January 26, 2016 / 5:36 PM / 2 years ago

Fitch Affirms ASML at 'BBB+': Outlook Stable

(The following statement was released by the rating agency) LONDON, January 26 (Fitch) Fitch Ratings has affirmed Dutch technology group ASML Holding N.V.'s (ASML) Long-term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB+'. The Outlook is Stable. The ratings reflect ASML's market-leading position and technological expertise in the manufacture of equipment for the semiconductor market. While the company's single product and segment focus weakens its operating risk profile, this is effectively managed through the maintenance of a flexible business model, R&D focus and a conservative financial policy. The company's investment in leading-edge EUV technology and holistic lithography is coming to fruition. The technology is likely to strengthen ASML's market position and improve its growth profile over the next two to three years. This is providing greater visibility in cash flows and supported by management's confidence in their medium- to long-term business plan; the company has increased its shareholder remuneration with a 50% increase in the company's dividend per share for 2015. KEY RATING DRIVERS Market and Technology Leadership ASML is the leading provider of lithography systems that are used in the production of semiconductors, which are embedded into almost all electronic devices from mobile phones and computers to cars. The production of lithography machines is a highly technical, niche area with significant barriers to entry created by know-how, relationships, track record and investment requirements. Over the past 30 years, the industry has consolidated from eight major players to three - ASML, Nikon and Canon. During this period, ASML has emerged as a market leader with over 80% market share of revenues. Investments in EUV technology, holistic lithography and product improvement roadmaps for existing DUV technology are likely to extend its lead. EUV Growth Likely to Quicken EUV is a technology that ASML has been developing over the past decade. Machines based on the new technology will simplify the process of manufacturing high-end semiconductors while reducing cost and cycle time for its customers. This is achieved through printing smaller features on to a chip while increasing capacity and capability, which in turn spurs innovation and growth in end-customer applications. The technology is in its final stage of development with ASML needing to make typical new technology improvements to meet customer productivity and availability targets. Leading semiconductor manufacturers are targeting volume production using EUV machines from 2018 and 2019. ASML expects to ship six to seven EUV machines during 2016 with the number expected to double in 2017 and 2018 each. Robust and Flexible Business Model ASML manages two major risks within its business. The first is the cyclical exposure of its revenues, which are significantly more volatile than changes in global GDP, as semiconductor manufacturers are able to either delay orders or suspend expenditure at fairly short notice. The second is technology and execution risk, which the company aims to address by maintaining R&D spend through economic cycles in line with its long-term development plan. ASML further manages these risks through deploying a flexible business model and maintaining a conservative financial policy. ASML achieves cost flexibility by focusing on design and systems integration and outsourcing the supply of major components (accounting for approximately 80% of cost of goods) and maintaining approximately 20% of employees on temporary contracts. This enables the company to leverage best-in-class expertise while sharing risk and retaining the flexibility to reduce costs in a downturn if needed. Conservative Financial Policy ASML's financial policy targets a gross cash buffer of between EUR2bn and EUR2.5bn. This is supported by an undrawn revolving credit facility (RCF) of EUR700m and provides the company with strong liquidity. ASML aims to return excess cash to shareholders via dividends and share buybacks. Greater visibility in cash flows on the back of new product development, market evolution and confidence in the company's medium- to long-term business plan has led management to increase the dividend declared for 2015 to EUR1.05 per share, from EUR0.7 in 2014 and announce a share buyback programme of EUR1.5bn over 2016 and 2017, which includes a remaining EUR500m from the prior programme. Despite the current increase in dividends and share buyback programme our assessment indicates ASML has the ability to maintain a strong net cash position until end-2017. ASML's dividend pay-out ratio remains fairly low (2015: 33%) and, combined with the significant use of share buybacks as a means of shareholder remuneration, helps maintain financial flexibility while providing scope for stable dividend growth. Product and Customer Concentration ASML's focus on one cyclically exposed, technology-driven product segment, with high R&D costs (2015: EUR1.1bn) and supplying to few large semiconductor manufacturers weakens the company's operating risk profile and is a constraint on the rating. There are a number of intrinsic factors that help to offset some of the concentration risk. Along with the company's business model these relate to the company's revenue mix, improving stability from end- customer consolidation and customer shareholdings. ASML's field options and service sales have grown strongly to account for 33% of revenues for 2015, up from 11% since 2007. While these revenues provide some diversification, they remain tied to the sales of ASML's core lithography systems. The revenues have, however, demonstrated resilience in down cycles, for example, in 2009 they declined 4% YoY while net systems sales declined 53% over the same period. Further areas of support are provided from increasing diversification in end applications such as wearables and biomedical devices and opposing revenue cycles from ASML's customers who manufacture semi-conductors for either memory or logic processing reasons. At the shareholder level, two of ASML's key customers Intel and Samsung have taken equity stakes in the company and along with TSMC, agree to make contributions to R&D costs. By aligning interests, all parties have achieved a strategic partnership structure that increases their interdependence, sharing of R&D risk and reduces the risk of one party switching. Key Industry Sector ASML's prospects are intrinsically linked to that of the semiconductor industry. While cyclicality will continue to be a feature, the medium- to long-term trend is likely to be robust given that semiconductors are central to almost all electronic equipment and devices and their innovation. Growth for ASML will be driven by an increase in electronic equipment and device sales, increased need in lithography intensity for greater semiconductor shrink, and as the proportion of silicon content in electronic devices rises. Current growth drivers include smartphones, tablets, computing power, cloud computing, connected devices, wearables, digital memory and FTTx infrastructure, among others. EUV will help to sustain this into the medium- to long-term. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Revenue growth of 5% in 2016, driven by a 10% growth in field option and services. - Stable R&D expenditure at EUR1.1bn in 2016. - EBITDA margin of 27% in 2016. - Stable capital expenditure to sales at 6% in 2016. - Cash dividend increase of 10% in 2016, in addition to ASML's 50% increase in 2015. - Share buybacks of EUR1bn in 2016 and EUR500m in 2017. RATING SENSITIVITIES Negative: Future developments that may, individually or collectively, lead to negative rating action include: - Operating margins materially outside 10%-15% in downturns and 25%-30% at the peak of up-cycles. Fitch, however, recognises that operating losses may be incurred during extreme cyclical contractions. - Gross cash consistently below EUR1.5bn (2015: EUR3.4bn). The company's public commitment is to a strong cash balance. - Major loss of market share. Revenue market share is currently estimated at around 75%-80% (up from 65% in 2009). A decline to 55%, albeit still strong, would signal a rapid shift in market position and one that would likely reflect a sustained negative trend. Positive rating action is unlikely in the near term. The unique nature of ASML's business, including the cyclicality in its customers' end- markets, technology migrations that drive the need for high R&D investment and its limited diversification, are a constraint on the ratings. Contact: Principal Analyst Jonathan Levy Analyst +44 20 3530 1701 Supervisory Analyst Tajesh Tailor Director +44 20 3530 1726 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Damien Chew, CFA Senior Director +44 20 3530 1424 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=998403 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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