0.4

 
0.8

 
6.0

 
10.4

 
Sales of systems (in units)
222

 
170

 
157

 
136

 
169

 
ASP of system sales (in millions EUR)
22.0

 
22.4

 
25.4

 
31.2

 
25.1

 
Value of systems backlog (in millions EUR)
1,732.5

 
1,214.1

 
1,953.3

 
2,772.4

2 
3,184.3

1 
Systems backlog (in units)
71

 
46

 
56

 
82

2 
79

1 
ASP of systems backlog (in millions EUR)
24.4

 
26.4

 
34.9

 
33.8

2 
40.3

1 
Value of booked systems (in millions EUR)
2,909.3

 
3,312.3

 
4,644.0

 
4,902.2

2 
4,639.0

1 
Net bookings (in units)
134

 
144

 
166

 
157

2 
165

1 
ASP of booked systems (in millions EUR)
21.7

 
23.0

 
28.0

 
31.2

2 
28.1

1 
Number of payroll employees (in FTEs)
7,955

 
8,497

 
10,360

 
11,318

 
12,168

 
Number of temporary employees (in FTEs)
1,935

 
2,139

 
2,865

 
2,754

 
2,513

 
Increase (decrease) net sales in percentage
25.4

 
(16.3
)
 
10.9

 
11.6

 
7.4

 
Number of ordinary shares issued and outstanding (in thousands)
413,669

 
407,165

 
440,852

 
432,935

 
427,987

 
Closing ASML share price on Euronext Amsterdam (in EUR)
32.48

 
48.00

 
68.04

 
89.50

 
82.55

 
Volatility 260 days as percentage of our shares listed on Euronext Amsterdam (in EUR) 3
32.46

 
28.64

 
23.98

 
27.49

 
33.62

 
Closing ASML share price on NASDAQ (in USD)
41.79

 
64.39

 
93.70

 
107.83

 
88.77

 
Volatility 260 days as percentage of our shares listed on NASDAQ (in USD) 4
41.83

 
30.05

 
24.01

 
26.01

 
28.94

 
Dividend per ordinary share (in EUR)
0.46

 
0.53

 
0.61

 
0.70

 
1.05

5 
Dividend per ordinary share (in USD)
0.61

6 
0.69

6 
0.84

6 
0.76

6 
1.14

5,7 
 
 
 
 
 
 
 
 
 
 
 
1.
As of 2015, our systems backlog and net bookings include all system sales orders for which written authorizations have been accepted (for EUV starting with the NXE:3350B). This change had no impact on the comparative figures.
2.
As of 2014, our systems backlog and net bookings include sales orders for which written authorizations have been accepted and shipment and/or revenue recognition is expected within 12 months. As of 2014 we also include EUV in our backlog starting with our NXE:3350B systems. Before 2014, our systems backlog and net bookings included only sales orders for which written authorizations have been accepted and system shipment and revenue recognition dates within the following 12 months have been assigned. This change had no impact on the comparative figures.
3.
Volatility represents the variability in our share price on Euronext Amsterdam as measured over the 260 business days of each year presented (source: Bloomberg Finance LP).
4.
Volatility represents the variability in our share price on NASDAQ as measured over the 260 business days of each year presented (source: Bloomberg Finance LP).
5.
Subject to approval of the AGM to be held on April 29, 2016.
6.
The dividend per ordinary share in USD has been adjusted compared to the relevant Annual Reports for such years to reflect the actual exchange rates at time of dividend payment.
7.
The exchange rate used to express the proposed dividend per ordinary share in USD is the exchange rate of USD/EUR 1.08 as of January 31, 2016.


ASML ANNUAL REPORT 2015    4



Exchange Rate Information
We publish our Financial Statements in euro. A portion of our assets, liabilities, net sales and costs 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 3.D. "Risk Factors – Fluctuations in foreign exchange rates could harm our results of operations", Item 11 "Quantitative and Qualitative Disclosures About Market Risk", Note 1 and Note 4 to our Financial Statements.
The following are the Noon Buying Rates certified by the Federal Reserve Bank for customs purposes, expressed in US dollars per euro.
 
 
 
 
 
 
 
 
Calendar year
2011

2012

2013

2014

2015

2016

2 

 
 
 
 
 
 
 
 
Period End
1.30

1.32

1.38

1.21

1.09

1.08

 
Period Average 1
1.40

1.29

1.33

1.33

1.10

1.08

 
Period High
1.49

1.35

1.38

1.39

1.20

1.10

 
Period Low

1.29

1.21

1.28

1.21

1.05

1.07

 
 
1.
The average of the Noon Buying Rates on the last business day of each month during the period presented.
2.
Through January 31, 2016.
Months of
August
2015

September
2015

October
2015

November
2015

December
2015

January
2016

 
 
 
 
 
 
 
 
 
Period High
1.16

1.14

1.14

1.10

1.10

1.10

 
Period Low

1.09

1.11

1.10

1.06

1.06

1.07

 
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. These risks are not the only ones that we face. Some risks may not yet be known to us and certain risks that we do not currently believe to be material could become material in the future.
Risks related to the semiconductor industry

The semiconductor industry is highly cyclical and we may be adversely affected by any downturn
As a supplier to the global semiconductor industry, we are subject to the industry’s business cycles, of which the timing, duration and volatility are difficult to predict. The semiconductor industry has historically been cyclical. Sales of our lithography 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 manufacturing capacity utilization of semiconductor manufacturers;
• Semiconductor equipment industry capacity and utilization;
• Changes in semiconductor inventory levels;
• General economic conditions; and
• Access to capital.
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.


ASML ANNUAL REPORT 2015    5



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 level of sales that we must reach in a year to achieve positive net income. If sales decrease significantly as a result of an industry downturn and we are unable to adjust our costs over the same period, our net income may decline significantly or we may suffer losses. As we need to keep certain levels of inventory on hand to meet anticipated product and service demand, we may also incur increased costs related to inventory obsolescence in an industry downturn, and such inventory obsolescence costs may be higher with our newer technology systems such as EUV. We have grown in terms of employees, facilities and inventories in recent years, so it may be even more difficult for us to reduce costs in order to respond to an industry downturn. In addition, industry downturns generally result in overcapacity, resulting in downward pressure on sales prices and impairment of assets, including inventories, intangible assets, and machinery and equipment, which in the past has had, and in the future could have, a material adverse effect on our business, financial condition and results of operations.
Current and future instability of the financial markets and the global economy in general can have a number of effects on our business, including (i) declining business and consumer confidence resulting in reduced, or delayed purchase of our products or shorter-term capital expenditures for our products or a delay in transition to newer technology tools; (ii) insolvency of key suppliers resulting in product delays, (iii) an inability of customers to obtain credit to finance purchases of our products, delayed payments from our customers and/or customer insolvencies and (iv) other adverse effects that we cannot currently anticipate. If global economic and market conditions deteriorate, we are likely to experience material adverse impacts on our business, financial condition and results of operations.
Conversely, 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 as our products become increasingly sophisticated, the lead-time required to successfully deliver our systems has grown considerably. Accordingly, we may not be able to effectively increase our production capacity to respond to an increase in customer demand in an industry upturn resulting in lost sales, damage to customer relationships and we may lose market share.
We are also subject to trends in the key end markets of our customers - Memory and Logic, each of which exhibit different levels of cyclicality. Trends in our end markets may be affected by a number of factors, including business conditions in their respective markets (or in the economy generally), consumer confidence, competition, and changing consumer demand. Decreased demand in the end-markets of any of our customers could cause our customers to reduce their purchases of our systems, which could have a material adverse effect on our business, financial condition and results of operations.
Our business will suffer if we or the industry 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
•
Short product life cycles.
Our success in developing new products and in enhancing our existing products depends on a variety of factors, including the successful management of our R&D programs and the 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 production facilities and upgrades of existing facilities, which would have a material adverse effect on our business, financial condition and results of operations.
In particular, we are investing considerable financial and other resources to develop and introduce new products and product enhancements, such as Immersion, EUV and Holistic Lithography. If we or our suppliers are unable to successfully develop and introduce these products and technologies, or if our customers do not fully adopt the new technologies, products or product enhancements due to a preference for more established or alternative new technologies and products, due to the failure to meet their development roadmaps which require our new technology or for any other reason, this could result in customers continuing to use existing technology tools and we may not recoup all of our investments in these technologies or products, which could have a material adverse effect on our business, financial condition and results of operations.


ASML ANNUAL REPORT 2015    6



The success of EUV, which we believe is critical for keeping pace with Moore’s Law, which postulates that the number of transistors on a chip doubles approximately every 18 to 24 months at equivalent costs, remains dependent on continuing technical advances by us and our suppliers. These advances include in particular advances in technology related to the light source, source power, system availability, and scanner performance, without which EUV tools cannot achieve the productivity and yield required to economically justify the higher price of these tools. A delay in the development of these tools or a delay in such tools meeting production requirements could discourage or result in much slower adoption of this EUV technology and could delay purchases of these tools. In addition, the introduction of alternative technologies or processes by our competitors that compete with EUV could discourage or result in much slower adoption of EUV technology. If the technologies that we pursue to assist our customers in producing smaller and more efficient chips are not as effective as those developed by our competitors, or if our customers adopt new technological architectures that are less focused on lithography, this may adversely affect our business, financial condition and results of operations.
In addition, we maintain in inventory a certain amount of parts and components for system production and when we stop producing a particular model in favor of newer models, there is a risk that this inventory of parts and components may become obsolete, particularly as a result of the rapid pace of technological change. In such cases, we seek to use such parts and components in new systems, but in case we are not able to do so, this can result in impairments of inventory. Many of these parts and components are particularly expensive and may only be used in a single type of system.
Cadence for the introduction of new systems is lengthening
Our lithography systems have become more complex and costly to develop and build. In addition, our customers have experienced delays in implementing their product roadmaps, which has resulted in delayed demand of new systems. These factors resulted in longer development cycles and a longer transition period (or cadence) both for our new systems and industry-wide, increasing the risk of a slowing down of the overall transition period for new systems as predicted by Moore's Law. A lengthening of the cadence for new system purchases by our customers could result in a slower adoption of EUV or any other new technology as a result of delays in the development of new tools or a change in the customer's product roadmaps or investment outlook. As a result of a lengthening of the cadence, our customers may purchase existing technology systems rather than new leading-edge systems or delay their investment in new systems to the extent that such investment is not economical or required given their product cycles. A lengthening of the cadence for the introduction of our new systems can also result in increased competition, as competitors may have more time to develop competing systems. In addition, longer cadence means we face increasing competition from manufacturers who produce systems with lower performance levels than our new systems. The change in cadence of our new systems could result in a decrease in the number of new systems or technology we sell in a given year, which could have a material adverse effect on our business, financial condition and results of operations.
Industry adoption of EUV technology may be delayed
EUV represents the next-generation lithography technology for ASML, and we have made significant investments in EUV, including our 2013 acquisition of Cymer Corporation, to develop EUV technology. To date, we have only sold a limited number of EUV systems. There are a number of development milestones to be met with respect to EUV systems, and EUV has not yet been widely adopted by the semiconductor manufacturing industry. There are a number of factors that may inhibit or delay industry adoption of our EUV systems, including those set forth in this Risk Factors section. Any delay in industry adoption of our EUV systems could have a material adverse effect on our business, financial condition and results of operations. In addition, for our EUV systems which we sell as part of our commercial sales, we defer a portion of the revenues pending completion of performance milestones agreed with the customer, so to the extent that our systems fail to meet these milestones, our revenues and profitability in certain periods may be lower than anticipated.
We face intense competition
The semiconductor equipment industry is highly competitive. The principal elements of competition in our market are:
•
The technical performance characteristics of a lithography system;
•
The value of ownership of lithography systems based on purchase price, maintenance costs, throughput, and customer service and support costs;
•
The exchange rate of the euro against the functional currency of our competitors and our customers, particularly against the Japanese yen;
•
The strength and breadth of our portfolio of patents and other intellectual property rights; and
•
Our customers’ desire to obtain lithography equipment from more than one supplier.
Our competitiveness increasingly depends 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 18 to the Financial Statements.


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We compete primarily with Nikon and Canon in respect of systems. Each of 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, which may cause a decline in our sales or a loss of market acceptance for our lithography 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 US dollar, could further intensify price-based competition in those regions that account for the majority of our sales, resulting in lower prices and margins and lower sales which could have a material adverse effect on our business, financial condition and results of operations. We also face the risk of a decline in sales if our products and services do not meet our customers' standards, which could result in decline in demand from or loss of such customers.
We also compete with providers of software applications that support or enhance complex patterning solutions, including lithography, such as KLA-Tencor Corporation. These applications effectively compete with our holistic lithography offering, which has become an increasingly significant part of our business.
In addition to competitors in lithography, we may face competition with respect to alternative technologies. If we fail to keep pace with Moore’s Law or in the event the delivery of new technology is delayed, our customers may opt for other solutions in IC manufacturing as a substitute for purchasing our products.
Furthermore, a number of business combinations and strategic partnerships among our customers and research partners in the semiconductor industry have occurred recently, and more could occur in the future. Consolidation among our customers and research partners could affect industry dynamics and could adversely affect our business and margins, which could have a material adverse effect on our business, financial condition and results of operations.
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 components and subassemblies used in our systems including the design thereof, 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, reduced control over pricing and the risk of untimely delivery of these components and subassemblies.
The number of lithography systems we are able to produce may be limited by the production capacity of Zeiss. Zeiss is our single supplier of lenses, mirrors, illuminators, collectors and other critical optical components (which we refer to as optics). If Zeiss were unable to maintain and increase production levels or if we are unable to maintain our business relationship with Zeiss in the future we could be unable 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 optics 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 a supplier of optics, a number of other critical components such as drive lasers included in our CO2 lasers used in our EUV systems are available from only a limited number of suppliers.
Designing and manufacturing some of these components and subassemblies that we use in our manufacturing processes is an extremely complex process and could result in delays by our suppliers. Lead-times in obtaining components have increased as our products have become more complex, and our failure to adequately predict demand for our systems or any delays in the shipment of components can result in insufficient supply of components or, conversely, excess inventory. A prolonged inability to obtain adequate deliveries of components or subassemblies, 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.
In addition, as we develop new technologies, such as EUV, this requires our suppliers to participate in the development process so that the components they supply will meet the requirements of our development roadmap, and this may require significant R&D spending and investment on the part of our suppliers, particularly with the long lead-time required for EUV components. If our suppliers are unable to meet our technological and supply demands in line with our development roadmap, this may delay the development and introduction of new products. In addition, our suppliers may not have or may not be willing to spend sufficient financial resources to make the necessary R&D expenditures and investments to enable them (and therefore us) to maintain their development roadmaps and ultimately meet our supply demands. In this case, we may be required to co-invest with our suppliers to continue the R&D required to continue development roadmaps.


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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. We expect customer concentration to increase because of continuing consolidation in the semiconductor manufacturing industry. Consequently, while the identity of our largest customers may vary from year to year, sales may remain concentrated among relatively few customers in any particular year. In 2015, recognized net sales to our largest customer accounted for EUR 1,633.6 million, or 26.0 percent of net sales, compared with EUR 1,532.1 million, or 26.2 percent of net sales, in 2014. The loss of any significant customer or any significant reduction in orders by a significant customer may have a material adverse effect on our business, financial condition and results of operations.
Additionally, as a result of our limited number of customers, credit risk on our receivables is concentrated. Our three largest customers (based on net sales) accounted for EUR 704.1 million, or 58.3 percent of accounts receivable and finance receivables on December 31, 2015, compared with EUR 643.2 million, or 49.3 percent on December 31, 2014.
As a result of the foregoing risks, business failure or insolvency of one of our main customers may have a material adverse effect on 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 (169 units in 2015 and 136 units in 2014), with an ASP per system in 2015 of EUR 25.1 million (EUR 28.5 million for new systems and EUR 5.1 million for used systems) and an ASP per system in 2014 of EUR 31.2 million (EUR 35.6 million for new systems and EUR 5.8 million for used systems). As a result, the timing of shipment and recognition of revenue for a particular reporting period from a small number of system sales may have a material adverse effect on our business, financial condition and results of operations in that period. Specifically, the failure to receive anticipated orders, or delays in shipments near the end of a particular reporting period, due, for example, to:
•
A downturn in the highly cyclical semiconductor industry;
•
Volatility in the Logic and Memory end-markets as a result of oversupply and undersupply;
•
Shipment rescheduling;
•
Cancellation or order push-back by customers;
•
Unexpected manufacturing difficulties; or
•
Delays in deliveries by suppliers
may cause net sales in a particular reporting period to fall significantly below net sales in previous periods or below our expected net sales, and may have a material adverse effect on our results of operations for that period. In particular, our published quarterly earnings may vary significantly from quarter to quarter and may vary in the future and reduce our visibility on future sales for the reasons discussed above.
The time window for new product introduction is short 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 predict with precision the time and expense required to overcome these initial problems and to ensure full performance to specifications. Moreover, we anticipate that this learning-curve effect will continue to present increasingly difficult challenges with each new generation of our products as a result of increasing technological complexity. In particular, the development of an EUV volume production system is dependent on, and subject to the successful implementation of, among other things, technology related to the light source, source power, system availability, scanner performance and other technologies specific to EUV. There is a risk that we may not be able to introduce or bring to full-scale production new products as quickly as we anticipate in our product introduction plans, which could have a material adverse effect on our business, financial condition and results of operations.
For the market to accept technology enhancements, our customers, in many cases, must upgrade their existing technology capabilities. Such upgrades from established technology may not be available to our customers to enable volume production using our new technology enhancements. This could result in our customers not purchasing, or pushing back or canceling orders for our technology enhancements, which could negatively impact our business, financial condition and results of operations.
We are also dependent on our suppliers to maintain their development roadmaps to enable us to introduce new technologies on a timely basis, and if they are unable to keep pace whether due to technological factors, lack of financial resources or otherwise, this could prevent us from meeting our development roadmaps.
Additionally, in connection with our EUV production, we have made advanced payments to suppliers that we may not recoup if we do not reach expected EUV sales levels in the future. We may make similar advance payments (or other investments in our suppliers) to suppliers in connection with EUV or other technologies we develop, and we may not recoup those advanced payments or other investments (e.g. if expected sales are not met). See Note 9 to our Financial Statements.


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As lithography technologies become more complex, the success of our R&D programs becomes more uncertain, while their cost rises
Our lithography systems have become increasingly complex, and accordingly, the costs to develop new products and technologies have increased, and we expect such costs to continue to increase. This increase in costs requires us to continue obtaining sufficient funding for our R&D programs. For example, we obtained partial funding for our EUV R&D program through the CCIP. We may however, be unable to obtain this type of funding from customers in the future, in which case we may be unable or we may determine not to fund R&D investments necessary to maintain our technological leadership. The increasing complexity of new technologies, which leads to increasing cost of R&D programs for new technologies, also increases the risk that a new product or technology may not be successful.
Furthermore, as the innovation cycle becomes more complex, developing new technology, including EUV technology, requires increased R&D investments by our suppliers in order to meet the technology demands of us and our customers. Our suppliers may not have, or may not be willing to invest in, the resources necessary to continue the development of the new technologies to the extent such investments are necessary, which may result in our contributing funds to such R&D programs or limiting the R&D investments that we can undertake.
Failure to adequately protect the intellectual property rights upon which we depend could harm our business
We rely on intellectual property rights such as patents, copyrights and trade secrets to protect our proprietary technology. However, we face the risk that such measures could prove to be inadequate because:
•
Intellectual property laws may not sufficiently support our proprietary rights or may change in the future in a manner adverse to us;
•
Patent rights may not be granted or interpreted as we expect;
•
Patents will expire which may result in key technology becoming widely available that may hurt our competitive position;
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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, legal proceedings may be necessary 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 proceedings may result in substantial costs and diversion of management resources, and, if decided unfavorably to us, could have a material adverse effect on our business, financial condition and results of operations.
A disruption in our information technology systems, including incidents related to cyber security, could adversely affect our business operations
We rely on the accuracy, availability and security of our information technology systems. Despite the measures that we have implemented, including those related to cybersecurity, our systems could be breached or damaged by computer viruses and systems attacks, natural or man-made incidents, disasters or unauthorized physical or electronic access.
From time to time we experience cybersecurity attacks on our information technology systems, these attacks are increasing and becoming more sophisticated, and may be perpetrated by computer hackers, cyber terrorists or other corporate espionage. These attacks include malicious software (malware), attempts to gain unauthorized access to data, and other electronic security breaches that could lead to disruptions in critical systems, unauthorized release of confidential or otherwise protected information (including confidential information relating to our customers and suppliers), and corruption of data. To date, none of the attacks we have experienced has materially impacted our business or operations. Nevertheless, any system failure, accident or security breach could result in business disruption, theft of our intellectual property, trade secrets (including our proprietary technology), customer or supplier information, unauthorized access to personnel information, or corruption of our data and of our systems.
Moreover, there can be no assurance that such measures we have implemented will be sufficient to prevent a system failure, accident or security breach from occurring. To the extent that our business is interrupted or data or proprietary technology or customer data is lost, destroyed or inappropriately used or disclosed, this could adversely affect our competitive position, relationships with customers and suppliers and therefore our business, financial condition and results of operations. In addition, we may be required to incur significant costs to protect against or repair the damage caused by these disruptions or security breaches in the future.
In addition, from time to time, we implement updates to our information technology systems and software, which can disrupt or shutdown our information technology systems. We may not be able to successfully integrate and launch these new systems as planned without disruption to our operations. Information technology system disruptions, if not anticipated and appropriately mitigated, could have a material adverse effect on our operations.
Defending against intellectual property claims brought by others could harm our business
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. If successful, such claims could limit or prohibit us from developing our technology and manufacturing our products, which could have a material adverse effect on our business, financial condition and results of operations.


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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 patents issued to such third 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, which could have a material adverse effect on our business, financial condition and results of operations.
We also may incur substantial licensing or settlement costs, which although potentially strengthening or expanding our intellectual property rights or limiting our exposure to intellectual property claims of third parties, may have a material adverse effect on our business, financial condition and results of operations.
From late 2001 through 2004, ASML was a party to a series of civil litigations and administrative proceedings in which Nikon alleged ASML’s infringement of Nikon patents relating to lithography. ASML in turn filed claims against Nikon. Pursuant to agreements executed on December 10, 2004, ASML and Nikon agreed to settle all pending worldwide patent litigation between the companies. The settlement included an exchange of releases, a patent cross-license agreement related to lithography equipment used to manufacture semiconductor devices, and payments to Nikon by ASML.
Under the terms of the Nikon Cross-License Agreement, beginning on January 1, 2015, the parties may bring suit for infringement of certain patents subject to the agreement, including any infringement that occurred from January 1, 2010 through December 31, 2014 (the "Cross-License Transition Period"). Damages resulting from claims for patent infringement occurring during the Cross-License Transition Period are limited to three percent of the net sales price of applicable licensed products including optical components. For more information on the Nikon Cross-License Agreement, see Item 4.B. "Business Overview - Intellectual Property."
Accordingly, from January 1, 2015, both Nikon and we are no longer prohibited under the agreement from bringing claims against each other on the basis of infringement of certain patents subject to the Nikon Cross-License Agreement.
If Nikon files suit against us alleging patent infringement, we may incur substantial legal fees and expenses, and we may not prevail. Similarly, if we file suit against Nikon alleging patent infringement, we may incur substantial legal fees and expenses, and we may not prevail. Patent litigation is complex and may extend for a protracted period of time, giving rise to the potential for both substantial costs and diverting the attention of key management and technical personnel. Potential adverse outcomes from patent litigation may include, without limitation, payment of significant monetary damages, injunctive relief prohibiting the sale of products, and/or settlement involving significant costs to be paid by us, any of which may have a material adverse effect on our business, financial condition and/or results of operations. We are unable to predict at this time whether any such patent suit will in fact materialize, or, if so, what its outcome might be.
We are subject to risks in our international operations
The majority of our sales are made to customers outside Europe. There are a number of risks inherent in doing business in some of those regions:
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Potentially adverse tax consequences;
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Unfavorable political or economic environments;
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Unexpected legal or regulatory changes;
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An inability to effectively protect intellectual property; and
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Adverse effects of foreign currency fluctuations.
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, 24.7 percent of our 2015 net sales and 19.2 percent of our 2014 net sales were derived from customers in Taiwan. Taiwan has a unique international political status. The People’s Republic of China asserts sovereignty over Taiwan and does not recognize the legitimacy of the Taiwanese government. Changes in relations between Taiwan and the People’s Republic of China, Taiwanese government policies and other factors affecting Taiwan’s political, economic or social environment could have a material adverse effect on our business, financial condition and results of operations. In addition, certain of our manufacturing facilities as well as customers are located in South Korea. There are tensions between the Republic of South Korea and the Democratic People’s Republic of Korea (North Korea) since the division of the Korean Peninsula following World War II. The worsening of relations between those two countries or the outbreak of war on the Korean Peninsula could have a material adverse effect on our business, financial condition or results of operations.
In addition, the installation and servicing of our products requires us to travel to our customers’ premises. Natural disasters could affect our ability to do so. For example, the Japanese earthquake in 2011 resulted in the disruption of our installation and servicing of systems for our customers in Japan. Natural disasters in areas where our customers are located could prevent or disrupt the installation or servicing of our systems. In addition, we have customers located in Israel. If the geopolitical environment prevents travel to Israel, it could result in the disruption of our installation and servicing of systems for our customers.


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Lastly, if there is a pandemic outbreak located near any of our customers, it could result in the disruption of our installation and servicing of systems for our customers near the outbreak. Therefore, if there is a natural disaster, geopolitical conflict or pandemic that prevents our ability to travel to our customers’ premises, our business, financial condition and results of operations may be materially adversely effected.
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 cleanroom facilities in Veldhoven, the Netherlands, in Wilton, Connecticut and in San Diego, California, both in the United States, in Pyeongtaek, South-Korea and in Linkou, Taiwan. These facilities may be 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 such capacity was 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. In addition, some of our key suppliers, including Zeiss, have a limited number of manufacturing facilities, the disruption of which may significantly and adversely affect our production capacity.
Because of labor laws and practices, any workforce reductions that we may seek 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 formal procedures that can delay or may result in the modification of our planned workforce reductions. For example, ASML Netherlands B.V., our operating subsidiary in the Netherlands, has a Works Council, as required by Dutch law. If the Works Council renders contrary advice in connection 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 Enterprise Chamber of the Amsterdam Court of Appeal. 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. Also 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 rates between the US dollar, Japanese yen and the euro, as we incur costs of sales predominantly in euros with portions of our net sales and cost of sales also denominated in US dollars.
In addition, a portion of our sales and costs are denominated in US dollars, particularly following our acquisition of Cymer in 2013, and a small portion of our operating results are denominated in currencies other than the euro and the US dollar. Our Financial Statements are expressed in euros. Accordingly, our results of operations are exposed to fluctuations in exchange rates between the euro and such other currencies, and changes in currency exchange rates can result in losses in our Financial Statements. In general, our customers generally run their businesses in US dollars and therefore a weakening of the US dollar against the euro might impact the ability or desire of our customers to purchase our products.
Furthermore, a strengthening of the euro particularly against the Japanese yen could further intensify price-based competition in those regions 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.
We may be unable to make desirable acquisitions or to integrate successfully any businesses we acquire
Our future success may depend in part on the acquisition of businesses or technologies intended to complement, enhance or expand our current business or products or that might otherwise offer us growth opportunities. Our ability to complete such transactions may be hindered by a number of factors, including potential difficulties in obtaining government approvals.
Any acquisition that we do make would pose risks related to the integration of the new business or technology with our business. We cannot be certain that we will be able to achieve the benefits we expect from a particular acquisition or investment. Acquisitions may also strain our managerial and operational resources, as the challenge of managing new operations may divert our management from day-to-day operations of our existing business. Our business, financial condition and results of operations may be materially and adversely affected if we fail to coordinate our resources effectively to manage both our existing operations and any businesses we acquire.
In addition, in connection with acquisitions, anti-trust regulators may impose conditions on us, including requirements to divest assets or other conditions that could make it difficult for us to integrate the businesses that we acquire. For example, in connection with the Cymer acquisition we have agreed to maintain Cymer Light Sources as a stand-alone business.
We may also face challenges with integrating any business we acquire into our organization.


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As a result of acquisitions, we have recorded, and may continue to record, a significant amount of goodwill and other intangible assets. Under current accounting guidelines, we must assess, at least annually and potentially more frequently, whether the value of goodwill and other intangible assets has been impaired. Any reduction or impairment of the value of goodwill or other intangible assets will result in additional charges against earnings, which could materially reduce our reported results of operations in future periods.
Our business and future success depend on our ability to attract and retain a sufficient number of adequately educated and skilled employees
Our business and future success significantly depends upon our employees, including a large number of highly qualified professionals, as well as our ability to attract and retain employees. Competition for such personnel is intense, and we may not be able to continue to attract and retain such personnel. Our R&D programs require a significant number of qualified employees. If we are unable to attract sufficient numbers of qualified employees, this could affect our ability to conduct our research and development programs on a timely basis, which could adversely affect our business, financial condition and results of operations.
In addition, if we lose key employees or officers to retirement, illness or otherwise, particularly a number of our highly qualified professionals and/or senior management, we may not be able to timely find a suitable replacement. Moreover, as a result of the uniqueness and complexity of our technology, qualified engineers capable of working on our systems are scarce and generally not available (e.g. from other industries or companies). As a result, we must educate and train our employees to work on our systems. Therefore, a loss of a number of key professionals and/or senior management can be disruptive, costly and time consuming. Our R&D activities with respect to new technology systems such as EUV have increased our need for qualified personnel. Competition for qualified personnel is significant in the area surrounding our headquarters in Veldhoven, the Netherlands and in the other regions where our facilities are located, where a number of high technology companies are located.
Furthermore, the increasing complexity of our products results in a longer learning-curve for new and existing employees and suppliers leading to an inability to decrease cycle times and may result in the incurrence of significant additional costs.
Our suppliers face similar risks in attracting qualified employees, including attracting employees in connection with R&D programs that will support our R&D programs and technology developments. To the extent that our suppliers are unable to attract qualified employees, this could adversely affect our business, financial condition and results of operations.
Changes in taxation could affect our future profitability
We are subject to income taxes in the Netherlands and numerous other jurisdictions. Our effective tax rate has fluctuated in the past and may fluctuate in the future.
Changes in tax legislation in the countries where we operate can affect our effective tax rate. For example, the OECD has recently embarked on a project to propose measures against so called BEPS, which the OECD describes as tax planning strategies that exploit gaps and mismatches in tax rules to reduce overall corporate tax. In October 2015, the OECD published 15 reports on various BEPS topics. These reports introduced new tax concepts which has resulted, and is expected to result, in substantial changes to tax legislation in the countries in which ASML operates.
In particular, one of the OECD BEPS reports introduces minimum requirements for Patent Box Regimes. In 2007, a Patent Box Regime was introduced in The Netherlands, which provides that income generated from qualifying innovative activities is effectively taxed at a beneficial tax rate of currently 5% rather than the Dutch statutory tax rate of 25%. The Patent Box Regime is called "Innovation Box" in The Netherlands legislation. A portion of our earnings currently qualifies for beneficial tax treatment under the Dutch Innovation Box. In order to meet the minimum requirements for Patent Box regimes mandated by the OECD BEPS report, the Dutch Innovation Box will have to be amended by July 1, 2016. Changes in Dutch tax laws to comply with the OECD BEPS report may reduce ASML’s current benefits under the Dutch Innovation Box.
Changes to tax legislation of jurisdictions ASML operates in may adversely impact ASML’s tax position and consequently our net income. In addition, jurisdictions levy corporate income tax at different rates. The distribution of our systems sales over the various jurisdictions in which we operate may vary from year to year, resulting in a different mix of corporate income tax rates applicable to our profits, which can affect the world wide effective tax rate for ASML.


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Hazardous substances are used in the production and operation of our systems and failure to comply with applicable regulations or failure to implement appropriate practices for customer and employee environment, health and safety could subject us to significant liabilities
Hazardous substances are used in the production and operation of our lithography systems, which subjects us to a variety of governmental regulations relating to environmental protection and employee and product health and safety, including the transport, use, storage, discharge, handling, emission, generation, and disposal of toxic or other hazardous substances. In addition, operating our machines (which use lasers and other potentially hazardous tools) is dangerous and can result in injury. The failure to comply with current or future regulations could result in substantial fines being imposed on us or other adverse consequences. Additionally, our products have become increasingly complex. The increasing complexity requires us to invest in continued risk assessments and development of appropriate preventative and protective measures for health and safety for both our employees (in connection with the production and installation of our systems) and our customers’ employees (in connection with the operation of our systems). There can be no assurance that the health and safety practices we develop will be adequate to mitigate all health and safety risks. Failing to comply with applicable regulations or the failure of our implemented practices for customer and employee health and safety could subject us to significant liabilities, which could have a material adverse effect on our business, financial condition and results of operations.
Risks related to our ordinary shares

We may not declare cash dividends at all or in any particular amounts in any given year
We aim to pay an annual dividend that will be stable or growing over time. Annually, the BoM will, upon prior approval from the SB, submit a proposal to the AGM with respect to the amount of dividend to be declared with respect to the prior year. The dividend proposal in any given year will be subject to the availability of distributable profits or retained earnings and may be affected by, among other factors, the BoM’s views on our potential future liquidity requirements, including for investments in production capacity, the funding of our R&D programs and for acquisition opportunities that may arise from time to time; and by future changes in applicable income tax and corporate laws. Accordingly, the BoM may decide to propose not to pay a dividend or pay a lower dividend with respect to any particular year in the future, which could have a negative effect on our share price.
Restrictions on shareholder rights may dilute voting power
Our Articles of Association provide that we are subject to the provisions of Dutch 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 SB. As a result, holders of ordinary shares may have more difficulty in protecting their interests in the face of actions by members of our SB than if we were incorporated in the United States or another jurisdiction.
Our authorized share capital also includes a class of cumulative preference shares and we have granted "Stichting Preferente Aandelen ASML", a Dutch foundation, an option to acquire, at their nominal value of EUR 0.09 per share, such cumulative preference shares. Exercise of the preference share option would effectively dilute the voting power of our outstanding ordinary shares by one-half, which may discourage or significantly impede a third party from acquiring a majority of our voting shares.
See Item 6.C. "Board Practices" and Item 10.B. "Memorandum and Articles of Association".
Participating customers in our Customer Co-Investment Program together own a significant amount of our ordinary shares and their interests may not coincide with the interests of our other shareholders
In the CCIP, the Participating Customers, being Intel, Samsung and TSMC, through certain wholly-owned subsidiaries, acquired in aggregate 96,566,077 ASML shares, which represented 23% of our outstanding shares at that time. In the CCIP, all of the Participating Customers agreed to a lock-up arrangement with us which expired in the first half of 2015. As the lock-up has now expired, the Participating Customers are permitted to sell their shares and the Stichting that held TSMC's shares in the CCIP has informed ASML that all of the ASML shares acquired by TSMC have been sold (20,992,625 ASML shares). Intel and Samsung are now presumed to own a total of 75,573,452 ASML shares based on the number of ASML shares initially acquired. Any sales by the Participating Customers are subject to the following limitations: any market sales are limited in any 6 month period to a total of 4% or 1.5% of our disclosed outstanding shares, in the case of Intel and Samsung, respectively, but such limitations do not apply to underwritten sales or block trades. The sale of a large number of these shares, or the perception that such sales may occur, could have an adverse effect on the trading price of our shares.
See Item 7.A. "Major Shareholders".


ASML ANNUAL REPORT 2015    14



Additionally, the interests of the Participating Customers who continue to own ASML shares may not always coincide with the interests of other holders of our shares. The shares acquired by the Participating Customers are held by Dutch foundations which have issued depositary receipts in respect thereof and the participating customers may only vote those shares in General Meetings in exceptional circumstances, including the authorization of certain significant share issuances and share repurchases, the approval of a significant change in the identity or nature of ASML or its business, any amendment to ASML’s Articles of Association that would materially affect the specific voting rights of the Participating Customers or that would cause a significant change in the identity or nature of ASML or its business, the dissolution of ASML, and any merger or demerger which would result in a material change in the identity or nature of ASML or its business. When such exceptional circumstances occur, the Participating Customers who continue to own ASML shares, and in particular Intel (due to the percentage of our shares that Intel owns), will be able to influence matters requiring approval by the General Meeting and may vote their ordinary shares in a way with which other shareholders may not agree.
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. In 2001, we changed our name to ASML Holding N.V. Our registered office is located at De Run 6501, 5504 DR Veldhoven, the Netherlands, telephone number +31 40 268 3000. We have operating subsidiaries in the Netherlands, the United States, Italy, France, Germany, the United Kingdom, Ireland, Belgium, Korea, Taiwan, Singapore, China, Hong Kong, Japan, Malaysia and Israel.
From time to time, we pursue acquisitions of businesses that we believe will complement or enhance our core lithography business: these have included the acquisitions of MaskTools (business unit of MicroUnity Systems Engineering Inc.) in 1999, Silicon Valley Group Inc. in 2001, Brion Technologies Inc. in 2007, Wijdeven Motion Holding B.V. and Wijdeven Motion B.V. in 2012 and Cymer Inc. in 2013.
Capital Expenditures and Divestitures
Our capital expenditures (purchases of property, plant and equipment) for 2015, 2014 and 2013 amounted to EUR 371.8 million, EUR 358.3 million and EUR 210.8 million, respectively. The increased capital expenditures in 2015 and 2014 compared to 2013 mainly relate to the construction of our EUV production facilities in Veldhoven, the Netherlands. Capital expenditures are primarily financed through cash provided by operating activities. See item 4.D. "Property, Plant and Equipment" for our expected capital expenditures in 2016.
B. Business Overview
ASML is one of the world’s leading manufacturers of chip-making equipment. Our vision is to enable affordable microelectronics that improve the quality of life. To achieve this, our mission is to invent, develop, manufacture and service advanced technology for high-tech lithography, metrology and software solutions for the semiconductor industry. ASML's guiding principle is continuing Moore's Law towards ever smaller, cheaper, more powerful and energy-efficient semiconductors. This results in increasingly powerful and capable electronics that enable the world to progress within a multitude of fields, including healthcare, technology, communications, energy, mobility, and entertainment. We are a multinational company with over 70 locations in 16 countries, headquartered in Veldhoven, the Netherlands. As of December 31, 2015, we employed 12,168 payroll employees (2014: 11,318) and 2,513 temporary employees (2014: 2,754), measured in FTEs. ASML is traded on Euronext Amsterdam and NASDAQ under the symbol ASML.
Our Business Model
For our business strategy, see Item 5. "Operating and Financial Review and Prospects – Executive Summary – Business Strategy - Business Strategy".
Our business model is derived from our "value of ownership" concept which is based on the following principles:
•
Offering ongoing improvements of throughput, imaging, overlay and availability by introducing advanced technology based modular platforms, advanced applications and Holistic Lithography solutions outside the traditional lithography business, each resulting in lower costs or higher value per product for our customers;
•
Providing customer service that offers efficient installation and maintenance, superior support and training to optimize manufacturing processes of our customers;
•
Enhancing the capabilities of the installed base of our customers through ongoing field upgrades of throughput, imaging, overlay, Holistic Lithography and availability, based on further technology developments;
•
Reducing the cycle time between a customer’s order of a system and the use of that system in volume production; and
•
Providing refurbishing services that effectively increase residual value by extending the life of equipment.
To be able to execute our business model we seek to:
•
Maintain appropriate levels of R&D to offer the most advanced technology suitable for following Moore’s Law, as well as achieving high-throughput and low-cost volume production at the earliest possible date;
•
Be able to attract, train, retain and motivate highly qualified, skilled and educated employees; and
•
Retain operational flexibility in R&D and manufacturing by reinforcing strategic alliances with world class partners, including outsourcing companies.


ASML ANNUAL REPORT 2015    15



Our Markets and Products
We have built a collaborative community of suppliers, customers, partners and research institutes that we work with to minimize the cost of innovation and maximize the chance of success. A significant part of the components and modules used in our systems are sourced from our supply chain and assembled in our factories to create the final products delivered to our customers.
Through 2015, all of the top 10 chipmakers worldwide, in terms of semiconductor capital expenditure, were our customers. We also have a significant share of customers outside the top 10. We strive for continued business growth with all our customers. We expect that customer concentration might increase in the semiconductor manufacturing industry.
In 2015, our satisfaction ratings by customers surpassed every lithography competitor. According to VLSI Research, ASML ranks third among the large semiconductor industry equipment suppliers and first among lithography competitors. Our performance has consistently been strong: for thirteen years in a row we have both ranked among the top 5 semiconductor industry suppliers and our ranking surpassed that of any of our lithography competitors.
Markets
Memory chips
Memory chips can store a large amount of data in a very small area in electronic products like personal computers, tablets or smartphones. There are two main classes of Memory: DRAM and NAND. With NAND chips, information can be stored even when the device is powered off. DRAM memory is used to enhance the performance of the electronic product. These DRAM and NAND chips are made in dedicated Memory factories.
Logic chips
Logic chips process information in electronic devices. They are produced by two groups of manufacturers. The first group designs and manufactures Logic chips and is referred to as IDMs. The second group are contract manufacturers known as Foundries. Foundry manufacturers do not design chips, but produce chips for other companies.
Total net sales by end-use market for 2013 - 2015 for Memory, Foundry, IDM and net service and field option sales were divided as follows:
Year ended December 31
2013

 
2014

 
2015

 
(in millions)
EUR

% 1

EUR

% 1

EUR

% 1

Memory
1,488.8

28.4
%
2,225.1

38.0
%
2,115.0

33.6
%
Foundry
2,064.3

39.3
%
1,186.0

20.3
%
1,608.1

25.6
%
IDM
440.0

8.4
%
831.7

14.2
%
514.1

8.2
%
Net service and field option sales
1,252.2

23.9
%
1,613.5

27.5
%
2,050.2

32.6
%
Total net sales
5,245.3

 
5,856.3

 
6,287.4

 
1.
As a percentage of total net sales.
Products
General
Our systems are essentially projection systems, not unlike a slide projector. Laser light is projected using a so-called mask (also called a reticle), which contains the blueprint of the pattern that will be printed. A lens or mirror focuses the pattern onto the wafer -a thin, round slice of semiconductor material- which is coated with a light-sensitive chemical. When the unexposed parts are etched away, the pattern is revealed. Because lithography patterns the structures on a chip, it is lithography that determines how small the features on the chip can be, and how densely chip makers can pack transistors together. In other words, lithography is crucial to follow the path described by Moore’s Law.
For a further discussion on Moore's law see Item 5 "Operating and Financial Review and Prospects - Executive Summary - Business Strategy - Business Strategy".
Systems
In 2000 we introduced the TWINSCAN platform, which is the basis for our current and next-generation systems, which are expected to be capable of extending shrink technology with MPT techniques. We offer TWINSCAN systems, equipped with i-line, KrF and ArF light sources for 300 mm processing wafers for manufacturing environments for which imaging at a small resolution is required. The modular upgradeable design philosophy of the older systems has been further refined and applied in the TWINSCAN design.
Due to the increasing demand for 200 mm systems in the market place, i.e. driven by several applications like Internet of Things, ASML has re-introduced TWINSCAN 200 mm systems equipped with i-line and KrF light sources, which are sold alongside the 300 mm version. These systems can be built new, unlike the PAS steppers and scanners, which can be only refurbished and are difficult to source in large volumes.


ASML ANNUAL REPORT 2015    16



TWINSCAN systems also include immersion lithography systems (TWINSCAN immersion systems). With a TWINSCAN immersion system, wafer measurement, including focus and alignment, is completed in the "dry" stage, while the imaging process, using water, is completed in the "wet" stage. This immersion technology places water between the wafer and a system’s projection lens to enhance focus and enable circuit line width to shrink to smaller dimensions than what is possible with "dry" lithography systems. ASML pioneered this "wet" technology and has experienced strong demand for immersion-based systems; this technology has been adopted by all of our leading customers. We are one of the world’s leaders (measured in revenues) in immersion technology and we were the world’s first producer of dual-stage design lithography systems.
We have developed different immersion systems for different customer needs. The TWINSCAN NXT platform enables next generations of semiconductors through the so-called MPT which requires two or more exposures per layer on a chip, enabling precise imaging patterns and lines by using our TWINSCAN NXT planar wafer stage and breakthrough grid metrology.
In 2015 we shipped our first seven TWINSCAN NXT:1980 systems to support increasingly demanding multiple-patterning performance requirements. Demonstrating 1.2 nanometer (nm) dedicated chuck overlay and better than 10 nm focus uniformity, the NXT:1980 features new grid calibrations and hardware that enables chipmakers to achieve tighter process windows for next-generation process nodes. The NXT:1980Di improves throughput by 10% to 275 wafers per hour.
In 2010, we achieved a major milestone with EUV lithography when we shipped our first NXE:3100 system. NXE systems are equipped with EUV light source technology, based upon a tin plasma, producing light at a wavelength of 13.5 nm. The NXE system has an innovative optical technology, utilizing reflective mirrors rather than the traditional refractive optics, with a NA of 0.25. The light in a NXE system operates in a vacuum environment, through the entire optical path, to the wafer level. With the combination of these revolutionary technologies, EUV offers the potential to provide our customers a roadmap for future shrink, and we expect it to become the predominant lithography technology for the coming years. NXE systems are targeted for production of ICs down to minimum features of 13 nm with single patterning, addressing current Memory and Logic roadmaps and processes down to the 5 nm node. Extension beyond this 5 nm is possible, using MPT.
The success of EUV is dependent on, and subject to, the successful implementation of, among other things, technology related to the light source, throughput, system availability, imaging, overlay and other technologies specific to EUV, by us and our suppliers. We acquired Cymer on May 30, 2013, with the goal of achieving our strategic objective of delivering an economically viable EUV scanner to semiconductor manufacturers as soon as reasonably possible. Combining Cymer’s expertise in EUV light sources with our expertise in lithography systems design and integration reduces the risks related to further development of EUV technology.
In 2013, we shipped our first NXE:3300B systems. The NXE:3300B system is the successor of the NXE:3100 system and is our third-generation EUV-system. A NXE:3300B system combines a wavelength of 13.5 nm and an optical system with a NA of 0.33 to provide imaging at a resolution of 22 nm. Compared to the NXE:3100 system, the NXE:3300B system has among other things a better NA as well as an improved light source.
EUV lithography met its 2015 productivity and availability targets. We had already achieved a productivity of more than 1,000 wafers per day early in 2015 on the NXE:3300B system and improved this to more than 1,250 wafers per day on its successor system, the NXE:3350B. The NXE:3350B system achieves an overlay of 1.0 nanometers, a 50% improvement over the NXE:3300B, and also features a lens with a higher transmission, which means it generates higher throughput from a given EUV power source. In addition, the availability of systems in the field improved, with the majority of systems achieving a four-week availability of more than 70 percent; the best result was more than 80 percent over four weeks. We also shipped two of our latest NXE:3350B EUV systems and started shipping the third in 2015. They will be used in our customers' fabs for preparing the introduction of EUV into volume production.
In April 2015 we signed an agreement with one of our major US customers to deliver a minimum of 15 EUV lithography systems to support increased development activity and pilot production of future-generation manufacturing processes. This customer has indicated that it intends to use EUV lithography for multiple processing steps in future process technology nodes.



ASML ANNUAL REPORT 2015    17



ASML Lithography System Product Portfolio for new systems:
 
 
 
 
 
System1
Resolution
Wavelength
Light source
Numerical aperture
 
TWINSCAN DUV SYSTEMS 2
 
 
 
 
TWINSCAN XT:400
350 nm
365 nm
i-line
0.48-0.65
TWINSCAN XT:800
120 nm
248 nm
KrF
0.55-0.80
TWINSCAN XT:860
110 nm
248 nm
KrF
0.55-0.80
TWINSCAN XT:10X0
80 nm
248 nm
KrF
0.50-0.93
TWINSCAN XT:1460
65 nm
193 nm
ArF
0.65-0.93
TWINSCAN XT:1950 immersion
38 nm
193 nm
ArF
0.85-1.35
TWINSCAN NXT:19XX immersion
38 nm
193 nm
ArF
0.85-1.35
 
 
 
 
 
TWINSCAN EUV SYSTEMS
 
 
 
 
NXE:3300
22 nm
13.5 nm
EUV
0.33
NXE:3350
16 nm
13.5 nm
EUV
0.33
1.
This table does not include used systems or system enhancements on steppers and scanners and products other than systems (e.g. YieldStar or computational lithography products).
2.
The X in the product number represents different models in the product portfolio within the same resolution. For example, XT:10X0 can either represent XT:1000 or XT:1060.
ASML’s MPS business refurbishes PAS 5500 and TWINSCAN lithography equipment and offers associated services. Our PAS 5500 product family, which we no longer manufacture but continue to refurbish, comprises advanced wafer steppers and Step & Scan systems equipped with i-line, KrF and ArF light sources for processing wafers up to 200 mm in diameter, and are employed in volume manufacturing to achieve design nodes requiring imaging at a resolution down to 90 nm.
System related products
We continuously develop and sell a range of product options and enhancements designed to increase throughput and improve imaging and overlay to optimize value of ownership over the entire life of our systems. This is complemented by full system upgrade packages which enable our TWINSCAN NXT immersion scanners to be upgraded from one model to another. This enables customers to migrate these systems in production from one process technology node to another meeting tighter lithography requirements for the more advanced process technology nodes.
Our customers optimize their scanner performance by taking into account the entire chip creation process, from design to volume manufacturing, we call this approach Holistic Lithography. We complement our scanner products with a rapidly expanding Holistic Lithography portfolio of software and metrology products to help our customers optimize semiconductor scanner performance, provide a faster start to chip production and achieve better imaging at higher resolutions. Semiconductor manufacturers face increasingly smaller margins of error as they shrink chip features. Holistic Lithography provides a way to shrink within these margins, offering additional significant revenue-generating and cost-saving opportunities to our customers.
Our computational lithography products capture detailed knowledge of scanner design and real performance, which enables our systems to accurately predict real-life manufacturing performance. These predictions are essential in addressing possible ramp-up and yield problems in advance, potentially avoiding months of delay in time-to-market for our customers. The same prediction capabilities allow our scanners to be optimally calibrated for improved performance in production, given specific chip designs or masks, thereby achieving improved yield. Our current computational lithography portfolio comprises both traditional products, as well as solutions that directly interface with the numerous calibration controls in our scanner to optimize performance.
To provide a total solution for scanner control we offer our own advanced wafer metrology system ("YieldStar"). This wafer metrology system leverages the scanner controls to compensate for potential performance drifts in the scanner itself, as well as in other steps of the device manufacturing process, such as mask deterioration, resist coating fingerprints, etching fingerprints, or chemical-mechanical polishing fingerprints. YieldStar uses scatterometry technology for overlay and CD measurements. YieldStar scatterometry provides high overlay and low cost wafer metrology data that can be used for further improving the performance of our systems.
In 2012, ASML began shipment of the third generation YieldStar metrology system, the S200C, which featured higher throughput and measurement overlay to support tighter on product wafer overlay and focus control performance of the NXT:19X0 systems. In 2014, we introduced the fourth generation YieldStar Metrology system, the T250D, available in both stand-alone and integrated version. The YieldStar 250D contains a source with wavelengths up to 765nm and has sensor improvements whereas the YieldStar 200 series enables more precise overlay measurement of thicker stacks with increased sampling as well as in-line focus and CD. In 2015, we shipped the first YieldStar 1250D, a measurement tool, which helps identify any inaccuracies in chips during the production cycle, enabling customers to make improvements and enhance the efficiency of their machines and therefore reduce cost.


ASML ANNUAL REPORT 2015    18



Furthermore, following the acquisition of Cymer, our subsidiary CLS offers their customers OnPulse contracts on DUV sources, providing on-site support from certified service engineers and continuous real-time light source monitoring. These contracts, used to enhance light source productivity, offer CLS customers predictable light source running costs that scale directly with pulse utilization.
Sales and Customer Support
Our top priority is to provide customers with the best possible products and services. We work closely with them to ensure we understand their needs, priorities and challenges. Only by collaborating and aligning with our customers can we help them to produce ever smaller and more energy efficient chips, thereby realizing Moore’s law and sustaining the growth of the industry as a whole.
The cost of a new semiconductor fabrication plant equipment continues to be a large incentive driving semiconductor manufacturing productivity improvements. Industry leaders are realizing that on their own, they cannot afford to do the learning necessary to maximize equipment investment. Hence, partnerships, collaboration, and the sharing of combined knowledge between ASML and its customers is key in optimization of equipment productivity.
We strive to meet the needs of our customers by regularly reviewing and aligning, at all levels, with customer demands, product roadmaps, support requirements and business terms.
We support our customers with a broad range of applications, services, and technical support products to maintain and maximize the performance of our systems at customer sites. We also offer refurbished systems and system upgrades.
We market and sell our products through our direct sales force.
Our account managers, field and application engineers, service and technical support specialists are located throughout Asia, the US and Europe. We have established an industrial site in Linkou, Taiwan. The primary goal of this site is to serve as a supplementary engine to propel ASML’s long-term growth, by means of:
•
Featuring customer support and training, logistics, refurbishment, technology and application development and also producing all YieldStar systems;
•
Enabling sourcing of equipment modules, components and services in the region; and
•
Performing as a training center to develop worldwide talent for our workforce and customers.
Revenue per Geographic Market
In 2015, we derived 77.3 percent of net sales from Asia, 19.3 percent from the US and 3.4 percent from Europe (2014: Asia: 64.3 percent; US: 32.3 percent and Europe: 3.4 percent; 2013: Asia: 82.5 percent; US: 13.7 percent and Europe: 3.8 percent).
Manufacturing, Logistics and Suppliers
The execution of our business model is supported by outsourcing production of a significant part of components and modules that comprise our lithography systems, working in partnership with suppliers from all over the world. Our manufacturing activities comprise subassembly and testing of certain modules and the final assembly and fine tuning/ testing of a complete system from components and modules that are manufactured to our specifications by third parties and by us. All of our manufacturing activities are performed in cleanroom facilities in Veldhoven, the Netherlands, in Wilton, Connecticut and in San Diego, California, both the US, in Linkou, Taiwan and in Pyeongtaek, South Korea. We procure system components and subassemblies from single suppliers or a limited group of suppliers in order to ensure overall quality and on-time delivery. We jointly operate a strategy with suppliers known as "value sourcing", which is based on competitive performance. The essence of value sourcing is to maintain a supply base that is world class and globally competitive and present.
Value sourcing is intended to align the performance of our suppliers with our requirements on quality, logistics, technology, cost, and sustainability management.
Our value sourcing strategy is based on the following strategic principles:
• Maintaining long-term relationships with our suppliers;
• Sharing risks and rewards with our suppliers;
• Dual sourcing of knowledge, globally, together with our suppliers; and
• Single sourcing of products, where possible or required.
Zeiss is our single supplier, and we are their single customer, of optical components for lithography systems and is capable of producing these items only in limited numbers and only through the use of its manufacturing and testing facilities in Oberkochen and Wetzlar, Germany. In 2015, 26.2% of our aggregate cost of system sales were purchased from Zeiss (2014: 27.4 percent; 2013: 27.4 percent).
Zeiss is highly dependent on its manufacturing and testing facilities in Oberkochen and Wetzlar, Germany, and its suppliers. Moreover, Zeiss has a finite capacity for production of optical components included in our systems. From time to time, the number of systems we are able to produce may be limited by the capacity of Zeiss. In 2015 our production was not limited by capacity constraints from Zeiss.


ASML ANNUAL REPORT 2015    19



Our relationship with Zeiss is structured as a strategic alliance pursuant to several agreements executed in 1997 and subsequent years. These agreements define a framework in all areas of our business relationship. The partnership between ASML and Zeiss is focused on continuous improvement of operational excellence.
Pursuant to these agreements, ASML and Zeiss have agreed to continue their strategic alliance until either party provides at least three years notice of its intent to terminate.
In addition to Zeiss, we also rely on other outside vendors for the components and subassemblies used in our systems and sources, each of which is obtained from a limited number of suppliers many of whom have almost exclusive competences in their respective industries.
We have a flexible labor model with a mix of fixed and flexible contracted labor throughout our departments and facilities in Veldhoven, the Netherlands. This reinforces our ability to adapt to semiconductor market cycles, including support for potential 24/7 production activities as needed.
Maximizing the flexibility of our technically-skilled workforce means we can shorten lead-times, adding value for customers. Flexibility also reduces our working capital requirements.
Research and Development
The semiconductor manufacturing industry is subject to rapid technological changes driven by Moore’s Law. We believe that continued and timely development and introduction of new and enhanced products are essential for us to maintain our competitive position. As a result, we have historically devoted a significant portion of our financial resources to R&D programs, and we expect to continue to allocate significant resources to these efforts. In addition, we have established sophisticated development centers in Veldhoven, the Netherlands, in Wilton, Connecticut, and San Diego, California, both in the US, in Shenzhen, China and in Linkou, Taiwan. We are also involved in joint R&D 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.
On July 9, 2012, we announced our CCIP to accelerate our development of EUV technology and 450mm silicon wafer technology. For further information about CCIP, see Note 27 to our Financial Statements.
During 2013, together with imec (an independent research partner), we established an advanced patterning center located at the imec campus in Leuven, Belgium. Together we plan to address upcoming scaling challenges due to the chips industry's move towards single digit nanometer dimensions.
As of 2014, in order to conduct fundamental and applied research in areas that are key to unlocking innovation in the global semiconductor industry, we established ARCNL in Amsterdam, the Netherlands, together with FOM/NWO and UvA/VU.
During 2015, researchers from ASML, ARCNL, Tata Steel and VU joined forces to develop new techniques for imaging surfaces based on lensless microscopy.
See Item 4.B. "Business Overview – Our Markets and Products - Products" and Item 5.A. "Operating Results—Results of Operations 2015 compared to 2014 – Research and Development Costs".
Intellectual Property
We rely on IPR such as patents, copyrights and trade secrets to protect our proprietary technology. We aim to obtain ownership rights on technology developed by us or for us, alternatively, to have license rights in place with respect to such technology.
Our IPR management focuses on protecting ASML’s intellectual property and respecting the intellectual property of other parties. Preservation of intellectual property and other assets is one of our business principles and part of our Code of Conduct.
From late 2001 through 2004, ASML was a party to a series of civil litigations and administrative proceedings in which Nikon alleged ASML’s infringement of Nikon patents relating to lithography. ASML in turn filed claims against Nikon. Pursuant to agreements executed on December 10, 2004, ASML and Nikon agreed to settle all pending worldwide patent litigation between the companies. The settlement included an exchange of releases, a patent cross-license agreement related to lithography equipment used to manufacture semiconductor devices, and payments to Nikon by ASML.
In 2004, the Nikon Cross-License Agreement was signed. Under the Nikon Cross-License Agreement, (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 under patents owned or otherwise sublicensable by Nikon. These license grants cover patents having an effective application date before or on December 31, 2002 ("Class A Patents"), as well as patents with an effective application date after December 31, 2002 that were issued worldwide before the end of 2009 ("Class B Patents"), but exclude certain specified patents set forth in the Nikon Cross-License Agreement. The license period is perpetual for Class A Patents, and the licenses for Class B Patents terminated at the end of 2009.


ASML ANNUAL REPORT 2015    20



At any time until June 30, 2015 (which deadline has been extended through at least mid-March 2016) each of ASML and Nikon has a right to designate up to five 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 Nikon Cross-License Agreement are deemed Class B Patents. In addition, pursuant to the terms of the Nikon Cross-License Agreement, the parties have agreed, from January 1, 2010 through December 31, 2014, not to bring suit for claims related to infringement of patents issued and not perpetually licensed, including the Class B Patents. Under the terms of the Nikon Cross-License Agreement, beginning on January 1, 2015, the parties may bring suit for infringement of certain patents subject to the agreement, including any infringement that occurred from January 1, 2010 through December 31, 2014. Damages resulting from claims for patent infringement occurring during the Cross-License Transition Period are limited to three percent of the net sales price of applicable licensed products including optical components.
Accordingly, from January 1, 2015, both Nikon and we are no longer prohibited under the agreement from bringing claims against each other on the basis of infringement of certain patents subject to the Nikon Cross-License Agreement.
If Nikon files suit against us alleging patent infringement, we may incur substantial legal fees and expenses, and we may not prevail. Similarly, if we file suit against Nikon alleging patent infringement, we may incur substantial legal fees and expenses, and we may not prevail. Patent litigation is complex and may extend for a protracted period of time, giving rise to the potential for both substantial costs and diverting the attention of key management and technical personnel. Potential adverse outcomes from patent litigation may include, without limitation, payment of significant monetary damages, injunctive relief prohibiting the sale of products, and/or settlement involving significant costs to be paid by us, any of which may have a material adverse effect on our business, financial condition and/or results of operations. We are unable to predict at this time whether any such patent suit will in fact materialize, or, if so, what its outcome might be.
In connection with entering into the Nikon Cross-License Agreement, ASML entered into a sublicense agreement with Zeiss, effective November 12, 2004, pursuant to which Zeiss granted ASML a non-exclusive license of all of the rights it received from Nikon under the Nikon-Zeiss Patent Cross-License Agreement between Nikon and Zeiss effective November 12, 2004.
In 2007, ASML and Zeiss signed an agreement with Canon for the global cross-license of patents in their respective fields of semiconductor lithography and optical components, used to manufacture ICs. The Canon Cross-License Agreement expires on December 31, 2016.
See Item 3.D. "Risk Factors – Risks related to ASML – Failure to adequately protect the intellectual property rights upon which we depend could harm our business" and "Risk Factors – Risks related to ASML – Defending against intellectual property claims brought by others could harm our business".
Competition
The semiconductor equipment industry is highly competitive. The principal elements of competition in our market are:
•
The technical performance characteristics of a lithography system;
•
The value of ownership of lithography systems based on purchase price, maintenance costs, throughput, and customer service and support costs;
•
The exchange rate of the euro against the functional currency of our competitors and our customers, particularly against the Japanese yen;
•
The strength and breadth of our portfolio of patents and other intellectual property rights; and
•
Our customers’ desire to obtain lithography equipment from more than one supplier.
We believe that the market for lithography systems and the investments required to be a significant competitor in this market segment has resulted in increased competition for market share through aggressive prosecution of patents. Our competitiveness depends 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.
Government Regulation
Our business is subject to direct and indirect regulations 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 safety, environmental 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. The impact of these changes in regulation could adversely affect our business, financial condition and our results of operations 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 ultimately wholly-owned by ASML Holding N.V., are ASML Netherlands B.V., ASML Systems B.V., ASML Hong Kong Ltd. and ASML US Inc.
See Exhibit 8.1 for a list of our main subsidiaries.


ASML ANNUAL REPORT 2015    21



D. Property, Plant and Equipment
We lease a number of our facilities under operating leases. We also own a number of buildings, mainly consisting of production facilities in Veldhoven, the Netherlands, in Wilton, Connecticut, and San Diego, California, both in the US, in Linkou, Taiwan and in Pyeongtaek, South-Korea. The book value of land and buildings owned amounts to EUR 1,067.7 million as of December 31, 2015 compared with EUR 973.4 million as of December 31, 2014. See Note 12 to our Financial Statements.
Subject to market conditions, we expect that our capital expenditures (purchases of property, plant and equipment) in 2016 will be approximately EUR 300 million. These expenditures will mainly consist of further expansion and upgrades of facilities. We expect to finance these capital expenditures through cash generated by operations and existing cash and cash equivalents.
Facilities in Europe
Our headquarters, main manufacturing and R&D facilities are located at a single site in Veldhoven, the Netherlands. This state-of-the-art facility includes 66 thousand square meters of office space and 50 thousand square meters of cleanroom used for manufacturing and R&D activities and 24 thousand square meters of warehouses. Our facilities in Veldhoven, the Netherlands are partly owned and partly leased through long-term operating and financing leases that contain purchase options. During 2015 we have exercised these options which will be effectuated in 2016. Some of our office facilities at our headquarters in Veldhoven, the Netherlands, are financed through a special purpose vehicle that is a VIE. We also lease several sales and service facilities at locations across Europe.
Facilities in the United States
Our US head office is located in a 5 thousand square meter office building in Chandler, Arizona. We maintain R&D and manufacturing operations in a 28 thousand square meter facility in Wilton, Connecticut, and a 5 thousand square meter facility in Santa Clara, California. Furthermore, our facilities in San Diego include 25 thousand square meters of buildings used for manufacturing and office space, 19 thousand square meters of buildings used for engineering and R&D activities and 7 thousand square meters of buildings used for warehousing.
Facilities in Asia
Our Asian headquarters is located in Hong Kong, The People’s Republic of China. In addition, our facility in Linkou, Taiwan comprises a cleanroom (approximately 3 thousand square meters) and office space (approximately 6 thousand square meters). Our facility in Korea comprises of a cleanroom (approximately 700 square meters) and office space (approximately 6 thousand square meters). We also lease and own several sales, service and training facilities at locations across Asia. As a result of the Cymer acquisition, we acquired a manufacturing facility in Pyeongtaek, South Korea, mainly used for refurbishment activities of light sources. Additionally, Cymer leases various smaller locations across Asia which are mainly used for local sales and service activities.
Item 4A Unresolved Staff Comments
Not applicable.
Item 5 Operating and Financial Review and Prospects
All information disclosed in this item is provided as a supplement to, and should be read in conjunction with, our Financial Statements and the accompanying Notes to the Consolidated Financial Statements included in Item 18 "Financial Statements".
Executive Summary
Introduction
ASML is one of the world’s leading manufacturers of chip-making equipment. Our vision is to enable affordable microelectronics that improve the quality of life. To achieve this, our mission is to invent, develop, manufacture and service advanced technology for high-tech lithography, metrology and software solutions for the semiconductor industry. ASML's guiding principle is continuing Moore's Law towards ever smaller, cheaper, more powerful and energy-efficient semiconductors. This results in increasingly powerful and capable electronics that enable the world to progress within a multitude of fields, including healthcare, technology, communications, energy, mobility, and entertainment. We are a multinational company with over 70 locations in 16 countries, headquartered in Veldhoven, the Netherlands. As of December 31, 2015, we employed 12,168 payroll employees (2014: 11,318) and 2,513 temporary employees (2014: 2,754), measured in FTEs. ASML is traded on Euronext Amsterdam and NASDAQ under the symbol ASML.
Business Strategy
Our Vision and Mission
Our vision is to enable affordable microelectronics that improve the quality of life.
To achieve this, our mission is to invent, develop, manufacture and service advanced technology for high-tech lithography, metrology and software solutions for the semiconductor industry. ASML's guiding principle is continuing Moore's Law towards ever smaller, cheaper, more powerful and energy-efficient semiconductors.


ASML ANNUAL REPORT 2015    22



This results in increasingly powerful and capable electronics, with faster processing speeds, that enable the world to progress within a multitude of fields, including healthcare, technology, communications, energy, mobility, and entertainment. ASML creates economic value with strong financial results; social value by enhancing the welfare of our employees, suppliers and the communities we operate in; and environmental value by improving the energy efficiency of chips.
Business Strategy
The long-term growth of the semiconductor industry is based on the principle that the power, cost and time required for every computation on a digital electronic device can be reduced by shrinking the size of transistors on chips. In 2015, chip makers produced electronic chip features with geometries between 28 and 20 nm routinely, compared to typical geometries of 10,000 nm in the early 1970s, resulting in an increase in the number of transistors on leading chips from several thousand to over two billion. This trend was first observed by Intel co-founder Gordon Moore in 1965, and is referred to as "Moore’s Law". Moore’s Law is reflected in ever smaller, cheaper, more powerful and energy-efficient semiconductors. Smaller geometries allow for much lower electrical currents to operate the chip. Using advanced semiconductors in industrial and consumer products often provides economic benefits, user-friendliness and increased safety. The technology revolution powered by the semiconductor industry has brought many advantages: not only can information be more widely disseminated than ever before, but affordable chip intelligence has also enabled industry and service sectors to create and distribute products and ideas at high speed.
We are a focused supplier of equipment to IC manufacturers, providing high-performance lithography, metrology and software solutions that enable our customers to continue the feature shrink that underpins Moore's Law in a cost-effective way. Where there is a compelling customer benefit and industrial logic, we may expand into adjacent markets serving IC manufacturers. Finally, with a view to the future, we will explore areas outside of IC or lithography where we can apply our strengths in creating advanced systems that are geared for high throughput, reliable operation and extreme accuracy. To realize this we focus our internal efforts on technology leadership, strong customer and supplier relationships, and great people. This is complemented with showing responsible behavior as a prerequisite in executing our strategy.
See item 4.B. "Business Overview - Our Markets and Products - Products".
Technology Leadership
Moore’s Law is the industry’s roadmap. It tells us where the industry wants to be in two years, five years or even 10 years from now. For three decades, we have kept up with Moore’s Law by constantly improving the capabilities of our lithography systems, meeting the needs of our customers allowing them make smaller, faster and more energy-efficient chips.
To make this happen, we invest heavily in developing cutting-edge technology. We employ more than 5,000 engineers in R&D, with an annual budget of over EUR 1.0 billion. Our major R&D sites are in Veldhoven, the Netherlands, Wilton, Connecticut in the US, Santa Clara and San Diego, both California in the US, Linkou, Taiwan and Shenzhen, China. This R&D investment results in constant innovation, enabling our customers to develop chips for new devices and new applications, benefiting us all: from smartphones and wearable sensors, to tablets and car electronics.
As part of our innovative culture we make investments to further mature management processes to identify, create and share knowledge inside and outside of our organization. We also invest in product stewardship. This means we design systems that can produce ever smaller electronic circuits. This in turn allows our customers to produce 'low power' chips that require fewer natural resources and use less energy over their lifetime compared to older-generation chips. We also strive to make our own systems more resource efficient, enabling our customers to reduce the carbon footprint per wafer produced.
Strong Customer and Supplier Relationships
Since ASML’s early days, we have developed our systems in a cooperative network of partners (including suppliers, universities and research institutes). Many disciplines have to come together to make our systems work, from mechanical and electrical engineering to optics and highly advanced software controls. ASML focuses on its role as a system architect and system integrator. We work with hundreds of technology companies that supply most of the components in our systems and often do substantial research and development work themselves. This model is our approach to 'Open Innovation'.
A good example is our relationship with Zeiss in Germany, which for more than two decades has developed and manufactured the lenses for our lithography systems.
Open Innovation benefits everyone involved. It opens up fast access to leading-edge knowledge and skills in a wide range of technologies, provides the flexibility required to adjust to changing business needs and product requirements and leads to affordable solutions in terms of development and cost.
Staying ahead of the technology curve and ensuring our products are not outdated before they are even launched, requires us to share roadmaps, risk and rewards with our partners. This means giving suppliers real responsibility and incentive to improve; not imposing our way of working but learning from others and sharing our business context so our partners can think along with us. The quality of our relationships with both customers and suppliers are key measures for success.


ASML ANNUAL REPORT 2015    23



Great people
ASML is an inspiring place where employees work, meet, learn and share in multidisciplinary and multinational teams. We push the boundaries of technology, and for that we need the most creative minds in physics, electronics, mechatronics, software and precision engineering. We offer all our people the opportunity to develop their talents and a working environment in which they feel included, engaged and can perform. Our thousands of engineers must effectively work together to ensure that our products ship on time and perform according to specifications, which requires a disciplined systems engineering approach. We thus continuously strike the balance between giving our engineers the creative freedom to solve the big technology challenges and ensuring that we deliver what our customers need, when they need it. Our measures for success include evaluating employee engagement and our organization’s ability to nurture talent.
Responsible Business Behavior
ASML is committed to behaving responsibly - it’s at the foundation of our company. This means doing business according to high ethical and professional standards. We seek to comply with the laws and regulations applicable in the countries and regions where we operate. We have a moral obligation to provide safe and healthy working conditions for our employees while minimizing our impact on the environment. We expect our people to respect human rights and expect the same from our business partners. Our Code of Conduct and Business Principles help us and our business partners to make ethically sound decisions. We also want to contribute to the local communities in which we operate by supporting their activities through collaborative and consultative partnerships. As a measure for responsible business success we evaluate our performance using the results of the RobecoSAM sustainability assessment, which are the basis for the Dow Jones Sustainability Indices.
For more information about this topic see our Corporate Responsibility Report as published on our Website. Information on ASML's website is not incorporated into, and does not form a part of, this Annual Report.
 
Profitability
Our long term business and financial model targets an annual revenue opportunity of EUR 10 billion by 2020 and a potential tripling of EPS by the end of this decade, compared to calendar year 2014, thereby creating significant value for all stakeholders. Our roadmap to an annual revenue opportunity of EUR 10 billion is primarily based on organic growth. ASML continuously reviews its product roadmap and has, from time to time, made focused acquisitions to enhance the industrial value of its product offering. Based on such reviews and the assessment of clear potential product and value synergies, ASML may also entertain focused merger and acquisition activities in the future.



ASML ANNUAL REPORT 2015    24


ASML Operations Update on Key Performance Indicators
The following table presents the key performance indicators used by our BoM and senior management to regularly measure performance.
Year ended December 31
2013

 
2014

 
2015

 
(in millions)
EUR

%1
EUR

%1

EUR

%1

 
 
 
 
 
 
 
Sales
 
 
 
 
 
 
Total net sales
5,245.3

 
5,856.3

 
6,287.4

 
Increase in total net sales (%)
10.9

 
11.6

 
7.4

 
Net system sales
3,993.1

 
4,242.8

 
4,237.2

 
Net service and field option sales
1,252.2

 
1,613.5

 
2,050.2

 
Sales of systems (in units)
157

 
136

 
169

 
ASP of total system sales
25.4

 
31.2

 
25.1

 
ASP of new system sales
27.4

 
35.6

 
28.5

 
ASP of used system sales
6.9

 
5.8

 
5.1

 
Value of systems backlog
1,953.3

 
2,772.4

3 
3,184.3

2 
Systems backlog (in units)
56

 
82

3 
79

2 
ASP of systems backlog
34.9

 
33.8

3 
40.3

2 
ASP of systems backlog (New)
41.4

 
42.0

3 
46.3

2 
ASP of systems backlog (Used)
4.7

 
4.7

3 
3.2

2 
Immersion systems recognized (in units) 4
77

 
76

 
67

 
NXE:3300 systems recognized (in units)
1

 
5

 
1

 
Profitability
 
 
 
 
 
 
Gross profit
2,177.2

41.5
2,596.4

44.3

2,895.7

46.1

Income from operations
1,047.9

20.0
1,282.2

21.9

1,565.1

24.9

Net income
1,015.5

19.4
1,196.6

20.4

1,387.2

22.1

Liquidity
 
 
 
 
 
 
Cash and cash equivalents
2,330.7

 
2,419.5

 
2,458.7

 
Short-term investments
679.9

 
334.9

 
950.0

 
Operating cash flow
1,054.2

 
1,025.2

 
2,025.5

 
 
1.
As a percentage of total net sales.
2.
As of 2015, our systems backlog and net bookings include all system sales orders for which written authorizations have been accepted (for EUV starting with the NXE:3350B). This change had no impact on the comparative figures.
3.
As of 2014, our systems backlog and net bookings include sales orders for which written authorizations have been accepted and shipment and/or revenue recognition is expected within 12 months. As of 2014 we also include EUV in our backlog starting with our NXE:3350B systems. Before 2014, our systems backlog and net bookings included only sales orders for which written authorizations have been accepted and system shipment and revenue recognition dates within the following 12 months have been assigned. This change had no impact on the comparative figures.
4.
Included in the total number of immersion systems recognized in 2015 are 7 units of our most advanced immersion technology NXT:1980 systems (2014: 0 and 2013: 0).
Backlog
We started 2015 with a systems backlog of 82 systems. In 2015, we booked orders for 165 systems, and recognized sales for 169 systems (including one NXE:3300B system, which was not included in backlog). This resulted in a systems backlog of 79 as of December 31, 2015.
As of December 31, 2015, our systems backlog was valued at EUR 3,184.3 million and includes 79 systems with an ASP of EUR 40.3 million. As of December 31, 2014, the systems backlog was valued at EUR 2,772.4 million and included 82 systems with an ASP of EUR 33.8 million. The ASP of our systems backlog increased in 2015 compared to 2014 mainly as a result of the inclusion of six additional EUV systems.
For discussion on the main key performance indicators indicated above, see Item 5.A. "Operating Results" and Item 5.B. "Liquidity and Capital Resources".



ASML ANNUAL REPORT 2015    25



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 Financial Statements, which have been prepared in conformity with US GAAP. The preparation of our Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities on the balance sheet dates, and the reported amounts of net sales and costs during the reported periods. Actual results could differ from those estimates. We evaluate our estimates continuously and we base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates if the assumptions prove incorrect. To the extent there are material differences between actual results and these estimates, our future results could be materially and adversely affected. We believe that the accounting policies described below require us to make significant judgments and estimates in the preparation of our Financial Statements. Our most critical accounting estimates include:
•
Revenue Recognition;
•
Inventories;
•
Income Taxes;
•
Contingencies and Litigation; and
•
Evaluation of Long-lived Assets for Impairment.
See Note 1 to our Financial Statements for a summary of our significant accounting policies.
Results of Operations 2015 Compared to 2014
The following discussion and analysis of Results of Operations should be viewed in the context of the risks that may interfere with our business objectives or otherwise affect our results of operations, described in Item 3.D. "Risk Factors".
Set out below our Consolidated Statements of Operations data for the years ended December 31, 2014 and 2015:
Year ended December 31
2014

2015

(in millions)
EUR

EUR

 
 
 
Total net sales
5,856.3

6,287.4

Cost of sales
(3,259.9
)
(3,391.7
)
Gross profit
2,596.4

2,895.7

Other income
81.0

83.2

Research and development costs
(1,074.1
)
(1,068.1
)
Selling, general and administrative costs
(321.1
)
(345.7
)
Income from operations
1,282.2

1,565.1

Interest and other, net
(8.6
)
(16.5
)
Income before income taxes
1,273.6

1,548.6

Provision for income taxes
(77.0
)
(161.4
)
Net income
1,196.6

1,387.2

 
 
 
 
Set out below are our Consolidated Statements of Operations data for the years ended December 31, 2014 and 2015 expressed as a percentage of our total net sales:
Year ended December 31
2014

2015

 
 
 
Total net sales
100.0

100.0

Cost of sales
(55.7
)
(53.9
)
Gross profit
44.3

46.1

Other income
1.4

1.3

Research and development costs
(18.3
)
(17.0
)
Selling, general and administrative costs
(5.5
)
(5.5
)
Income from operations
21.9

24.9

Interest and other, net
(0.1
)
(0.3
)
Income before income taxes
21.7

24.6

Provision for income taxes
(1.3
)
(2.6
)
Net income
20.4

22.1

 
 
 
 


ASML ANNUAL REPORT 2015    26



Net Sales and Gross Profit
The following table shows a summary of sales data, units sold, gross profit and ASP data for the years ended December 31, 2014 and 2015:
Year ended December 31
2014

2015

(in millions, unless otherwise indicated)

EUR

EUR

 
 
 
Net sales
5,856.3

6,287.4

Net system sales
4,242.8

4,237.2

Net service and field option sales
1,613.5

2,050.2

Total sales of systems (in units)
136

169

Total sales of new systems (in units)
116

144

Total sales of used systems (in units)
20

25

Gross profit as a percentage of net sales
44.3

46.1

ASP of system sales
31.2

25.1

ASP of new system sales
35.6

28.5

ASP of used system sales
5.8

5.1

 
Net sales increased by 7.4 percent, driven by the increase in net service and field option sales of 27.1 percent, with a similar level of net system sales in 2015 compared to 2014. The increase in net service and field option sales is mainly driven by:
•
An increase in the sales of productivity and focus upgrade packages; and
•
Higher service sales mainly resulting from an increased installed base.
The decrease of the ASP of our new systems sold is due to a shift in the product mix of systems sold towards more lower-end systems (more KrF systems and less EUV systems) in 2015 compared to 2014.
Gross profit increased by EUR 299.3 million mainly due to higher service and field option sales and lower EUV system sales (which currently do not contribute to gross profit).
Gross profit as a percentage of net sales increased from 44.3 percent in 2014 to 46.1 percent in 2015 primarily driven by lower EUV system sales (which currently do not contribute to gross profit).
Other Income
Other income consists of contributions for R&D programs under the NRE funding arrangements from certain Participating Customers in the CCIP and amounted to EUR 83.2 million for 2015 (2014: EUR 81.0 million).
Research and Development Costs
R&D costs (net of credits and excluding contributions under the NRE Funding Agreements from Participating Customers in the CCIP) were EUR 1,068.1 million in 2015 as compared to EUR 1,074.1 million in 2014. R&D costs for both 2015 and 2014 were primarily focused on programs supporting EUV, DUV immersion, and Holistic Lithography. In 2015, R&D activities mainly related to:
•
EUV - Further improving availability and productivity, and supporting the design of our NXE:3400B system;
•
DUV immersion - Focused on the final stages of development relating to our NXT:1980 systems, of which we shipped the first systems in 2015, as well as development of future DUV platforms; and
•
Holistic Lithography - Further development of Yieldstar and process window control solutions.

Selling, General and Administrative Costs
SG&A costs increased by 7.7 percent mainly driven by an increase in the number of employees, further impacted by exchange rate fluctuations, primarily related to our US operations.
Income Taxes
The effective tax rate increased to 10.4 percent of income before income taxes in 2015 compared to 6.0 percent in 2014. In 2014 the tax rate was favorably impacted by settling agreements entered into by ASML Netherlands B.V. and Cymer LLC., prior to our acquisition of Cymer in 2013, at different tax rates.
Net Income
Net income in 2015 amounted to EUR 1,387.2 million, or 22.1 percent of total net sales, representing EUR 3.22 basic net income per ordinary share, compared with net income in 2014 of EUR 1,196.6 million, or 20.4 percent of total net sales, representing EUR 2.74 basic net income per ordinary share.


ASML ANNUAL REPORT 2015    27



Results of Operations 2014 Compared to 2013
Set out below our Consolidated Statements of Operations data for the years ended December 31, 2013 and 2014:
Year ended December 31
2013

2014

(in millions)
EUR

EUR

 
 
 
Total net sales
5,245.3

5,856.3

Cost of sales
(3,068.1
)
(3,259.9
)
Gross profit
2,177.2

2,596.4

Other income
64.4

81.0

Research and development costs
(882.0
)
(1,074.1
)
Selling, general and administrative costs
(311.7
)
(321.1
)
Income from operations
1,047.9

1,282.2

Interest and other, net
(24.4
)
(8.6
)
Income before income taxes
1,023.5

1,273.6

Provision for income taxes
(8.0
)
(77.0
)
Net income
1,015.5

1,196.6

 
 
 
Set out below are our Consolidated Statements of Operations data for the years ended December 31, 2013 and 2014 expressed as a percentage of our total net sales:
Year ended December 31
2013

2014

 
 
 
Total net sales
100.0

100.0

Cost of sales
(58.5
)
(55.7
)
Gross profit
41.5

44.3

Other income
1.2

1.4

Research and development costs
(16.8
)
(18.3
)
Selling, general and administrative costs
(5.9
)
(5.5
)
Income from operations
20.0

21.9

Interest and other, net
(0.5
)
(0.1
)
Income before income taxes
19.5

21.7

Provision for income taxes
(0.1
)
(1.3
)
Net income
19.4

20.4

 
 
 
Net Sales and Gross Profit
The following table shows a summary of net sales, units sold, gross profit and ASP data for the years ended December 31, 2013 and 2014:
Year ended December 31
2013

2014

(in millions EUR, unless otherwise indicated)
EUR

EUR

 
 
 
Net sales
5,245.3

5,856.3

Net system sales
3,993.1

4,242.8

Net service and field option sales
1,252.2

1,613.5

Total sales of systems (in units)
157

136

Total sales of new systems (in units)
142

116

Total sales of used systems (in units)
15

20

Gross profit as a percentage of net sales
41.5

44.3

ASP of system sales
25.4

31.2

ASP of new system sales
27.4

35.6

ASP of used system sales

6.9

5.8

Net sales increased by 11.6 percent, mainly driven by the increase in net service and field option sales of 28.9 percent. The increase in net service and field option sales was mainly caused by:
•
The full-year effect of Cymer in 2014, whereas 2013 only included Cymer for seven months; and
•
An increase in Holistic Lithography through the sales of integrated metrology and feedback loop technology.
The increase in net system sales of 6.3 percent was caused by higher NXE:3300B system sales, which drove a higher ASP which more than offset the decrease in the number of units sold.


ASML ANNUAL REPORT 2015    28



The increase of the ASP of our systems sold can mainly be explained by the ASP of our new systems sold which increased to EUR 35.6 million in 2014 from EUR 27.4 million in 2013, which was the result of a shift in the mix of systems sold towards more high-end system types (NXE:3300B and NXT:1970Ci systems) in 2014 compared to 2013.
Gross profit increased by 19.3 percent. The increase in gross profit was mainly driven by:
•
The full-year effect of Cymer in 2014, whereas 2013 only included Cymer for seven months;
•
An increase in holistic Lithography increased through the sales of integrated metrology and feedback loop technology; and
•
2014 included lower one-off purchase price accounting adjustments related to Cymer.
Gross profit as a percentage of net sales increased from 41.5 percent in 2013 to 44.3 percent in 2014, reflecting the increase in gross profit, partly offset by higher EUV sales (which currently do not contribute to gross profit).
Other Income
Other income consists of contributions for R&D programs under the NRE funding arrangements from Participating Customers in the CCIP and amounted to EUR 81.0 million for 2014 (2013: EUR 64.4 million).
Research and Development Costs
R&D costs (net of credits and excluding contributions under the NRE Funding Agreements from certain Participating Customers in the CCIP) increased by EUR 192.1 million, or 21.8 percent, to EUR 1,074.1 million in 2014 from EUR 882.0 million in 2013. R&D costs increased mainly due to the acceleration of certain R&D programs, primarily EUV and DUV immersion.
Selling, General and Administrative Costs
SG&A costs increased by EUR 9.4 million, or 3.0 percent, to EUR 321.1 million in 2014, from EUR 311.7 million in 2013. This increase was mainly driven by the full-year effect of Cymer in 2014, whereas 2013 only included Cymer for seven months.
Interest and Other, Net
Interest and other, net decreased by EUR 15.8 million in 2014 compared to 2013. In 2013 interest and other, net included a loss on the partial extinguishment of our EUR 600 million 5.75 percent senior notes due 2017.
Income Taxes
The effective tax rate increased to 6.0 percent of income before income taxes in 2014 compared to 0.8 percent in 2013. In 2014 the tax rate was favorably impacted by settling agreements entered into by ASML Netherlands B.V. and Cymer LLC., prior to our acquisition of Cymer in 2013, at different tax rates. In 2013, we recognized a gain as a result of the accounting for the Cymer acquisition. This gain is not recognized for tax purposes and was, apart from the R&D tax incentives, the major driver for the change in the effective tax rate between 2013 and 2014.
Net Income
Net income in 2014 amounted to EUR 1,196.6 million, or 20.4 percent of net sales, representing EUR 2.74 basic net income per ordinary share, compared with net income in 2013 of EUR 1,015.5 million, or 19.4 percent of net sales, representing EUR 2.36 basic net income per ordinary share.
B. Liquidity and Capital Resources
Our cash and cash equivalents increased to EUR 2,458.7 million as of December 31, 2015 from EUR 2,419.5 million as of December 31, 2014 and our short-term investments increased to EUR 950.0 million as of December 31, 2015 from EUR 334.9 million as of December 31, 2014.
Our principal sources of liquidity consist of cash flows from operations, cash and cash equivalents as of December 31, 2015 of EUR 2,458.7 million, short-term investments as of December 31, 2015 of EUR 950.0 million and available credit facilities as of December 31, 2015 of EUR 700.0 million. In addition, we may from time to time raise additional capital in debt and equity markets. Our goal is to remain an investment grade rated company and maintain a capital structure that supports this.
We invest our cash and cash equivalents and short-term investments in short-term deposits with financial institutions that have good credit ratings and with the Dutch government, in Dutch Treasury Certificates and in money market funds that invest in high-rated short-term debt securities of financial institutions and governments. Our investments are denominated in euros.
Our available credit facilities amount to EUR 700.0 million as of December 31, 2015 and as of December 31, 2014. No amounts were outstanding under these credit facilities at the end of 2015 and 2014. The amounts available at December 31, 2015 and 2014 consisted of one EUR 700 million committed revolving credit facility with a group of banks. In 2015, the terms and conditions of the facility were amended by, among other things, removing the financial covenant and by extending the maturity until 2020. Outstanding amounts under this credit facility will bear interest at EURIBOR or LIBOR plus a margin that depends on our credit rating.
We have repayment obligations in 2017, amounting to EUR 238.2 million and in 2023, amounting to EUR 750.0 million, both relating to our Eurobonds.


ASML ANNUAL REPORT 2015    29



ASML seeks to ensure that our principal sources of liquidity will be sufficient to satisfy its liquidity requirements throughout every phase of the industry cycles.
Our liquidity needs are affected by many factors, some of which are based on the normal on-going operations of the business, and others that relate to the uncertainties of the global economy and the semiconductor industry. Although our cash requirements fluctuate based on the timing and extent of these factors, we believe that cash generated from operations, together with our principal sources of liquidity are sufficient to satisfy our current requirements, including our expected capital expenditures in 2016. We intend to return cash to our shareholders on a regular basis in the form of dividend payments and, subject to our actual and anticipated liquidity requirements and other relevant factors, share buybacks or capital repayments.
See Consolidated Statements of Cash Flows and Notes 4, 5, 14, 15, 25 and 26 to our Financial Statements.
C. Research and Development, Patents and Licenses, etc.
Research and Development
See Item 4.B. "Business Overview – Research and Development" and Item 5.A. "Operating Results – Results of Operations 2015 compared to 2014".
Intellectual Property Matters
See Item 3.D. "Risk Factors – Risks related to ASML – Failure to adequately protect the intellectual property rights upon which we depend could harm our business" and "Risk Factors – Risks related to ASML – Defending against intellectual property claims by others could harm our business" and Item 4.B. "Business Overview – Intellectual Property".
D. Trend Information
We expect that Moore’s Law will continue in the coming decade including industry fundamentals of a decline in cost per transistor. There is a strong demand for advanced ICs, supported by a value chain with means and incentive to support this. However, cost and process complexity of shrinking with multiple patterning together with new device structures and materials reshapes customer roadmaps, resulting in a continued need to improve DUV lithography performance while exploiting execution of agreed EUV targets for the future and complementing it with a portfolio of product options, enhancements and upgrade packages that support product stewardship and optimize the value of ownership over the entire lifetime of our systems. It also results in zero tolerance for non-performance, driving improvement of quality and cost efficiency of our products and services.
In DUV, we began ramping shipments of the TWINSCAN NXT:1980, our most advanced immersion system, shipping seven systems in 2015.
In Holistic Lithography, which grew by over 20 percent in revenue in 2015, we saw increased adoption of our latest metrology systems and control software at both Logic and Memory customers. These applications play an increasingly critical role in helping our customers achieve the best possible patterning performance on advanced nodes.
EUV met its 2015 productivity and availability targets. We achieved a productivity of more than 1,000 wafers per day early in 2015 on the NXE:3300B system and improved this to more than 1,250 wafers per day on the successor system, the NXE:3350B. In addition, the availability of systems in the field improved, with the majority of systems achieving a four-week availability of more than 70 percent in recent months; the best result was more than 80 percent over four weeks. In 2015, we also shipped two of our latest NXE:3350B EUV systems and started shipping the third. They will be used in our customers' fabs for preparing the introduction of EUV into volume production. Our goals for 2016 are to continue improving productivity and availability and shipping six to seven EUV systems.
On January 20, 2016 we announced a new share buyback program, to be executed within the 2016-2017 time frame. As part of this program, we intend to purchase shares up to EUR 1.5 billion, which includes an amount of approximately EUR 500 million remaining from the prior program, announced on January 21, 2015. We intend to cancel the shares upon repurchase. This buyback program started on January 21, 2016.




ASML ANNUAL REPORT 2015    30



The following table sets forth our systems backlog1 as of December 31, 2014 and 2015.
 
Year ended December 31
2014

2015

1 
(in millions EUR, unless otherwise indicated)
 
 
 
 
 
 
 
New systems backlog (in units)
64

68

 
Used systems backlog (in units)
18

11

 
Total systems backlog (in units)
82

79

 
Value of new systems backlog
2,687.0

3,149.6

 
Value of used systems backlog
85.4

34.7

 
Total value of systems backlog
2,772.4

3,184.3

 
ASP of new systems backlog
42.0

46.3

 
ASP of used systems backlog
4.7

3.2

 
ASP of total systems backlog
33.8

40.3

 
 
 
 
 
1.
As of 2015, our systems backlog and net bookings include all system sales orders for which written authorizations have been accepted (for EUV starting with the NXE:3350B). This change had no impact on the comparative figures.
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 systems backlog at any particular date is not necessarily indicative of actual sales for any succeeding period.
For the first-quarter of 2016, we expect net sales at approximately EUR 1.3 billion, a gross margin of around 42 percent, R&D costs of about EUR 275 million, other income of about EUR 23 million, which consists of contributions from participants of the CCIP, and SG&A costs of about EUR 90 million and an effective annualized tax rate of around 13 percent.
Looking ahead to the first half of 2016 we expect our Logic customers to take shipments of our leading edge immersion tools in the second quarter in preparation of their 10 nanometer node ramp. As a result, we expect second-quarter sales to increase significantly from the first-quarter level.
The trends discussed in this Item 5.D. "Trend information" are subject to risks and uncertainties. See "Part I – Special Note Regarding Forward Looking Statements" and item 3.D. "Risk Factors".
E. Off-Balance Sheet Arrangements
We have various contractual obligations, some of which are required to be recognized as liabilities in our Financial Statements, including long- and short-term debt. Other contractual obligations, namely operating lease commitments, purchase obligations and guarantees, are generally not required to be recognized as liabilities on our balance sheet but are required to be disclosed.
F. Tabular Disclosure of Contractual Obligations
Our contractual obligations as of December 31, 2015 can be summarized as follows:
Payments due by period
(in thousands)
Total
EUR

1 year
EUR

2 year
EUR

3 year
EUR

4 year
EUR

5 year
EUR

 
After
5 years
EUR

 
 
 
 
 
 
 
 
Long-Term Debt Obligations, including interest expense 1
1,266,151

44,908

283,058

54,155

27,075

27,075

829,880

Operating Lease Obligations
99,004

35,159

20,711

15,595

12,814

7,336

7,389

Purchase Obligations
2,121,418

1,841,942

133,637

113,277

6,171

11,328

15,063

Total Contractual Obligations 2
3,486,573

1,922,009

437,406

183,027

46,060

45,739

852,332

 
 
 
 
 
 
 
 
 
1.
See Note 14 to our Financial Statements for the amounts excluding interest expense.
2.
We have excluded unrecognized tax benefits for an amount of EUR 96.5 million as the amounts that will be settled in cash are not known and the timing of any payments is uncertain.
Long-term debt obligations mainly relate to interest payments and principal amounts of our Eurobonds. See Note 14 to our Financial Statements.
Operating lease obligations include leases of equipment and facilities. Lease payments recognized as an expense were EUR 45.1 million, EUR 43.9 million and EUR 42.0 million for the years ended December 31, 2015, 2014 and 2013, respectively.


ASML ANNUAL REPORT 2015    31


Several operating leases for our buildings contain purchase options, exercisable at the end of the lease, and in some cases, during the term of the lease. During 2015 we have exercised these options which will be effectuated in 2016, therefore no purchase options exists as per year end December 31, 2015. The related obligations are included under Purchase Obligations.
Purchase obligations exist of purchase commitments towards suppliers in the ordinary course of business. ASML expects that it will honor these purchase obligations to fulfill future sales, in line with the timing of those future sales. The general terms and conditions of the agreements relating to the major part of our purchase commitments as of December 31, 2015 contain clauses that enable us to delay or cancel delivery of ordered goods and services up to the dates specified in the corresponding purchase contracts. These terms and conditions that we typically agree with our supply chain partners give us additional flexibility to adapt our purchase obligations to our requirements in light of the inherent cyclicality of the industry in which we operate. We establish a provision for cancellation costs when it is probable that the liability has been incurred and the amount of cancellation fees is reasonably estimable.
G. Safe Harbor
See Part I "Special Note Regarding Forward-Looking Statements".
Item 6 Directors, Senior Management and Employees
A. Directors and Senior Management
The members of our SB and our BoM are as follows:
 
Name
Title
Year of Birth
Term Expires    

Arthur P.M. van der Poel 1,2,5
Chairman of the Supervisory Board
1948
2016
Douglas A. Grose 2,3
Vice Chairman and Member of the Supervisory Board
1950
2017
Pauline F.M. van der Meer Mohr 1,2
Member of the Supervisory Board
1960
2017
Wolfgang H. Ziebart 3,4
Member of the Supervisory Board
1950
2017
Clara (Carla) M.S. Smits-Nusteling 1
Member of the Supervisory Board
1966
2017
Johannes (Hans) M.C. Stork 3
Member of the Supervisory Board
1954
2018
Antoinette (Annet) P. Aris 3,4
Member of the Supervisory Board
1958
2019
Gerard J. Kleisterlee 2, 3
Member of the Supervisory Board
1946
2019
Rolf-Dieter Schwalb 1,4
Member of the Supervisory Board

1952
2019
Peter T.F.M. Wennink
President, Chief Executive Officer and member of the Board of Management
1957
2018
Martin A. van den Brink
President, Chief Technology Officer and member of the Board of Management
1957
2018
Frits J. van Hout
Executive Vice President, Chief Program Officer and member of the Board of Management
1960
2017
Frédéric J.M. Schneider-Maunoury
Executive Vice President, Chief Operations Officer and Member of the Board of Management
1961
2018
Wolfgang U. Nickl
Executive Vice President, Chief Financial Officer and Member of the Board of Management
1969
2018
 
 
 
 
 
1.
Member of the AC.
2.
Member of the Selection and Nomination Committee.
3.
Member of the Technology and Strategy Committee.
4.
Member of the Remuneration Committee.
5.
Mr. Van der Poel is to retire by rotation at the 2016 AGM.
Mr. Fröhlich retired from the SB per the 2015 AGM. At the 2015 AGM Ms. Aris, Mr. Kleisterlee and Mr. Schwalb were appointed as members of the SB for a period of four years.
The Works Council has an enhanced right to make recommendations for nomination of one-third of the members of the SB, which recommendations may be rejected by the SB in limited circumstances. See Item 6.C. "Board Practices — Supervisory Board". At the AGM held in 2009, Ms. Van der Meer Mohr was appointed pursuant to this recommendation right, and at the 2013 AGM she was reappointed in accordance with this recommendation right. At the 2014 AGM, Mr. Stork was appointed pursuant to this recommendation right. At the 2015 AGM, Ms. Aris was appointed based on this enhanced recommendation right.
The SB spent considerable time discussing its future composition, in view of the rotation schedule and envisaged changes in the coming years. For the fulfillment of vacancies several factors are taken into consideration. The SB profile includes the intention to have at least 30 percent representation of each gender in ASML’s SB. This aspect has been taken into account in the process that has led to the nomination and appointment of the following three new SB members by the 2015 AGM: Ms. Aris, Mr. Kleisterlee and Mr. Schwalb.
There are no family relationships among the members of our SB and our BoM.


ASML ANNUAL REPORT 2015    32