RISK CATEGORIES AND FACTORS
In conducting our business, we face a number of risks that may interfere with our business objectives. Some of these risks relate to our operational processes, while others relate to our business environment. It is important to understand the nature of these risks and the impact they may have on our business, financial condition, and results of operations. Some of the more relevant risks are described below, which may not be in order of likelihood or materiality. These risks are not the only ones we face. Some risks may not yet be known to us and certain risks that we do not currently believe to be material could become material in the future.
STRATEGIC RISKS
- The semiconductor industry is highly cyclical and is subject to rapid technological change. We face intense competition from companies that have greater resources than we do, and potential competition from new companies entering the market in which we compete. Therefore, we invest in research and development, in an effort to compete effectively. Our primary competitors for our wafer processing equipment include Applied Materials, Lam Research Corporation, Tokyo Electron, Hitachi Kokusai, Wonik IPS, and Jusung;
- We have to recruit or retain qualified personnel or integrate qualified personnel into our organization in order to avoid reduced sales, delayed product development, and diversion of management resources. Our business and future operating results depend in part upon our ability to attract and retain qualified management, technical, sales, and support personnel for our operations on a worldwide basis. Competition for qualified personnel is intense, and we cannot guarantee that we will be able to continue to attract and retain qualified personnel; and
- The costs to semiconductor manufacturers for switching from one semiconductor equipment supplier to another can be high, therefore it may be more difficult to sell our products to customers having a competing installed base.
OPERATIONAL RISKS
- The Company derives a significant percentage of its revenue from a small number of large customers. The ten largest customers accounted for approximately 83.1% of net sales in 2017 (2016: 78.5%). Reduction, rescheduling or cancellation of orders would reduce our revenues;
- Our products generally have long sales cycles and implementation periods, which increase our costs of obtaining orders and reduce the predictability of our earnings. Our products are technologically complex. Prospective customers generally must commit significant resources to test and evaluate our products and to install and integrate them into larger systems. In addition, customers often require a significant number of product presentations and demonstrations, in some instances evaluating equipment on site, before reaching a sufficient level of confidence in the product’s performance and compatibility with the customer’s requirements to place an order. As a result, our sales process is often subject to delays associated with lengthy approval processes that typically accompany the design and testing of new products;
- We outsource a significant portion of the manufacturing of our business to a limited number of suppliers. If our suppliers were unable or unwilling to deliver products in a timely manner to us in the quantities we require, we may be unable to fill customer orders on a timely basis, which could negatively affect our customer relationships and financial performance. We conduct much of our operational activities to our Front-end Manufacturing Singapore (FEMS) facility. If this facility were to experience a manufacturing disruption for any reason, our ability to timely meet our customers’ needs may be impaired, which would negatively affect our customer relationships and financial performance; and
- Our internal information technology systems are a fundamental component of our business operations. In today's world, these systems are subject to compromise by aging and other matters, such as computer viruses, unauthorized access, and general system failures or unforeseen difficulties. Such incidents could result in business disruption and theft of confidential information. We focus on proactive measures to prevent and mitigate such risks.
LEGAL AND REGULATORY RISKS
- Our success and ability to compete depends a large extent upon protecting our proprietary technology. We rely on a combination of patent, trade secret, copyright and trademark laws, non-disclosure and other agreements, and technical measures to protect our proprietary rights and confidential information. These agreements and measures may turn out not to be sufficient. Our technology may be infringed by third parties. In addition, patents issued to us may be challenged, invalidated or circumvented, rights granted to us under patents may not provide competitive advantages to us. In addition, monitoring unauthorized use of our intellectual property is difficult and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology. The laws of some countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as do the laws of the Netherlands and the United States. In past years, there has been substantial litigation regarding patent and other intellectual property rights in our semiconductor and related technology industries. Litigation is sometimes necessary to enforce patents issued to us, to protect trade secrets or know-how owned by us or to defend us against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others. A threat is that third parties may assert that our products infringe their intellectual property;
- We are party from time to time to various legal proceedings and claims generally incidental to our business, including without limitation to, intellectual property and product liability claims. For each of these proceedings and claims, our management evaluates, based on the relevant facts and legal principles, the likelihood of an unfavorable outcome and whether the amount of the loss can be reasonably estimated, in connection with our determination of whether or not to record a charge to earnings. In 2007, ASMI licensed Hitachi Kokusai under certain of its patents in the field of Atomic Layer Deposition. The license agreement was renewed in 2012. On August 30, 2017, ASMI initiated an arbitration with the American Arbitration Association against Hitachi Kokusai for breach of the license agreement between the parties. At this point of time it is unpredictable when the arbitration will be completed. Following the expiration of the parties’ patent license agreement, ASMI filed, on December 1, 2017, a suit for patent infringement against Hitachi Kokusai and its US subsidiary in the US District Court for the Northern District of California. ASMI has asserted infringement of three of its patents and is seeking both an injunction and monetary damages. Hitachi Kokusai subsequently filed suit on December 1, 2017 for alleged patent infringement against ASMI in the US District Court for the Northern District of California. Hitachi Kokusai has asserted seven patents and also seeks an injunction and monetary damages. No specific monetary amount has been requested to date. Thereafter, on February 20, 2018, Hitachi Kokusai initiated litigation in the District of Oregon asserting four patents against ASMI. ASMI is evaluating the allegations in the Oregon action. ASMI will vigorously defend its position in each suit asserted by or against Hitachi Kokusai. Litigation concerning intellectual property rights is complex and usually takes a protracted period of time. Therefore in connection with these lawsuits ASMI may incur substantial legal fees and costs, and it is not certain that ASMI will prevail in the suits. If ASMI would not be successful in its suits as plaintiff or as defendant, then the potential outcomes may include, without limitation, payment of significant monetary damages, injunctive relief prohibiting sales in the USA, and/or settlement involving significant costs. At this stage it is not possible to predict the outcome of the above mentioned suits, or whether other suits will be started by Hitachi Kokusai. The final outcome could potentially have a material adverse effect on our business, results and financial condition;
- Our operations are subject to many laws and regulations wherever we operate. To the extent such regulations or directives apply to our business throughout the world, such legislation may adversely affect our business. As with other companies engaged in similar activities, we face inherent risks of environmental liability in our current and historical manufacturing, R&D activities, and operations. Accordingly, costs and regulatory fines associated with such future environmental compliance or remediation obligations could adversely affect our business. We seek to mitigate these risks through preventative and protective practices; and
- Changes in taxation could affect our future profitability.
RISKS RELATED TO OUR INVESTMENT IN ASM PACIFIC TECHNOLOGY
- A significant portion of our total assets is composed of our interest in ASMPT. Prior to March 2013, we owned approximately 52% of the outstanding equity of ASMPT, and the assets and operating results of ASMPT were reported by us on a consolidated basis. On March 15, 2013, we disposed of a 12% stake in ASMPT, which reduced our ownership to approximately 40% of the outstanding equity. As a result of this, ASMPT ceased to be a consolidated subsidiary as of that date and our pro rata interest in the net earnings of ASMPT is reported in our Consolidated Statement of Profit or Loss. During 2017, we disposed a stake of approximately 14% in ASMPT. As per December 31, 2017, our interest in ASMPT is 25.18%. Although ASMPT operates in the same industry as ASMI, ASMPT addresses a different segment of the industry, which may involve different market dynamics and competitive factors from time to time, as well as different business risks unique to their operations. ASMPT is a public company traded on the Hong Kong Stock Exchange.
The significant risks currently considered relevant, potential consequences, and applicable mitigating measures can be outlined as follows:
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