asml holding n.v. · pdf filemoody's investors service corporates detailed rating...

CORPORATES

CREDIT OPINION29 June 2017

Update

RATINGS

ASML Holding N.V.Domicile Netherlands

Long Term Rating Baa1

Type Senior Unsecured -Dom Curr

Outlook Stable

Please see the ratings section at the end of this reportfor more information. The ratings and outlook shownreflect information as of the publication date.

Contacts

Martin Kohlhase 49-69-70730-719VP-Sr Credit [email protected]

Matthias Hellstern 49-69-70730-745MD-Corporate [email protected]

ASML Holding N.V.Update to Key Credit Considerations

Summary Rating RationaleASML's Baa1 senior unsecured rating reflects the company's highly dominant marketposition in the global market for lithography equipment. Over recent years ASML's marketshare has strengthened owing to the company's cutting-edge technology and the growingimportance of its contribution to the semiconductor manufacturing process. The strengthof ASML's market share is reinforced by its strong relationships and partnerships with keycustomers including the alignment of its product roadmap with customers' demands.ASML's technological leadership is evidenced by high adjusted EBITDA margins, which haveconsistently been between 25% and 33% over the last five years.

In 2016 ASML acquired Taiwan-based Hermes Microvision, Inc. (“HMI”, unrated) andannounced an investment in a 24.9% minority stake in Carl Zeiss SMT. The investmentin Carl Zeiss SMT is expected to close in Q2 2017. Both transactions strengthened ASML'smarket position, but led to an increase of ASML´s leverage to 1.6x per December 2016,compared to its adjusted debt/EBITDA of 0.6x as at December 2015. We expect ASML todigest both acquisitions quite swiftly, noting strong demand fundamentals for lithographyequipment. We also expect that ASML improves leverage towards 1.0x-1.2x in the next 12-18months.

ASML's rating is also underpinned by solid FCF generation throughout the cycle andconservative financial policy. The company has publicly committed to maintain a cashbalance of above €2.0 billion. This was evidenced by ASML pausing its share buybackprogram (with total consideration of €1.5 billion within the 2016-2017 timeframe) in thelight of the acquisition of HMI and the investment in Carl Zeiss SMT. We expect that thecompany will continue to balance cash returns to shareholders with the business outlook andits cash flow generation to ensure it retains this minimum cash balance.

ASML's sizeable liquidity buffer (cash & liquid short term investments of €2.8 billion inaddition to the €700 million unused revolving credit facility as of Q1-17 and pro-forma theinvestment in Carl Zeiss SMT) as well as its flexible cost base, provide the company with acushion to manage demand volatility for lithography equipment. However, ASML's customerscan moderate their investment spending in advance of cyclical downturns, often at shortnotice. Due to strong demand fundamentals of the semiconductor industry, we do notexpect sharp declines in future performance to be prolonged as we expect customers to deferorders and shipments rather than sustainably reduce their investments.

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MOODY'S INVESTORS SERVICE CORPORATES

Credit Strengths

» Highly dominant global market position in lithography systems, critical for semiconductor manufacturing process

» Strong market dynamics and order backlog should support future earnings and free cash flow

» Proven commitment to prudent financial policies is expected to continue to support credit metrics

Credit Challenges

» High volatility to some degree mitigated by operational flexibility

» Timing of EUV adoption becoming evident, but high technological risk remains

Rating OutlookThe stable outlook reflects ASML's adequate positioning within its rating and the expectation ASML will continue to perform well inthe short to medium-term on the back of strong demand fundamentals for lithography equipment. Together with management'sconservative financial policy, we expect this to support positive free cash flow generation and allow the company to maintain solidcredit metrics.

Factors that Could Lead to an UpgradeAn upgrade would require the company to make further headway in its product roadmap, including achieving the productivity neededfor full scale volume production of its EUV systems (namely the exposure of 1500 wafers per day). This would reinforce the importanceof lithography and ASML's key role in the semiconductor manufacturing process.

We would also expect further diversification of the company's product range, including an increased metrology presence but also anincrease in net recurring service revenues as a proportion of ASML's sales. We believe this should allow for reduced volatility in theevent of a downturn.

Factors that Could Lead to a DowngradeNegative rating action is likely in the event the company relaxes its cost discipline and capital investment and/or if successive quarterlymaterial negative free cash flows (including dividend payments) lead to a reduction in cash balances to below €2.0 billion or adeterioration in adjusted gross leverage, sustainably in excess of 2.0x.

Evidence that the company is losing market share, or it becomes unlikely EUV will be commercially viable and at risk from alternativetechnologies, may also pressure the rating.

Key Indicators

Exhibit 1

ASML’s Key Credit Metrics

12/31/2013 12/31/2014 12/31/2015 12/31/2016 4/2/2017(L)

Revenue (USD Billion) $7.0 $7.8 $7.0 $7.5 $8.1

Free Cash Flow (USD Billion) 82.8% 52.6% 149.9% 99.1% 82.0%

EBITDA Margin 25.4% 27.3% 30.5% 31.4% 33.3%

Debt / EBITDA 0.9x 0.7x 0.6x 1.6x 1.3x

EBIT / Interest Expense 37.8x 53.5x 51.4x 41.3x 38.9x

Cash / Debt 259.5% 237.8% 293.5% 119.7% 123.3%

FCF / Debt 53.7% 34.2% 116.3% 26.4% 24.0%

[1] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestituresSource: Moody's Financial Metrics™

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 29 June 2017 ASML Holding N.V.: Update to Key Credit Considerations


Detailed Rating ConsiderationsHIGHLY DOMINANT GLOBAL MARKET POSITION IN LITHOGRAPHY SYSTEMS, CRITICAL FOR SEMICONDUCTOR MANUFACTURINGPROCESS

ASML dominates the global market for lithography equipment used in the semiconductor industry, with an overall market shareof approximately 80%. This market share has strengthened over the past few years, and is expected to remain strong owing to thecompany's cutting-edge technology. ASML has progressively outpaced the company's remaining sizeable competitors. Both NikonCorporation (unrated) and Canon Inc - (Aa1 stable), lack the necessary volume in lithography to invest in R&D to the same degree asASML. Market shares in respect of the company's more technologically-advanced ArF Immersion business are approximately 90%.

Currently there are limited viable alternatives to ASML's high-end lithography solutions, capable of providing similar shrink capabilityand yields. The company is a sole supplier of the next generation technology – EUV (extreme ultraviolet) Lithography, which facilitatesthe production of more complex chips, but equally, reduces customers' unit production costs, reinforcing continuation of Moore´s law.ASML's customers, such as Intel Corporation (A1, stable), Samsung Electronics Co., Ltd. (A1, stable) and TSMC Global Ltd. (A1, stable)have contributed around €1.4 billion in cash to ASML's research and development in the framework of the Customer Co-InvestmentProgram (CCIP) over the last five years and continue to invest in the entire ecosystem involved in building the EUV infrastructure.

Moreover, we favorably view the company's broadening product offering into metrology tools. These generate higher-margins dueto the higher software content and their enhancement of customer yields. An acquisition of Taiwan-based Hermes Microvision, Inc.(HMI) in 2016 has strengthened ASML's metrology offering. ASML uses HMI’s E-beam metrology solutions as an add-on to its existingsolutions, which allows ASML’s customers to improve process control during the lithography process and hence increase manufacturingyields. This has further strengthened ASML’s position within the semiconductor supply chain, especially as the semiconductor industrymoves to smaller technology nodes sub 10nm and three dimensional integrated circuits, requiring tighter process control during themanufacturing process.

STRONG MARKET DYNAMICS AND ORDER BACKLOG SHOULD SUPPORT FUTURE EARNINGS AND FREE CASH FLOW

Near-term prospects have improved for ASML compared to 2015 as semiconductor manufacturers accelerated their investment inhigh-end production capacity to meet the growth in chip demand. In 2016 ASML generated sales of €6.8bn, an increase of 8% vs. lastyear. Logic sales increased in 2016 driven by the ramp of the 10nm logic node, while memory sales seen strong momentum in Q4-2016and Q1-2017 driven DRAM capacity expansion. The company´s order backlog stood at record high at €4.5 billion as of Q1-2017. Givenpositive momentum in logic demand, recovery in memory and strong order backlog we expect solid growth to continue through 2017.

Service and field option sales grew by around 8% in 2016 vs. 2015, driven by continued demand for Holistic Lithography options, high-value system upgrades and growing installed base. We view positively the growth of the service and field options business and anincreased share of this segment in the product mix, which generates higher margins and enhances recurring revenues.

Exhibit 2

Sales by segment

0

1000

2000

3000

4000

5000

6000

7000

8000

2012 2013 2014 2015 2016 LTM

, m

Service & Field Options Foundry IDM Memory

Source: Company Financials, Moody's



As of Q1-2017 EUV represented more than half of total backlog and the contribution from EUV systems is set to gain relevancethroughout 2017 and beyond. Given initially low profitability margins for EUV systems, we expect to see some deterioration in thecompany´s gross margin in 2017. Nevertheless, we expect ASML to continue to generate solid free cash flow in the next 12-18 monthsgiven currently strong growth dynamics of the semiconductor industry and ASML´s customers' need to continually upgrade theirsystems and capabilities.

HIGH VOLATILITY TO SOME DEGREE MITIGATED BY OPERATIONAL FLEXIBILITY

ASML's rating incorporates the high volatility of lithography equipment demand. In 2009 net sales declined by around 46% comparedwith the previous peak of 2007, driving a sharp fall in margins to negative 10% and negative free cash flows (including dividends). Thiswas despite efforts to reduce capex and stricter working capital management.

Exhibit 3

ASML's revenue growth vs. semiconductor equipment market growth

42%

5%

-22%

-46%

182%

25%

-16%

11% 12% 7% 8%9% 6%

-31%-46%

149%

10%

-15% -14%

18%

-3%

13%

-100%

-50%

0%

50%

100%

150%

200%

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

ASML revenue growth

Semiconductor equipment market growth

Source: Company Financials, SEMI

Nevertheless, ASML's now more flexible cost structure should allow the company to more easily absorb a pronounced setback inrevenues on operating performance. ASML is expected to remain breakeven on an operating basis, even if its revenues halved comparedto 2016. A substantial part of its cost of goods sold (c.80%) as well as R&D, is outsourced. The company also operates flexiblepersonnel schemes. In addition, strong relationships with major suppliers, and the specialized nature of ASML's requirements in terms oflasers and lenses, allow it to share the burden of business volatility down the value chain.

ASML's service revenues are also expected to further increase over time, particularly in view of the company's increase into moretechnologically advanced systems. Of the €2.4 billion of net service and field option revenues as of LTM ended April 2017 thesubstantial part relates to recurring service contracts.

PROVEN COMMITMENT TO PRUDENT FINANCIAL POLICIES IS EXPECTED TO CONTINUE TO SUPPORT STRONG CREDIT METRICS

ASML has consistently demonstrated its commitment to maintaining conservative financial policies. Gross leverage has beensustainably below 1.0x since 2010 and the company has consistently been in a position of net cash, even during 2009. However, thedebt raised to finance a portion of the acquisition of HMI and in a 24.9% minority stake at Carl Zeiss SMT increased ASML's adjustedleverage to 1.6x at December 2016, compared to its adjusted debt/EBITDA of 0.6x as at December 2015. Nevertheless, we expectASML to digest both acquisitions quite swiftly, noting strong demand fundamentals for lithography equipment, and expect that thesewill enable the company to improve leverage towards 1.0x-1.2x in the next 12-18 months. In the context of ASML’s global marketpositions, its lean operational structure and solid FCF generation throughout the cycle, we believe this capital structure continues toposition ASML adequately within the Baa1 rating.



Exhibit 4

ASML's Adjusted Leverage and FCF/Debt

-50%

0%

50%

100%

150%

200%

250%

-5.0x

5.0x

10.0x

15.0x

20.0x

25.0x

2008 2009 2010 2011 2012 2013 2014 2015 2016 LTM 12-18 month

forward view

Debt / EBITDA FCF / Debt


The company is committed to its capital allocation policy, namely the commitment to maintain a gross cash balance of around€2.0-€2.5 billion, based on its current market share and expected sales levels at the peak of the cycle. This was evidenced by ASMLpausing its the share buyback program (with total consideration of €1.5 billion within the 2016-2017 timeframe) in the light of theacquisition of HMI and the investment in Carl Zeiss SMT. We also note a degree of conservatism in the funding mix of the HMIacquisition, including use of equity and cash on balance sheet. We expect share buybacks will continue to represent a key feature ofASML's financial strategy, but expect the company will continue to balance shareholder returns within the context of FCF generation,its liquidity targets, and the current business outlook, as it has done in the past.

Exhibit 5

Historical Shareholder Returns have been Balanced against Operating Cash Flows and Liquidity Position

-1000

-500

0

500

1000

1500

2000

2500

3000

3500

4000

4500

2008 2009 2010 2011 2012 2013 2014 2015 2016 LTM LTM PF

Cash & Cash Equivalents Free Cash Flow - Share buybacks


TIMING OF EUV ADOPTION BECOMING EVIDENT, BUT HIGH TECHNOLOGICAL RISK REMAINS

EUV is expected to reduce the lithography cost of critical layers, a successful adoption of EUV into volume production will solidifyASML's already dominant competitive position but most importantly reinforce the continuation of Moore's law.

During 2016, ASML has made good progress on technical achievements of the EUV tool to meet basic specifications of its customers.Currently the company aims to achieve 125-wafer per hour productivity and 90% availability. The adoption of EUV is becoming moreevident, as EUV represents more than half of total backlog and the contribution from EUV systems is set to gain relevance throughout2017 and beyond. However, technological challenges still remain, given the complexity of the technology and continued substantialR&D required, not only by ASML but by the entire ecosystem involved in building the EUV infrastructure. ASML´s customers, such asIntel Corporation (A1, stable), Samsung Electronics Co., Ltd. (A1, stable) and TSMC Global Ltd. (A1, stable), largest by capital equipmentspending in the semiconductor industry, are leading in terms of EUV production, but all have different roadmaps and timing for



roadmaps on the execution of EUV technology. Currently it is expected that EUV will be introduced to volume production at the 7nmnode, later than originally anticipated.

Liquidity AnalysisASML's healthy liquidity cushion represents a key credit strength. As at Q1-17 ASML had cash and cash equivalents of €3.8 billion whichincludes liquid short-term investments in respect of deposits and low risk money market funds (tenors of greater than 3 months butless than 1 year). It also has full access to a €700 million committed credit facility due November 2021, with one remaining one-yearextension option and no financial covenants. The approx. €2.8 billion cash balance (as of Q1-2017, pro-forma the investment of CarlZeiss SMT), is considered more than sufficient to accommodate the dividend payment of around €515 million as well as working capitaland capital expenditure needs.

ProfileASML Holding N.V. ("ASML", Baa1 stable) is the world's leading provider of lithography systems for the semiconductor industry,manufacturing complex machines that are critical to the cutting-edge production of integrated circuits. Headquartered in Veldhoven,the Netherlands, ASML generated revenues of €6.8 billion ($7.5 billion) in 2016.

Rating Methodology and Scorecard FactorsRATING METHODOLOGY

The principal methodology used in this rating was the Global Semiconductor Industry Methodology published in December 2015. Thegrid-implied rating based on financials for twelve month period ended April 2017 implies a grid indicated rating of Baa1 and the forwardview, indicates an A3 rating. The one notch differential with ASML's Baa1 rating is due to the company's product, customer and supplierconcentration and the still relatively high technology risk regarding EUV as well as the high demand volatility compared to other peersrated under the Global Semiconductor Industry Methodology, factors which are not captured in the methodology grid.

Exhibit 6

Applying Global Semiconductor Methodology to ASML

Semiconductor Industry Grid [1][2]

Factor 1 : Scale (20%) Measure Score Measure Score

a) Revenue (USD Billion) $8.1 Baa $8.9 - $9 Baa

b) Free Cash Flow (USD Billion) $0.8 Baa $0.8 - $1.4 A

Factor 2 : Business Profile (20%)

a) Business Profile Baa Baa Baa Baa

Factor 3 : Profitability(5%)

a) EBITDA Margin 33.3% A 30% - 33% A

Factor 4 : Leverage & Coverage (40%)

a) Debt / EBITDA 1.3x A 1x - 1.2x A

b) EBIT / Interest Expense 38.9x Aa 38x - 42x Aa

c) Cash / Debt 123.3% Baa 100% - 150% Baa

d) FCF / Debt 24.0% Baa 25% - 50% A

Factor 5 : Financial Policy (15%)

a) Financial Policy A A A A

Rating:

a) Indicated Rating from Grid Baa1 A3

b) Actual Rating Assigned Baa1

Current

LTM 4/2/2017

Moody's 12-18 Month Forward View

As of 6/11/2017 [3]

[1] All ratios are based on 'Adjusted' financial data and incorporate Moody's Global Standard Adjustments for Non-Financial Corporations.[2] As of 4/2/2017(L)[3] This represents Moody's forward view; not the view of the issuer; and unless noted in the text, does not incorporate significant acquisitions and divestitures.Source: Moody’s Financial Metrics™



Ratings

Exhibit 7Category Moody's RatingASML HOLDING N.V.

Outlook StableSenior Unsecured -Dom Curr Baa1

Source: Moody's Investors Service



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