Omslagen ASML - 51076 1/2/07 18:27 Page 1 Annual Report 2006 2006 A S M L A n n u a l R e p o r t 2 0 0 6 Annual Report 2006 Contents 4 About ASML 5 CEO Message to Our Shareholders 8 Corporate Achievements 10 Report of the Supervisory Board 16 Corporate Governance 33 Information and Investor Relations 34 ASML World Wide Contact Information 37 Form 20-F In this report the expression ‘‘ASML’’ is sometimes used for convenience in contexts where reference is made to ASML Holding N.V. and/or any of its subsidiaries in general. The expression is also used where no useful purpose is served by identifying the particular company or companies. ‘‘Safe Harbor’’ Statement under the U.S. Private Securities Litigation Reform Act of 1995: the matters discussed in this document may include forward-looking statements that are subject to risks and uncertainties including, but not limited to: economic conditions, product demand and semiconductor equipment industry capacity, worldwide demand and manufacturing capacity utilization for semiconductors (the principal product of our customer base), competitive products and pricing, manufacturing efficiencies, new product development, ability to enforce patents, the outcome of intellectual property litigation, availability of raw materials and critical manufacturing equipment, trade environment, and other risks indicated in the risk factors included in ASML’s Annual Report on Form 20-F and other filings with the U.S. Securities and Exchange Commission. Û 2007, ASML Holding N.V. All Rights Reserved About ASML ASML is the world’s leading provider of lithography systems for the semiconductor industry, manufacturing complex machines critical to the production of integrated circuits or chips. ASML technology transfers circuit patterns onto silicon wafers to make integrated circuits. This technology is central to making integrated circuits smaller, faster and cheaper. Our technology is known as optical lithography. ASML systems are called steppers and Step & Scan tools (scanners). They use a photographic process to image nanometric circuit patterns onto a silicon wafer, much like a camera prints an image on film. Most of the major semiconductor manufacturers are ASML customers. We are committed to providing customers with the right technology that is production-ready at the right time. Doing so enables our customers and their customers to sustain their competitive edge. ASML’s largest business focuses on lithography systems for 200- and 300-millimeter diameter wafer manufacturing. The ASML TWINSCANTM lithography system exemplifies our technology leadership. It is the industry’s only dual-stage system that allows exposure of one wafer while simultaneously measuring another wafer. Another example of ASML technology leadership is our immersion lithography system. It replaces the air over the wafer with fluid to enhance focus and shrink circuit dimensions. These technologies mean greater productivity for our customers. ASML Special Applications focuses on solutions for application markets, where it has evolved as the lithography market leader in the Microsystems (Thin Film Head and Microelectromechanical Systems or MEMS) and Compound Semiconductor industry. Our Remarketing Service has developed industry leading expertise to remanufacture and relaunch pre-owned ASML equipment into the market. ASML MaskTools provides innovative mask technologies and software products that extend the limits of optical lithography for chip manufacturing at the 65 nanometer node and beyond. These are optimized for ASML’s advanced scanners, enabling enlarged lithography process windows and higher manufacturing yields. ASML Optics provides precision optical systems for ASML’s advanced scanners. ASML Optics also offers design-to-image solutions, in optical design and manufacturing, cleanroom assembly, systems engineering and metrology for a broad range of commercial applications, serving customers worldwide. ASML operates sales and service in over 60 locations in 14 countries. Research, development and manufacturing facilities are located in Wilton, Connecticut, and Veldhoven, the Netherlands. Corporate headquarters is in Veldhoven. ASML is traded on Euronext Amsterdam and NASDAQ under the symbol ASML. For more information, visit: www.asml.com ASML ANNUAL REPORT 2006 4 CEO Message to Our Shareholders 2006 was another year of great execution at ASML. We further reinforced our leadership in technology, lead time and value of ownership. As a result, market share by revenue grew to 61 percent from 57 percent in 2005, marking our fifth year in a row as market leader, according to SEMI, an independent semiconductor industry organization. ASML also continued to strengthen its potential for significant future growth and profitability. In 2006, ASML sales increased to a record EUR 3.6 billion, up 42 percent versus 2005, showing robust growth in an overall semiconductor lithography equipment market that rose by an estimated 34 percent. Net income set a record in 2006 at EUR 625 million or 17.4 percent of sales, as it doubled versus the previous year. Technology leadership is consolidated In 2006, we shipped the 500th TWINSCANTM system, demonstrating the acceptance of the TWINSCAN platform as the semiconductor industry’s standard for 300-millimeter (mm) lithography. In total, ASML gained seven new customers in 2006, including our eighth customer in Japan where we have shipped six immersion tools. Sixteen of the top 20 semiconductor manufacturers ranked by capital expenditure are now customers of ASML. To date, we have shipped 36 ASML immersion tools, including 23 TWINSCANTM XT:1700i systems, the only available system capable of 45-namometer (nm) volume manufacturing. It positions ASML as the leader in the 45-nm race for 300-mm high volume wafer fabrication. In 2006, we announced the TWINSCAN XT:1900i, the semiconductor industry’s most advanced lithography system. The new XT:1900i will enable volume production for logic devices down to 32-nm and memory devices at 40-nm and below. We now offer customers a full suite of immersion products to satisfy their needs for continuous shrink: the relentless miniaturization of circuit line width that keeps improving the performance of semiconductors while reducing their manufacturing cost. During 2006, we reinforced our leadership in dry lithography, winning market share in i-line (365-nm) technology and continuing to gain share in KrF (248-nm) and ArF (193-nm) technologies. We also shipped the industry’s first two full-field extreme ultra violet (EUV) exposure systems to research and development centers in Albany, New York and Leuven, Belgium. In addition, ASML has three customer orders for EUV pre-production tools for delivery starting in 2009. ASML’s EUV achievements offer a solution for 32-nm circuit line width and below, ensuring the continuation of Moore’s law for years to come. Superior value of ownership While achieving and sustaining technology leadership in semiconductor lithography, ASML systems deliver superior value of ownership for our customers. Delivering value means superior performance with maximum productivity, among other parameters that drive customer production yields. In 2006, high-end ASML systems typically performed at more than 3,000 300-mm wafers per day at customer sites, an increase of 20 percent versus a year ago. With today’s semiconductors being made from as many as 40 layers of circuitry, the unsurpassed productivity of ASML systems is a major driver for reducing cost per wafer and raising customer value of ownership. In 2006, we reduced by about 20 percent our lead time and install time: this is the time from customer order to customer use of manufacturing tools in volume production. It heightens competitiveness for our customers, enabling them to ramp leading edge technology faster and achieve more production flexibility. It also reduces inventory and boosts efficiency gains for ASML, by lowering costs and contributing to cash generation. In the first quarter of 2006, we augmented our manufacturing capacity in Veldhoven, the Netherlands, by reconstructing facilities and introducing a flexible labor shift model. As a result, we have already increased production capacity in existing manufacturing facilities by 25 percent. We have also reinforced our ability to adapt more quickly to semiconductor market cycles, as we ASML ANNUAL REPORT 2006 5 support potential 24-hour, seven days-a-week manufacturing activities with production worker hour-banking, allowing more or fewer production hours on short notice. Maximizing flexibility of our work force has contributed to shortened lead time, a key driver of added value for customers. Reinforcing growth potential In 2006, we increased our research and development (R&D) expenses to EUR 386 million, an increase of 19 percent versus a year ago, as we accelerated new developments and advanced our immersion and EUV technologies. Aggressive R&D investment exemplifies our commitment to innovation and technology leadership. It was also an operating decision made possible by leveraging our outsourcing strategy. This strategy ensures our ability to adapt costs up or down rapidly and efficiently throughout a cycle while making use of leading edge capabilities in our supply chain. We sold 266 lithography systems in 2006 at an average selling price (ASP) of EUR 12.1 million, up from EUR 11.4 a year ago. Rising ASP is measure of the leading productivity of ASML tools, as well as their continued value growth and increased capability for further shrinking of circuit line width. We are encouraged by the needs of our customers as they race toward the newest chip designs and most advanced technology nodes. These needs play on ASML’s strengths in technology and customer support. In December, 2006, ASML and Brion Technologies, Inc. announced an agreement for ASML to acquire privately held Brion, a leading provider of semiconductor design and wafer manufacturing optimization solutions for advanced lithography. Founded in 2002, Brion is a leader in the rapidly growing field of computational lithography. Subject to approval by regulatory authorities, closing is expected in the first quarter 2007. Brion and ASML are leaders in different but highly complementary areas of the semiconductor lithography equipment market. We believe that the acquisition will create significant value for customers as our complementary technologies can enhance further the efficiency of chip manufacturing. Together, we can generate value for customers through faster time to market, better imaging quality and higher yield in wafer manufacturing. Board of Management The Board of Management reiterates the Company’s commitment to good corporate governance. Throughout 2006, managers and employees continued to focus on compliance with existing and new regulations in the Netherlands and the United States. A description of ASML corporate governance appears in this report. In June, 2006, the prestigious King Willem I Prize was awarded to ASML. It is awarded once every two years to one company whose performance defines enterprise in the Netherlands. This award included special recognition for ASML’s commitment to innovation both nationally and internationally. The Board of Management was proud to accept this award on behalf of all ASML employees. Growing success Our successful journey continues thanks to ASML’s people in every part of our organization. Our culture flourishes on commitment to leadership, customer satisfaction and results. ASML ANNUAL REPORT 2006 6 We are encouraged by significant opportunities for growth: developed through a fast-growing overall semiconductor lithography environment and by ASML’s own strengthening. We will continue striving ahead by reinforcing our leadership in technology, lead time and value of ownership. Eric Meurice President, Chief Executive Officer and Chairman of the Board of Management ASML Holding N.V. Veldhoven, January 26, 2007 ASML ANNUAL REPORT 2006 7 Corporate Achievements Customer Focus ) Increased market share by revenue to 61 percent in 2006 from 57 percent in 2005, according to the latest available data reported by Semiconductor Equipment and Materials International (SEMI), an independent industry organization. ASML is market leader for the fifth year in a row, according to SEMI. ) Achieved top customer satisfaction ratings among large suppliers of semiconductor wafer processing equipment, according to VLSI Research, an independent industry research firm. ASML’s ratings surpassed every lithography competitor for the fourth year in a row. ) Shipped the 500th TWINSCANTM system in September, concluding 2006 with an installed base of nearly 3,000 steppers and scanners throughout Asia, Europe and the United States. ASML has more than 275 lithography systems installed featuring 193-nanometer (nm) wavelength technology, including more than 100 TWINSCAN XT:1400 systems. ) Gained seven new customers in 2006 with orders for 200- and 300-millimeter (mm) wafer lithography systems. ) Progressed further in Japan, bringing the total number of customers to eight, and ending 2006 with an installed base of 365-, 248- and 193-nm wavelength lithography systems, including six immersion tools, in 10 locations. Technology Leadership ) Introduced the TWINSCAN XT:1900i, the semiconductor industry’s most advanced lithography system: it extends volume production to the 40-nm line width and below. This new product features the industry’s highest numerical aperture (1.35), the near practical limit for water-based immersion technology. ) Shipped 23 TWINSCAN XT:1700i lithography systems in 2006, bringing to 36 the total number of ASML immersion systems shipped as of year-end 2006. The XT:1700i is the only available system capable of volume manufacturing at the 45-nm line width. ) Shipped the industry’s first full-field extreme ultra violet (EUV) exposure systems to research and development centers in Albany, New York and Leuven, Belgium. ASML has three customer orders for EUV pre-production tools for delivery starting in 2009. ) Continued to gain market share in 300-mm volume manufacturing by shipping new and improved 365- and 248-nm systems. ASML further strengthened its position in mid- and non-critical chip layers by adding three new customers using the full suite of ASML products, delivering lower cost of ownership, increased productivity and improved performance. ) Increased the average selling price (ASP) of new lithography systems sold to EUR 14.0 million in 2006 from EUR 13.5 million in 2005. Operational Excellence ) Expanded manufacturing capacity in 2006 by 25 percent in Veldhoven, the Netherlands, through strengthened supply chain management and a new flexible labor model. It not only enables ASML to adapt more quickly to market cycles but also in 2006 the company reduced lead times by about 20 percent on volume manufacturing tools. ) Increased net sales in 2006 to a record EUR 3.6 billion, an increase of 42 percent versus 2005, and achieved a record gross margin of 40.6 percent for 2006, an increase of 2.1 percentage points year-on-year. ) Generated record operating income in 2006 of 24.2 percent of net sales, an increase of 6.4 percentage points versus 2005, and delivered record net income in 2006 of 17.4 percent of net sales, an increase of 5.1 percentage points versus 2005. ) Boosted research and development (R&D) spending during 2006 to EUR 386 million net of credit, an increase of 19 percent compared with 2005. This investment sustains ASML’s technology leadership and enables growth while supporting advanced immersion and EUV systems developments, and accelerating new developments. ) Contained selling, general and administrative (SG&A) expenses in 2006 to 5.7 percent of net sales, compared with 8.0 percent of net sales in 2005. SG&A expenses increased in 2006 by two percent while 2006 net sales grew by 42 percent. ) Generated EUR 477 million in cash from operations in 2006, ending the year with EUR 1.7 billion in cash and equivalents. ) Bought back 8.3 percent of outstanding ordinary shares during 2006. ) Achieved the fastest financial closing of any company with a listing of its shares in the United States when ASML filed its annual report on Form 20-F for the fiscal year ended December 31, 2005 with the U.S. Securities and Exchange Commission (SEC) on January 27, 2006. As the first filer, ASML heightens transparency and operational excellence in its financial reporting. ASML ANNUAL REPORT 2006 8