Edgar Filing: ASML HOLDING NV

Document

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, 2017

Commission file number 001-33463

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)

Skip Miller

Telephone: +1 480 235 0934

E-mail: skip.miller@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.

427,393,592 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 ( ) Emerging growth company ( )

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ( )

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 INTEGRATED REPORT 2017

Contents



1	Message from our CEO
2	Highlights
4	Management Board Report
5	Board of Management
7	The Role of Lithography
8	Our Company
10	Industry Trends and Opportunities
11	Business Strategy
14	Markets and Products
16	Products and Technology
23	People
31	Partners
37	Operations
41	Financial Performance
45	Trend Information
45	Business Risk and Continuity
48	Risk Factors
55	Materiality Assessment
58	Business Ethics and Compliance
60	Supervisory Board Report
61	Supervisory Board
63	Introduction
63	Activities in 2017
64	Meetings and Attendance
64	Composition, Diversity and Independence
65	Evaluation
65	Supervisory Board Committees
67	Remuneration of the Supervisory Board
67	A Word of Thanks to ASML Employees
68	Remuneration Report
74	Corporate Governance
75	General
75	Board of Management
77	Supervisory Board
81	Shareholders and General Meeting of Shareholders
83	The Audit of Financial Reporting and the Position of the Internal and External Auditor Function
83	Other Information on Governance
88	Compliance with the Corporate Governance Code
90	Consolidated Financial Statements
91	Consolidated Statements of Operations
92	Consolidated Statements of Comprehensive Income
93	Consolidated Balance Sheets
94	Consolidated Statements of Shareholders’ Equity
96	Consolidated Statements of Cash Flows
98	Notes to the Consolidated Financial Statements
143	Report of Independent Registered Public Accounting Firm
146	Non-Financial Statements
147	About the Non-financial Information
150	Non-financial Indicators
155	Stakeholder Engagement
156	Assurance Report of the Independent Auditor

ASML INTEGRATED REPORT 2017



158	Other Appendices
159	Appendix - Board of Management and Supervisory Board Remuneration
163	Appendix - Selected Financial Data
167	Appendix - Results of Operations 2016 Compared to 2015
169	Appendix - Principal Accountant Fees and Services
170	Appendix - Property, Plant and Equipment
171	Appendix - Taxation
176	Appendix - Financing and Capital Return Policy
177	Appendix - Competition
178	Appendix - Government Regulation
179	Appendix - Offer and Listing Details
180	Appendix - Material Contracts
181	Appendix - Exchange Controls
182	Appendix - Documents on Display
183	Appendix - Controls and Procedures
184	Appendix - Organizational Structure
185	Appendix - Information and Investor Relations
186	Appendix - ASML Worldwide Contact Information
187	Appendix - Reference Table 20-F
192	Definitions
200	Exhibit Index

A definition or explanation of abbreviations, technical terms and other terms used throughout this Integrated Report that require explanation can be found in the chapter Definitions.

This report comprises regulated information within the meaning of articles 1:1 and 5:25c of the Dutch Financial Markets Supervision Act (Wet op het Financieel Toezicht).

On May 30, 2013, we acquired 100 percent of the issued share capital of Cymer. Financial information presented in our Integrated Report includes Cymer from May 30, 2013 onwards.

On November 22, 2016, we acquired 100 percent of the issued share capital of HMI. Financial information presented in our Integrated Report includes HMI from November 22, 2016 onwards.

On June 29, 2017, we completed the acquisition of a 24.9 percent interest in Carl Zeiss SMT Holding GmbH & Co. KG, which owns 100 percent of the shares in Carl Zeiss SMT GmbH. We record the results from the interest in Carl Zeiss SMT Holding GmbH & Co. KG using a one-quarter time lag as the results are not available in time to record them in our concurrent period.

In this report the name ‘ASML’ is sometimes used for convenience in contexts where reference is made to ASML Holding N.V. and / or any of its subsidiaries and / or any equity method investments, as the context may require. The name is also used where no useful purpose is served by identifying the particular company or companies.

ASML INTEGRATED REPORT 2017

Special Note Regarding Forward-Looking Statements

In addition to historical information, this Integrated Report contains statements relating to our future business and / or results. These statements include certain projections, business trends and other matters 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 Integrated Report and include statements with respect to our expected trends and outlook, expected semiconductor industry trends, including incentive for continued innovation and that ASML products enable future industry growth, expected strong business growth and being on our way to achieve 2020 ambitions, including opportunity, outlook and expected customer demand in specified market segments including memory, logic and foundry, systems backlog and bookings, expected financial results, including expected sales levels and profitability, expected EUV revenue, gross margin, SG&A and R&D expenses, other income, tax rate, capital expenditures and repayment obligations, annual revenue opportunity and target EPS by 2020 with significant further growth potential into the next decade, expected impact of adoption of new accounting standards, expected growth in profitability and sales in 2018, expected lower attrition rate in the near future, anticipated impact of US tax reform legislation, customer, partner and industry roadmaps, including shrink roadmaps and continued semiconductor process scaling, the development of High-NA and the expected production of higher performance microchips at lower costs, the expected benefits of the acquisition of HMI and of an indirect interest in Carl Zeiss SMT GmbH, including expected contribution to ASML's results, further development of our EUV lithography chip-making systems and extension of EUV beyond the next decade, expected multi e-beam innovation and the provision of e-beam metrology and inspection capability and its effect on Holistic Lithography solutions, including the introduction of a new class of pattern fidelity control and the improvement of customers’ control strategy, statements with respect to DUV competitiveness, strategy alignment with international standards such as United Nations Sustainable Development Goals, expected growth of our service business, expected shipments of systems, the planned shipment of advance products to domestic Chinese customers in 2018, planned shipments of EUV tools in 2018, productivity of our tools and systems, including EUV productivity targets and goals, and system performance, expected industry adoption of EUV and statements with respect to the intent of customers to insert EUV into volume manufacturing, supply chain and service capabilities, the development of EUV technology and EUV industrialization, the number and timing of EUV systems expected to be shipped, expected use of EUV systems in high-volume manufacturing and revenue recognition, expected industry trends and expected trends and opportunities in the business environment, including the expected continuation of Moore's law, dividend policy, our proposed dividend and intention to repurchase and cancel shares, including statements with respect to the share repurchase plan for 2018-2019.

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 Management Board Report - Risk Factors. These forward-looking statements are made only as of the date of this Integrated Report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise.

ASML INTEGRATED REPORT 2017

Message from our CEO

Dear stakeholders,

Our business has never been more exciting than it is today. Adoption of semiconductors in an ever expanding application space has created a more connected world. Continued advancements in electronics are opening new markets in car navigation, industrial automation, personal health and artificial intelligence that offer tremendous growth opportunities in the future. All these exciting new growth opportunities are enabled by the semiconductor industry’s unwavering commitment to innovation. Profits generated by products and services built on semiconductor innovation total almost USD 300 billion every year. This helps fuel a powerful incentive for continued innovation in the years ahead and drives our customers’ appetite for our cutting-edge technology solutions.

ASML enables our customers to produce the most advanced and cost effective semiconductors by delivering superior integrated patterning solutions. Our products help create ever-smaller and more powerful chips that provide significant value and enable future industry growth. Our strategic priorities around EUV, DUV and Holistic Lithography are designed to support this objective and our roadmap stretches well into the next decade. You can read more about this in this Integrated Report, combining for the first time what were formerly three separate reports. ¹

In 2017 we made significant progress on our EUV technology. We have not only demonstrated all key system performance specifications on the scanner, but significant improvements were also made in the ecosystem. EUV is now ready to enter volume production and enable cost effective scaling well into the next decade. While our customers are preparing for a future with EUV, we also continue to serve our customers with innovations in DUV scanners and Holistic Lithography solutions. We introduced new DUV systems with improved performance to meet our customers’ technology requirements. In Holistic Lithography, where we bring together scanner, metrology and software, we continue to provide high value integrated solutions, including shipment of our first ASML-HMI jointly developed product less than one year after closing the HMI acquisition.

As we execute our product roadmap and deliver solutions to meet our customers’ roadmap, we continue to see strong business growth and are well on our way to achieve our stated 2020 ambitions. Our net sales grew to a record EUR 9.1 billion over 2017, as our net income rose to EUR 2.1 billion. To secure future innovation, we created about 2,500 jobs throughout our company and increased our R&D expenses by EUR 153.9 million to EUR 1,259.7 million.

Delivering great products is entirely dependent on good people, strong processes and a sustainable business model. We will continue to invest in growing our pool of talented people by helping our employees develop their skills, as well as by providing an inspiring and safe place for them to work. In addition, we will continue to support the communities we operate in, by building stronger local innovation eco-systems. We do this through our technology promotion program, our support of universities, research institutes and start-ups as well as by supporting the ASML Foundation’s global educational projects. Our business strategy seeks to balance the interests of our customers, employees, suppliers, shareholders and society. You can read more about our strategic and Corporate Priorities and how we make this work in this Integrated Report.

We are also working to align our strategy with the United Nations Sustainable Development Goals, which are aimed at ending poverty and protecting the planet. As an example, we are working towards using green electricity throughout our operations. We have identified the five most relevant United Nations Sustainable Development Goals we can contribute to and are excited that we are making good progress towards our sustainability objectives. Our sustainability efforts are recognized by ASML’s inclusion in the Dow Jones Sustainability World Index for the first time in 2017.

After adding strategic acquisitions in recent years to secure or complement our product offerings, we are well placed to realize our future potential. We continue to operate in a flexible way with suppliers and temporary staff and work closely with them to ensure that risks and benefits are shared and are fully transparent.

We are very aware that our success comes from sharing knowledge and constantly building on innovation and we would like to thank our customers, suppliers, peers and employees for their trust and commitment. We look forward to many more successful years of working together towards realizing our vision of a world in which semiconductor technology helps tackle society’s toughest challenges.

Peter Wennink

President and Chief Executive Officer

Dated: February 6, 2018


1.	We publish two versions of the Integrated Report: one version containing Financial Statements based on US GAAP and one version containing Financial Statements based on IFRS-EU.

ASML INTEGRATED REPORT 2017 1

ASML Integrated Report 2017

ASML INTEGRATED REPORT 2017 3

All information disclosed in this Management Board Report is provided as a supplement to, and should be read in conjunction with, our Corporate Governance and Consolidated Financial Statements.

Board of Management



	Peter T.F.M. Wennink (1957) Term expires 2018 President, Chief Executive Officer and Chairman of the Board of Management
l	Mr. Wennink joined ASML in 1999 and was appointed as Executive Vice President, CFO and member of our BoM per the 1999 AGM. Mr. Wennink was appointed as President and CEO in 2013.
l	Mr. Wennink has an extensive background in finance and accounting. Prior to his employment with ASML, Mr. Wennink worked as a partner at Deloitte Accountants B.V., specializing in the high technology industry with an emphasis on the semiconductor equipment industry.
l	Mr. Wennink is a member of the Dutch Institute of Registered Accountants, a member of the supervisory board of the Eindhoven University of Technology, and a member of the Advisory Board of the Investment Committee of Stichting Pensioenfonds ABP (Dutch pension fund for government employees). Mr. Wennink further serves on the board of the FME-CWM (the employers’ organization for the technology industry in the Netherlands).

	Martin A. van den Brink (1957) Term expires 2018 President, Chief Technology Officer and Vice Chairman of the Board of Management
l	Mr. Van den Brink joined ASML when the company was founded in 1984. Mr. Van den Brink held several positions in engineering and from 1995 he served as Vice President Technology. Mr. Van den Brink was appointed as Executive Vice President Product & Technology and member of the BoM per the 1999 AGM. Mr. Van den Brink was appointed as President and CTO in 2013.
l	Mr. Van den Brink earned a degree in Electrical Engineering from HTS Arnhem (HAN University), and a degree in Physics (1984) from the University of Twente, the Netherlands.
l	Mr. Van den Brink was awarded an honorary doctorate in physics by the University of Amsterdam, the Netherlands in 2012.



	Frédéric J.M. Schneider-Maunoury (1961) Term expires 2018 Executive Vice President and Chief Operations Officer
l	Mr. Schneider-Maunoury joined ASML in December, 2009, as Executive Vice President and COO and was appointed to our BoM per the 2010 AGM.
l	Prior to joining ASML, Mr. Schneider-Maunoury served as Vice President Thermal Products Manufacturing of the power generation and rail transport equipment group ALSTOM. Previously, Mr. Schneider-Maunoury was general manager of the worldwide Hydro Business of ALSTOM. Further, Mr. Schneider-Maunoury held various positions at the French Ministry of Trade and Industry.
l	Mr. Schneider-Maunoury is a graduate of Ecole Polytechnique (1985) and Ecole Nationale Supérieure des Mines (1988) in Paris.

ASML INTEGRATED REPORT 2017 5



	Frits J. van Hout (1960) Term expires 2021 Executive Vice President and Chief Program Officer
l	Mr. Van Hout joined ASML in 1984 and rejoined ASML in 2001, after an eight year absence. He was appointed as Executive Vice President and Chief Marketing Officer and became a member of our BoM per the 2009 AGM. Mr. Van Hout was appointed as Executive Vice President and Chief Program Officer on July 1, 2013. Prior to his BoM membership, Mr. Van Hout served as ASML’s Executive Vice President Integral Efficiency, Senior Vice President Customer Support and held various other positions.
l	Mr. Van Hout served as CEO of the Beyeler Group and held various management positions at Datacolor International from 1992 until 2001.
l	Mr. Van Hout earned a Master’s degree in Theoretical Physics (1981), University of Oxford; and a Master’s degree in Applied Physics (1984), Eidgenössische Technische Hochschule, Zürich.
l	Mr. Van Hout is a member of the Board of the Stichting Brainport, the Eindhoven Region Economic Development Board.

	Wolfgang U. Nickl (1969) Term expires 2018 Executive Vice President and Chief Financial Officer
l	Mr. Nickl joined ASML in December, 2013, as Executive Vice President and CFO and was appointed as a member of our BoM per the 2014 AGM.
l	Prior to joining ASML, Mr. Nickl served as Executive Vice President and CFO at Western Digital Corporation, a US-headquartered, NASDAQ-listed developer and manufacturer of storage devices, where he held several financial and operational leadership roles. Before Western Digital, Mr. Nickl gained experience in finance and IT consulting.
l	Mr. Nickl earned a Bachelor of Arts in Business from the University of Cooperative Education in Stuttgart, Germany, and a Master of Business Administration from the University of Southern California’s Marshall School of Business in Los Angeles, United States.
l	Mr. Nickl will step down from his position with ASML as per the 2018 AGM, completing his current term. ¹


1.	On January 17, 2018, we announced that the SB intends to appoint Roger Dassen as Executive Vice President and CFO to the BoM, effective June 1, 2018, subject to notification of the 2018 AGM.

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The Role of Lithography

Lithography is the critical process step in the production of microchips. Our systems are essentially projection systems, comparable to a slide projector, using laser light to lay out the transistors - the ‘brain cells’ of a microchip. The light is projected using a so-called mask (also known as a reticle), containing 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 material. When the unexposed parts are etched away, the pattern is revealed. Because lithography patterns the structures on a microchip, lithography plays an important role in determining how small the features on the chip can be and how densely chip makers can pack transistors together.

ASML INTEGRATED REPORT 2017 7

Faster, smaller, greener

Our guiding principle is continuing Moore’s Law towards ever-smaller, cheaper, more powerful and energy-efficient semiconductors. 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. One of the main drivers of shrink is the resolution that our systems can achieve. This, in turn, is mainly determined by the wavelength of the light that is used and the numerical aperture of the optics. A shorter wavelength - like a finer brush used for painting - can resolve smaller features. A larger numerical aperture can focus the light more tightly, which also leads to smaller resolution. The industry has gone through a series of technology transitions where it shortened the wavelength of the light from 365 nm (i-line) to 193 nm (ArF) in the DUV part of the spectrum. Currently ASML is helping customers to transition to 13.5 nm (EUV), which again allows lithography systems to resolve smaller features.

In 2017, leading-edge chip makers routinely produced chip features with geometries of between 20 nm and 10 nm, compared to typical geometries of 10,000 nm in the early 1970s. The number of transistors on the most advanced microchips has increased from several thousand to over 2 billion.

This trend was first observed by Intel co-founder Gordon Moore in 1965. Moore stated that chip makers could double the number of transistors in - and boost the performance of - a typical microprocessor every year, while maintaining the same cost. He later adjusted this to every 2 years. The trend has held for more than 50 years. While some industry observers are questioning if, and how long, Moore’s Law can continue, ASML and our customers are confident that it can be extended beyond the next decade, which is the time frame the industry has always used to plan its roadmap.

Our Company

It is hard to imagine the world without microchips. They are at the heart of the devices that we use to work, travel, stay healthy and be entertained - from smartphones to cars, from MRI scanners to industrial robots. Delivering new functionalities, better performance and lower cost with each generation, advances in chips have spawned new products and transformed industries. New technologies and trends, such as artificial intelligence, augmented reality and the Internet of Things, result in additional demand for semiconductor chips to generate, transfer, store, analyze and apply vast amounts of data.

As one of the world’s leading manufacturers of chip-making equipment, ASML provides its customers with tools - hardware, software and services - to create the patterns that define the electronic circuits on a chip. As we improve our products, our customers can increase the value and reduce the cost of chips for their customers.

We are a global company with 19,216 employees and achieved total net sales of EUR 9,052.8 million during 2017, resulting in a net income of EUR 2,118.5 million. Our thousands of engineers work in multi-disciplinary teams and with a network of suppliers and technology partners, innovating to maintain our technology leadership. We set ourselves ambitious goals and take pride in the impact we have on the world around us.

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A short company history

Our company was founded in 1984 in Eindhoven under the name of ASM Lithography. By 1985 we had grown into a company of more than 200 employees and moved to Veldhoven, where we have been headquartered ever since. In 1991 we launched our PAS 5500, which became a major success for ASML and continues to be in use today. After we incorporated as ‘ASM Lithography Holding N.V.’ in the Netherlands on October 3, 1994, we became a public company in 1995 with listings on the NASDAQ and Euronext Amsterdam.

We continued our growth and technological advancement also by acquiring the Silicon Valley Group in 2001, whose site in Wilton, Connecticut in the US, is now a major R&D and manufacturing center. That same year we introduced our TWINSCAN system which, using ‘dual-stage’ technology, exposes one wafer while the next wafer is already being measured, maximizing performance and productivity. In 2001, we also changed our name to ASML Holding N.V.

In 2007, we acquired Brion, a US company specialized in computational lithography for ICs, which became a cornerstone of our Holistic Lithography product strategy. In 2013 we completed the acquisition of Cymer, a manufacturer of light sources in the US, to accelerate the development of the next-generation lithography technology EUV. To further enhance our Holistic Lithography product portfolio we bought HMI in Taiwan, in 2016. In 2017, we completed the acquisition of a 24.9 percent indirect interest in Carl Zeiss SMT GmbH in Germany, to facilitate the further development of our EUV lithography chip-making systems.

ASML INTEGRATED REPORT 2017 9

Industry Trends and Opportunities

The exponential increase in data generation, transfer, storage, analysis and application has become the major driver for semiconductor industry growth. Fueling this growth is the Internet of Things (smart homes, infotainment, lighting, autonomous driving, healthcare, and factory automation) which combines sensors and smart devices with machine learning and artificial intelligence to process data autonomously into value added applications for consumers and businesses. These growth engines complement the maturing smartphones, PC, laptop and tablet semiconductor market segments which continue to refresh product offerings with more advanced ICs to process and store more data to offer new applications like smart assistants, augmented and virtual reality. ¹

To address these market requirements our customers continue to invest in developing more advanced semiconductor processes to enable more powerful, energy efficient, cost effective, logic and memory ICs, for further information on these markets see Management Board Report - Markets and Products - Our markets. Industry and customers' roadmaps indicate a path for continued semiconductor process scaling beyond the next decade. We are addressing this trend by extending the accuracy and productivity of our TWINSCAN XT and NXT lithography systems while in parallel maturing TWINSCAN NXE lithography to the point where it can be used for high-volume IC manufacturing. To secure the tighter accuracy requirements for the more advanced processes we continue to also develop enhancements to our YieldStar optical metrology systems and associated feedback and control software. This has been further strengthened with the acquisition of HMI in 2016 to provide higher resolution e-beam metrology and inspection capability.

Beyond technology and productivity our customers continue to focus on cost and quality of our products and services. To address this we are investing in programs to enhance quality and drive lean processes in our development, manufacturing and supply chain operations.

We believe these industry trends offer continued strong business opportunities for ASML for the coming 10 years and beyond. For a broader overview of trends, risks and opportunities in our industry and global environment, see Management Board Report - Materiality Assessment - Graphic: ASML's stakeholder groups and environment.

We also follow developments regarding international guidelines, such as the United Nations Sustainable Development Goals, which aim to end poverty, protect the planet and ensure prosperity for all. We support this ambition and have started to look at how to align our strategy with the United Nations Sustainable Development Goals, see also Management Board Report - Materiality Assessment - Sustainable Development Goals.


1.	Source: BI Intelligence, CCS Insights, Gartner.

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Business Strategy

How we create value

ASML creates economic value with strong financial performance; social value by enhancing the welfare of our employees, suppliers, customers and the communities we operate in; and environmental value by improving the energy efficiency of chips.

Our value chain

Geared towards providing long-term value to our customers and other stakeholders, our value chain consists of our R&D partners, our supply chain and our manufacturing and service activities, as shown below:

Creating value

We use input from stakeholders and analyses of trends in our industry and society to develop our strategy and to develop and provide our products and services. As such, we aim to create long-term value for our customers and other stakeholders.

For details on the value we created in the past year see Management Board Report - Products and Technology, People, Partners and Operations for our social and environmental impact and Management Board Report - Financial Performance for our economic impact. For the topics most relevant to our stakeholders see Management Board Report - Materiality Assessment and Non-Financial Statements - Stakeholder Engagement. For details on our value creation over the past 5 years see Highlights - Graphic: Last 5 Years.

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Our vision and mission

Our vision is a world in which semiconductor technology is everywhere and helps to tackle society’s toughest challenges. We contribute to this goal by creating products and services that let our customers define the patterns that ICs are made of, and we continuously raise the capabilities of our products, enabling our customers to increase the value and reduce the cost of chips. By helping to make chips cheaper and more powerful, we help to make semiconductor technology more attractive for a larger range of products and services, which in turn enables progress in fields such as healthcare, energy, mobility and entertainment.

Our strategy

We are a focused supplier of patterning and metrology products and services to IC manufacturers, providing high-performance hardware and software that allow our customers to increase the value and capability of their microchips, while reducing their cost. We work with a network of long-term partners to share the risk and reward of inventing, designing and manufacturing our high-end and market-leading technology. We set ourselves targets to get our innovations into the hands of our customers faster, while enhancing the value and reliability of our products with well-integrated software and services.

In determining our strategy we carefully consider the input and interests of all of our stakeholders. See Management Board Report - Materiality Assessment. We also analyze the risk and opportunities based on the industry and global trends and set strategic and corporate priorities aimed at creating value for all of our stakeholders. Our strategic priorities remain unchanged for 2018 and focus on the successful industrialization of EUV, securing our DUV competitiveness, building a leadership position in pattern fidelity control, and aligning the plan for the introduction of High-NA with our customers and key technology providers.

The strategic priorities are translated into Corporate Priorities that guide our entire company.

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The following table demonstrates how the execution of Corporate Priorities addresses our key risk areas and supports the themes material to our stakeholders in creating value for them.





Corporate Priorities		Corporate Priority 1:		Corporate Priority 2:		Corporate Priority 3:		Corporate Priority 4:		Corporate Priority 5:

		Execute the product and installed base services roadmap in EUV, DUV and Holistic Lithography.		Deliver quality products and services that consistently meet or exceed the expectations as agreed with customers, reinforced by an ASML quality culture.		Drive the patterning ecosystem with customers, suppliers and peers in target market segments.		Improve return on investments for ASML and its stakeholders, with a focus on cost of ownership and cost awareness.		Develop our people and processes to support the growth of the organization towards a EUR 11 billion revenue company by 2020.

Related material themes ¹	• •	Innovation Knowledge management	• •	Sustainable relationships with customers Operational excellence	• • •	Sustainable relationships with suppliers Sustainable relationships with customers Innovation	•	Financial performance	• • • • •	Employee safety Business ethics & compliance Talent management Sustainable relationships with our people Business risk & continuity

Key related risks ²	• •	Rapid and complex technological changes Ability to execute our R&D programs	•	Managing product industrialization	• • •	Supplier dependency Rapid and complex technological changes Managing product industrialization	• • • • •	Success of new product introductions High cyclicality of the semiconductor industry Competition High % of net sales derived from few customers Revenues derived from a small number of products	• •	Attraction and retention of adequately skilled people Use of hazardous substances

Related KPIs	• • • •	R&D expenses Technology Leadership Index Technical Competence and Functional Ownership maturity Number of technical training hours	•	Customer Loyalty Survey Score	• •	Supplier Relationship Satisfaction Survey Score VLSI Survey Results	• • • • •	Total net sales Gross margin EPS Cash flow ROAIC	• • • •	Employee engagement Employee attrition rate (overall, high performers) Promotion rate of high performers Recordable incident rate

Related impact areas ³	• • • •	Affordable technology Knowledge creation & sharing Resource efficient chips Financial performance	• •	Affordable technology Financial performance	• • • • •	Employment creation Affordable technology Knowledge creation & sharing Resource efficient chips Financial performance	•	Financial performance	• • •	Employment creation Employees welfare Financial performance


1.	See Management Board Report - Materiality Assessment.


2.	See Management Board Report - Risk Factors.


3.	See Management Board Report - Business Strategy - How we create value.

Profitability / Acquisitions

Our long-term business and financial model targets for 2020 are an annual revenue opportunity (ASML including HMI) of around EUR 11 billion and a target EPS of more than EUR 9, thereby creating significant value for all stakeholders. Our roadmap to an annual revenue opportunity of EUR 11 billion is primarily based on organic growth. ASML continuously reviews its product roadmap and has, from time to time, made focused acquisitions / equity method investments 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 evaluate and pursue focused merger and acquisition activities in the future.

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Markets and Products

Our markets

Our main customer groups are memory and logic chip makers. Memory chips can store a large amount of data in a very small area and are used in an increasing variety of electronic products like smartphones, high performance computing, automotive or personal computers and other communication devices. There are two main classes of memory: NAND and DRAM. 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 chip factories.

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.

Our products

We sell three categories of products: DUV lithography, EUV lithography, and Holistic Lithography solutions. We also provide services that ensure a rapid, efficient installation of our systems, superior support, and training to optimize the manufacturing processes of our customers. In addition, we provide services to upgrade and refurbish our systems, helping our customers extend their systems’ lifespan and maximizing our customers’ capital efficiency.

We offer TWINSCAN (N)XT (DUV) systems for imaging wafers. The DUV range consists of systems that operate at a specific wavelength of the light source, varying from the so-called i-line (365 nm) to KrF (248 nm) and ArF (193 nm). Although these systems are usually referred to as dry systems, the DUV range is completed with immersion lithography systems that provide imaging capability down to a resolution of 38 nm. In these systems, a film of water is placed between the wafer and the projection lens. This film of water acts as an extra lens, which results in smaller features compared with the previous generation of dry systems. We fostered this wet technology and there is strong demand for our immersion-based systems. Using the immersion systems in combination with so-called multiple patterning technology, our customers are able to produce integrated circuits with resolutions much lower than 20 nm.

Our next-generation lithography systems, TWINSCAN NXE (EUV), are equipped with an entirely new EUV light source technology and a new optical technology that uses reflective mirrors rather than the traditional lenses. The shorter wavelength of this light (13.5 nm) results in a higher resolution to enable manufacturing of denser and faster chips. The EUV platform can produce ICs of 13 nm resolution and smaller. We have also started developing the future generation of EUV lithography systems due in the first few years of the next decade, using a technology called High-NA. This technology will enable the semiconductor industry to produce higher performance microchips at lower costs. The next generation of EUV optics will offer a higher numerical aperture, making it possible to further reduce critical dimensions in the lithography process. The current EUV systems have an optical system with a numerical aperture of 0.33, whereas the new optics will have a numerical aperture greater than 0.5, enabling several generations of geometric chip scaling.

Our customers optimize the performance of their chip-making systems by taking into account the entire chip creation process, from design to volume manufacturing. We call this approach Holistic Lithography. We have complemented our scanner products with a rapidly expanding Holistic Lithography portfolio of software and metrology products, for example our YieldStar system. This portfolio of products helps our customers optimize and control semiconductor scanner performance, provide a faster start to chip production, and achieve better patterning at higher resolutions, resulting in higher product yields. Holistic Lithography offers cost saving opportunities for our customers. The addition of HMI’s e-beam technology to our existing Holistic Lithography portfolio extends our control scope. We have also identified new process control opportunities, built on the same unique and proven approach that will continue to provide additional value to our customers. This approach, pattern fidelity metrology, allows us to guide the e-beam inspection system to the most critical areas, based on the predictive model, on the wafer in order to increase the effective productivity. We will extend this technology even further with a multi beam design in the coming years. The biggest new opportunity resides in the extension of overlay control to a comprehensive control of pattern fidelity.

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See our systems overview below.

Upgrading and refurbishing our systems

We develop and sell a range of product options and enhancements designed to increase the throughput and improve patterning and overlay. This also optimizes the cost of ownership over the entire lifespan of our systems. We have developed field upgrade packages, allowing our DUV and EUV scanners to be upgraded from one model to another in the field. This enables customers to migrate these systems in production from one process technology node to another, meeting tighter lithography requirements for increasingly advanced processes. In addition, our Mature Products and Services business refurbishes used lithography equipment and offers associated services. Both upgrades and refurbishments help our customers extend their systems’ lifespan and maximize our customers’ capital efficiency, supporting our circular economy approach.

We support our customers with a broad range of applications, services, and technical support products to maintain and maximize the performance of our systems. Furthermore, we offer our customers OnPulse contracts on DUV sources, providing on-site support from certified service engineers and continuous real-time light source monitoring.

We expect our service business, which is critical to our overall success, to continue to grow over the coming years. Our aim is to deliver a comprehensive and cohesive service product offering to keep the systems our customers have installed in continuous competitive operation. Our service business strategy prioritizes customer value and satisfaction, while also optimizing our total net sales and gross margin. To maximize our total value proposition to customers, our Installed Base Management product portfolio and its wide range of service and upgrade product offerings is structured in line with the life cycle of our customers’ technology nodes.

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ASML Integrated Report 2017

Innovation is our lifeblood

Innovation is ASML’s lifeblood and the engine that drives our business. As the Internet of Things expands, consumers across the world are using ever-more powerful and sophisticated devices that are increasingly interconnected. These developments drive demand for microchips, which in turn drives demand for the chip-making systems that produce ever-smaller, faster, cheaper, more powerful and energy-efficient microchips. We can only meet this demand by making consistent and continuous technological advances.

Our innovations in 2017 helped improve our DUV technology. We sold 163 new TWINSCAN DUV systems in 2017, 66 of which were the TWINSCAN NXT:1980 model. Since their introduction in 2015, 119 of the TWINSCAN NXT:1980 systems have been shipped. This ramp equals the fastest ever for an NXT platform and underscores the market demand for leading-edge lithography as well as our ability to ship significant numbers to meet that demand. We provided early access to our latest TWINSCAN NXT:2000i immersion system for initial development of the 5 nm node. This new system features several hardware innovations that deliver improved imaging and overlay performance in support of the aggressive matched system overlay to EUV that is required for future nodes.

Continuous improvements in innovation helped us further improve our new EUV technology, bringing it closer to the high-volume production introduction requirements of more than 125 wafers per hour productivity and 90 percent production time (availability) with consistent performance. In 2017 we demonstrated a productivity of 125 wafers per hour for an NXE:3400B EUV system at our production site. In addition, the availability of our new EUV systems in the field improved, with systems achieving a 4-week availability of more than 80 percent more regularly across the installed base. The best result was more than 90 percent over 4 weeks. Consistency between tools and across sites still needs to be improved however. We shipped 10 NXE:3400B EUV systems to customers in 2017, taking another step towards the large-scale introduction of EUV systems that will enable high-volume microchip production. We also conducted a power capability test with our EUV pellicle, which protects the mask from particles during exposure, and showed that the current design can withstand 250 watts of EUV power.

In Holistic Lithography, we shipped the first product that was jointly developed with the engineering team of HMI, which ASML acquired in 2016. The product, ePfm5, is a pattern fidelity metrology tool that offers our customers enhanced capabilities for detecting patterning defects. It leverages HMI high resolution e-beam metrology technology, state-of-the-art computational modeling, machine learning and scanner metrology data to create defect maps for more wafers with a significantly higher accuracy than existing solutions can do. We also shipped the first HMI eXplore 6000 EUV reticle defect inspection system to a foundry customer. This system offers high resolution multi-column technology that supports full reticle qualification in production.

In July 2017, we announced a Holistic Lithography product suite for the 7 / 5 nm node. This product suite consisted of a TWINSCAN NXE:3400B EUV lithography system, a TWINSCAN NXT:2000i immersion system and a HMI eP5 e-beam metrology system. Our Holistic Lithography integrates a set of products that enables chip makers to develop, optimize and control the production process at the 7 / 5 nm logic and 16 nm DRAM nodes.

We measure innovation based on an internal KPI that we call the Technology Leadership Index. This index comprises 3 objectives; see Products and technology objectives in the table near the end of this chapter.

Another important indicator of our focus on innovation is the amount we spend on R&D. In 2017, we spent EUR 1,259.7 million or 14 percent of total net sales on R&D, compared to EUR 1,105.8 million or 16 percent of total net sales in 2016 and EUR 1,068.1 million or 17 percent of total net sales in 2015, which again demonstrates our commitment to investing in R&D.

How we manage innovation

We manage innovation based on ‘roadmaps’ - the semiconductor industry’s standard term for product development planning. Our marketing organization first assesses our customers’ needs, the required functionality of our systems and the deadline for these requirements. This ‘marketing roadmap’ of customer requirements includes detailed system specifications and functionalities. Our product organization then puts together a ‘product roadmap’ outlining the specifications and functionalities of the new types of system that are feasible for us to produce and that meet our customers’ demands.

Concurrently, we draw up a ‘technology roadmap’, identifying what technology we need to build in the system as described in the product roadmap. We create this trio of roadmaps for each of our main product groups: DUV, EUV and Holistic Lithography. Roadmaps typically look five years ahead. They are adjusted when required, depending on changing customer needs or unexpected technological breakthroughs or challenges.

In addition to the innovation steered by these roadmaps, we invest in innovation by conducting research with a longer-term horizon. Run by our Research department, this research aims to create technological solutions that our D&E experts can tap into when developing new systems or improving our existing models. Our research teams collaborate with a wide network of external technology partners, such as universities and other research institutions.

We manage our innovation efforts through our Product Generation Process. Our CTO is responsible for R&D at board level. Our Executive Vice-President Development and Engineering and our Senior Vice-President Technology report to the CTO.

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ASML’s ‘open innovation’ concept

The concept of ‘open innovation’ helps us sustain our pace of invention. This means that we develop our technology in close collaboration with partners inside and outside our company, sharing the rewards and the risks. This way of working ensures easy access to leading-edge knowledge and skills across a wide range of technologies, which our partners can also use in other markets.

In 2015, researchers from ASML, the Advanced Research Center for Nanolithography, Tata Steel and Vrije Universiteit Amsterdam joined forces to develop new techniques for imaging surfaces based on lensless microscopy. In 2016, we announced an agreement with Carl Zeiss AG to strengthen our long-standing and successful partnership in the semiconductor lithography business. In that same year, we acquired HMI. See Management Board Report - Our Company - A short company history.

As announced in our press releases during the year covered by this report, we extended our holistic patterning strategy in February 2017 by entering into a partnership with Cadence Design Systems and in June 2017 we signed a memorandum of understanding with Circuit Research and Development Center to set up a jointly-owned world-class training center in Shanghai.

Lighthouse project seeks to use accidental discovery for good

We occasionally invent things we don’t need for our own operations, but that can be of value to society. One example of such serendipity is the Lighthouse project. While researching a possible new light source for our new EUV systems, we discovered that a high-energy electron beam we were working with could also be used to produce the medical isotope ‘Mo-99’. This isotope is essential for diagnosing cancer. Currently, it is mainly produced from enriched uranium in nuclear plants that require extensive maintenance and produce radioactive waste. We are exploring opportunities to use our invention in alternative ways to produce medical isotopes.

In 2017, our annual ASML Technology Conference focused on the theme ‘Innovations for the perfect machine’. This gave us the opportunity to discuss ways to further improve the reliability and uptime of our systems, both of which are priorities for us. The about 3,200 delegates who attended included external technology experts and representatives from our customer base, such as the COO of Hynix. As in previous years, the conference touched upon our perennial dilemma, namely how to strive for innovation to deliver new generations of chip-making systems to customers as quickly as possible, while also working hard to achieve excellence in execution to ensure our systems are rock-solid in terms of reliability, safety and efficiency. Always meeting both these demands sometimes proves challenging. Our experts shared their ideas on how to balance and promote the two demands.

Knowledge management

Our major investment in R&D means it is crucial for us to share and protect our inventions and knowledge. Knowledge management is a key focus area for us.

To maintain our technological leadership and pace of innovation, we need to develop the right knowledge and share it quickly and efficiently. We share our knowledge internally and externally, with partners such as suppliers and customers. Faster access to knowledge spurs faster development, allowing problems to be solved more quickly. It also makes our investments in knowledge creation more effective and efficient.

Our ambition is to ensure that the right knowledge is available to the right people at the right time. This means we must acquire or develop the required competencies at an early stage, maintaining a knowledge pipeline that allows us to build the system functions we need. This process is facilitated by our Technical Training Center. Our line managers regularly assess the technical competencies we need, varying from software programming to laser physics, and take steps to fill capability gaps where necessary.

To guide our knowledge management, we measure our Technical Competence maturity and Functional Ownership maturity. Technical Competence maturity gauges the capabilities and spread of technical competencies among our people and also the extent to which they are embedded in our processes and operations. We have identified over 80 different competencies that are relevant to our technology. Functional Ownership maturity measures the level of required knowledge among our teams of experts about the system functions they are responsible for. A system is divided into about 90 distinct functions, and responsibility for each function is assigned to a ‘function owner’ and their team. We score the maturity KPIs on a scale of 1 to 5. Levels 1 and 2 cover the basic requirements, showing that teams are establishing links with departments they cooperate with, setting individual targets, etc. Levels 3, 4 and 5 are more advanced, reflecting mechanisms to gather and process feedback, make processes predictable, and ensure they function well at customers’ sites.

While continuing to build and maintain a solid knowledge base, in 2017 we focused on raising the maturity level of our employees in terms of their technical and functional knowledge. To achieve this, we paid particular attention to using feedback from customers, e.g. feedback loops. We met our target to achieve an average maturity score of 3.6 in 2017; see Products and technology objectives in the table near the end of this chapter.

We have roadmaps in place for most system functions. These plans will be updated on a regular basis. We have mechanisms to process feedback from customers and co-development partners, helping to reduce the recurrence of technical function issues.

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Our ‘MyLearning’ management system, which covers the activities of all our training centers, helps our employees and their managers to decide what courses to attend to further develop their skills and competencies. The system also provides information on training hours and the sort of training our employees have attended. It also helps our employees to design their individual Development Action Plans, see also Management Board Report - People - Talent management. The number of technical training hours per full-time employee increased to 18.2 in 2017 from 15.9 in 2016.

Protecting our intellectual property

We rely on intellectual property rights 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.

In our management of our intellectual property rights we focus on protecting ASML’s intellectual property and respecting the intellectual property of others. Preservation of intellectual property and other assets is one of our Business Principles and part of our Code of Conduct.

As of December 31, 2017, we had approximately 12,000 patents and patent applications across the main equipment and chip manufacturing countries around the world and covering various fields of our business.

See also Management Board Report - Risk Factors - Failure to adequately protect the intellectual property rights upon which we depend could harm our business and Defending against intellectual property claims brought by others could harm our business.

Product stewardship

While putting continuous effort into innovation and effectively managing and protecting our knowledge, we also seek to ensure our products are manufactured and can be operated responsibly. Our commitment to product stewardship means that we work to make our manufacturing processes and systems more environmentally friendly, improving their resource efficiency.

Energy measurements have shown that the energy efficiency of our latest DUV system, the TWINSCAN NXT:2000i, is similar to the TWINSCAN NXT:1980Di, while the latest system will deliver improved imaging and overlay performance to our customers, see Non-Financial Statements - Non-financial Indicators - Products and technology.

As we were bringing our EUV systems to the point of high-volume production in 2017, we began exploring how we can realize energy savings for these systems. As a first step, we focus on how we can reduce the additional energy needed to run EUV systems in a factory environment. We found we can redesign the pre-vacuum systems for our EUV systems to make them more energy efficient, thereby enabling a reduction of the power consumption of the complete EUV system by 100kW. We expect to implement this energy-saving measure in 2018. In addition, we made progress towards recycling the H₂ used for our systems, initial tests show an up to 80 percent recycling rate. In 2018, we will further study the implementation of the H₂ recycling. Furthermore, we will study an improved cooling concept in our systems, where some sections of the EUV system operate at higher temperatures to enable ‘free cooling’ at our customer’s sites.

We support the circular economy concept - a model for industry moving from the linear model of ‘Take, Make, Dispose’ to one where we extract the maximum value from resources we use and then recycle and regenerate products at the end of their lives. We believe this circular economy model is essential to ensuring the future success and competitiveness of the semiconductor equipment industry, hence we have incorporated circular economy into our Business Principles. We are keen to play our part, not only by enhancing energy efficiency and the efficient use of other resources and materials, but also by refurbishing systems, remanufacturing parts (‘As-new’ program) and by upgrading systems to an higher performance level while in use ‘in the field’ to extend their lives. Our systems have a modular design which is suitable for reuse and can be upgraded. About 45 percent of the weight of a typical NXT system consists of a fixed architecture that can be kept when upgrading the system and therefore does not have to be scrapped, see Graphic: ASML NXT system: Modular upgradeable design, in this section.

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Extending our systems’ lifetime

Our Mature Products and Services business refurbishes older lithography systems and offers associated services. A well-maintained ASML lithography system has a useful life that is measured in decades. Typically, an ASML lithography system will be used in a leading-edge Fab for many years, and will then be given a second life with, for example, a manufacturer that makes specialized devices, such as accelerometers, radio frequency chips, thin-film heads for hard disk drives, or LEDs, which require relatively less sophisticated chips.

In 2017 we developed new software and hardware to replace the operating system of our older generation systems, such as the PAS 5500 and AT / XT systems. Without this new operating system, these systems would not have been able to continue operating in the foreseeable future, due to the lack of dedicated computer hardware and operating system software maintenance. Thanks to the new software and hardware, we can significantly extend the lifespan of about 90 percent of our systems currently in use at our customers’ production locations.

We also further engaged with our customers about the introduction of ‘As-new’ modules into our mainstream manufacturing. ‘As-new’ modules (segments of our systems) are modules suitable for multiple product life cycles. They are returned from the field and, after a thorough re-qualification process, restored to an as-new condition offering a level of performance equal to new ones. We make these efforts in close cooperation with our customers and suppliers. In 2017, we continued a pilot project launched in 2016 to explore how we can effectively use ‘As-new’ parts and modules in new systems. In collaboration with our customers and suppliers, we aim to steadily increase the number of ‘As-new’ parts used in the future.

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By enabling the production of cheaper and more powerful computer chips, we also fuel the development of new electronic applications. This development poses a challenge for our entire industry, as these new applications may increase energy use and require potentially scarce resources. For us, it emphasizes the importance of working with all relevant stakeholders in the value chain to make our industry more sustainable and of contributing to this process through research and innovation.

RoHS and REACH

We are committed to complying with EU regulations for handling hazardous materials and chemicals, the so-called RoHS and REACH directives, even though the products we manufacture are currently excluded from the RoHS directive. We are committed to reducing and eliminating its use of hazardous substances and aims to replace non-compliant parts with RoHS-compliant alternatives whenever possible.

Product safety and compliance

Our products must be safe to work with, starting at the design stage. Our engineers develop systems that meet international safety regulations. A specially developed tool ensures our designers are instantly connected to risk experts for every part or function of a system that bears a safety risk. This enables us to address any safety issue at an early stage.

Our products and non-commercial tools comply with all relevant legislation, including EU safety regulations and SEMI S2, the semiconductor industry guidelines. A third party verifies our compliance with SEMI S2. During 2017, a report confirming SEMI S2 compliancy was available for each and every product type we shipped.

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Products and technology objectives



Theme	Objective	Target year	How we did

Innovation	Realize the following as part of our Technology Leadership Index: a) Enable DUV immersion / dry performance to produce 10 nm production and 7 nm R&D node. b) Drive economics and enhance capability to extend EUV. c) Enable enhanced product performance through improved metrology.	2016-2017 ¹		See Innovation is our lifeblood above.
	Realize the following as part of our Technology Leadership Index: a) DUV performance enabling memory 1x and 7/5 nm logic nodes. b) Enable on product performance. c) Drive economics and extendibility of EUV.	2018 ¹

Knowledge management	Increase the Technical Competence and Functional Ownership maturity score to 3.6.	2017		See Products and technology KPIs in the table below - we achieved a maturity score of 3.7 for Technical Competence and 4.0 for Functional Ownership, exceeding our 2017 target.

	Maintain the Technical Competence and Functional Ownership maturity score at a level around 3.8.	2020		We shall continue to focus on Technical Competence and Functional Ownership maturity.

	Each year have on average 15 hours of technical training per FTE (D&E employees).	2016-2017		See Products and technology KPIs in the table below - the number of training hours was 18.2, exceeding our 2017 target.

Product stewardship	Annual reduction of RoHS non-compliant parts by 15%.²	2016 and beyond		In 2017, we have assessed that 89% of the parts in scope are RoHS compliant (with 1% non-compliant and 10% unknown). We have therefore reduced the RoHS non-compliant parts by 21%, thus exceeding our annual target of 15% reduction. We will continue to investigate unknown parts and further reduce the RoHS non-compliant parts.
	Annual reduction of RoHS non-compliant parts by 15%.²	2016 and beyond


1.	In 2017, we fine-tuned the definition of objective a) Enable DUV performance to produce 1x memory and 7/5 nm logic nodes.


2.	Due to our change in methodology as reported in 2016, we re-assessed our annual reduction target from 30 percent to 15 percent.

Products and technology KPIs



KPI	2015	2016	2017

R&D expenses (in million EUR)	1,068.1	1,105.8	1,259.7
Technical Competence maturity score ¹	3.0	3.4	3.7
Function Ownership maturity score ¹	3.2	3.6	4.0
Number of technical training hours per FTE	14.4	15.9	18.2
Sales of lithography systems (in units) ²	169	157	198


1.	Measured on a scale from 0 to 5.


2.	Lithography systems do not include metrology and inspection systems. See Management Board Report - Financial Performance - Operating results - Total net sales and gross profit.

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ASML Integrated Report 2017

Talent management

Attracting and retaining talent is crucial to maintaining our fast pace of innovation and essential to our long-term success as a company. Highly skilled people with a technical background are scarce in the labor market. The increasing complexity of our products means that new and existing employees face a steep learning curve. As such, we look to develop our talented and highly skilled professionals through tailor-made training and development programs. This ensures continuity in our workforce and retains the required knowledge, skills, and competencies of our people.

To attract talent, we focus on two areas:

•

Internal talent - We assess the development potential of our employees for new roles and identify candidates for critical positions. Employees discuss their career ambitions with managers, jointly considering next steps. Employees can pursue opportunities themselves or be approached within the organization. We also have internal career fairs to provide information on internal career opportunities.


•	External talent - We cooperate closely with universities in Europe, the US, and Asia to attract highly talented staff, including offering internships and scholarships. For positions that cannot be developed and filled internally, we scan the labor market for the skills we need and run targeted recruitment campaigns.

Developing our people is crucial to the sustained success of our business. Every year our employees’ personal targets and development plans are aligned with our business targets through our People Performance Management process. This process helps us decide the actions required to achieve short-term goals as well as longer-term career development. Together, managers and employees define individual Development Action Plans.

Our company enjoyed strong growth in 2017. We had to set ambitious recruitment targets to support this growth and ensure we have the people we need, with the right skills. As in previous years, we were successful in meeting our recruitment objectives. We view our recruitment and employee development efforts as an ongoing process that we continuously seek to improve and professionalize, responding to changing business requirements and developments in the labor market. In 2017, we made strides in expanding our global talent acquisition governance structure, continued building our new governance model in the US, and started implementing one in Asia. We have started rolling out a number of additional measures to support recruitment and onboarding. As such we will be making specific training available for line managers to enhance their interviewing and selection skills. Online testing of candidates has also been further implemented throughout the organization. A pre-onboarding app has been rolled out in several countries, already strengthening the onboarding of new hires, and it will be deployed more widely in future too.

Our attrition rate, i.e. the number of employees leaving the company, increased slightly to 4.4 percent in 2017 (2016: 3.9 percent), which was mainly caused by the further integration of Cymer and HMI into ASML. In 2017 we harmonized the compensation and benefits, and as a result we expect a lower attrition rate in the near future. The attrition rate of our best people (‘high performers’) was 1.8 percent in 2017 (2016: 1.7 percent). We also measured the extent to which high performers move to higher level positions. This promotion rate was 37 percent (compared to an overall promotion rate of 13 percent), indicating our best people were over-proportionally promoted and thus able to further develop themselves. We fast-track the careers of our most promising managers through our Potentials Acceleration programs, with 431 people participating in 2017. We also introduced a new management development curriculum, geared to the needs and requirements of all managers at ASML.

Succession management is an essential part of building a pipeline of talent throughout the company. Our efforts in this area ensure we have sufficient talent ready to replace managers and employees as they are promoted or if they choose to leave the company. We completed assessments of about 7,200 employees to determine their potential to take over higher level positions, up from around 6,500 employees in 2016. We had succession plans in place for more than 300 senior positions. Two potential successors were identified in most of these cases.

We also support technical studies through scholarships. In 2017, 50 students entered our ASML Technology Scholarship program as planned. Starting in 2018, our scholarship program will also be made available to students in the US, increasing our total number of scholarships.

For further information, see Non-Financial Statements - Non-financial Indicators - People - Talent Management.

Sustainable relationship with our people

We strongly believe building sustainable relationships motivates our people to develop themselves, to make the most of their talents, and perform to the best of their abilities. All of this serves to boost our productivity, innovative strength and competitiveness.

Employee engagement and employability are the cornerstones of a sustainable relationship with our employees. To us, engagement is the dedication our employees have for their jobs and ASML. Engaged employees feel that their efforts make a difference and are motivated to go the extra mile. Employability is the capacity of our employees to sustain and improve their performance over time and adjust to change.

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To build an engaged and enabled workforce, we have our Place to Work, Meet, Learn and Share framework. Our aim is to create an inspiring and safe work environment that is conducive to our employees’ personal development and helps them strike a good balance between their work and personal life. There are three dimensions to the Place to Work, Meet, Learn and Share framework: People (our employees), Bricks (our campuses and buildings) and Bytes (IT innovation to improve collaboration and work processes).

In 2017, we introduced smart boards, Microsoft Surface Hubs, as teleconferencing and presentation tools to facilitate cross-sector and worldwide collaboration at ASML. Straight away this allowed us to cut both travel time and costs. It also enhanced the efficiency of our interactive design sessions and remote training, leading to increased productivity and letting us reach more employees. We believe this contributed to employee engagement.

We have also continued our program to convert our offices into activity based working environments, promoting more interaction in the work place and providing the facilities that meet our employees’ needs. In 2017 we added more than 2,100 flexible work places so overall we have now more than 5,600 flexible work places worldwide.

Our employee survey me@ASML showed an average engagement level of 7.0, the same as the previous year. This was slightly below our target, as we aimed to achieve the same level as our peer group benchmark, which is 7.2. We achieved a record 91.2 percent response rate, with scores for employee commitment and loyalty also being exceptionally high. Employees again said they thought the efficiency of their work leaves room for improvement, for instance by making approval of decisions and other processes simpler. They left about 45,000 personal comments in the survey’s open comment boxes, saying what they liked or disliked and making improvement suggestions. We view this as a sign that many of our employees are highly motivated to contribute to the success of our company. This engagement of our employees resulted in feedback sessions at a team level to improve efficiency of our processes and learn from each other.

For further information, see Non-Financial Statements - Non-financial Indicators - People - Sustainable relationship with our people.

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Promoting diversity and inclusion

We believe a diverse and inclusive workforce helps us develop new solutions and ideas. Different voices and points of view are necessary to drive our innovation. We maintained our high level of diversity in terms of culture and nationality, employing people of 115 different nationalities in 2017 (up from 105 in 2016). Thanks to our continuous efforts to recruit and retain women, our percentage of female employees increased from 11 percent in 2010 to 14 percent in 2017. Gender diversity is still, however, an area in which we can improve. To increase our future talent pool and get young women interested in technology, ASML supports initiatives in the Netherlands such as Girls’ Day, where girls aged 10-15 can get acquainted with technology. In 2017 our CEO signed the ‘Declaration of Amsterdam’, a call to action for employers, unions and governments to implement concrete changes that ensure progress in matters affecting LGBTI people. The declaration is an initiative by Workplace Pride, an Amsterdam-based international non-profit organization that strives for greater worldwide acceptance of LGBTI people in the workplace. In signing the declaration, we want to show our commitment to building an inclusive corporate culture where LGBTI people feel valued and can realize their full potential. For more information on our diversity and inclusion performance data, see Non-Financial Statements - Non-financial Indicators.

Fair remuneration

Our remuneration should be fair for employees and not be a distraction for the motivation and engagement they experience from their job content and from working at ASML as a great place to work. In our remuneration policies, we strive towards global consistency, while respecting what is common practice in local markets. We want our employees to work together towards shared company goals, and we believe that they are key to the success of our company and deserve to share in this success. We want to ensure that we pay our employees fair and balanced salaries and that we offer competitive benefits. Our remuneration is based on an individual employee’s contribution to the company, their experience and the local labor market. We apply objective criteria and our remuneration is unrelated to factors such as gender, nationality, religion, social position or age.

Every year we analyze paid salaries for any gender disparity and in 2017, like in previous years, we found no major differences in these salaries. See Non-Financial Statements - Non-financial Indicators for details on gender payment.

We continuously review how our remuneration compares to the market benchmark for technology professionals in every region where we operate. Where necessary, we make changes to our remuneration policies and levels. In 2017, we made changes to our remuneration policies for our operations in all regions to ensure alignment with our overall corporate remuneration philosophy and to facilitate the harmonization of remuneration packages after the acquisition of Cymer and HMI.

At ASML, where we strive for salaries that are competitive in each market and where we have a predominantly highly educated workforce with relatively high levels of remuneration, we are confident that we meet adequate ‘living wage’ requirements, meaning that employees earn salaries that meet their basic needs.

Human rights and labor relations

We believe that human rights, as defined by the United Nations in its Universal Declaration of Human Rights, are a common standard that all employers should uphold. We support the principles laid down in the OECD Guidelines for Multinational Enterprises and those in the International Labor Organization’s Tripartite Declaration of Principles concerning Multinational Enterprises and Social Policy. In the spirit of these principles, we support our employees’ right to organize in labor unions and to collectively negotiate fair wages and working conditions. We believe these rights must be respected for all ASML employees at our locations worldwide.

We want to provide fair labor conditions and social protection for all our employees, regardless of whether they are on a fixed contract or a flex one. In the Netherlands, we negotiate with and consult labor unions and our company’s Works Council, our employees’ representative body. As required by Dutch law, our BoM must seek the non-binding advice of the Works Council before taking certain decisions, such as those related to a major restructuring or a change of control. Some decisions directly involving employment matters that apply either to all employees or certain groups of employees may only be taken with the Works Council’s approval. In case the Works Council renders a contrary advice on a particular decision and the BoM nonetheless wishes to proceed, the BoM must temporarily suspend any further action while the Works Council determines whether to appeal to the Enterprise Chamber of the Amsterdam Court of Appeal.

We strive to comply with the relevant legislation in every country we operate in. In the US, for instance, we aim to comply with all state and federal laws and regulations regarding labor practices and employees’ rights to organize. This means we do not interfere with, restrain, or coerce employees who want to organize themselves in a labor organization for collective bargaining purposes. In Taiwan, where we have several business operations, all employees, except those working in government administrative organizations, can form unions. ASML seeks to comply with all relevant legislation, such as the Taiwanese Union Act and the Law Governing Collective Bargaining Agreements.

At ASML, the principle of free choice of employment is respected. It applies to every employee in every country we operate in. We adhere to the Responsible Business Alliance Code of Conduct and expect our suppliers to also adhere to this code, as well as other human rights principles, see Management Board Report - Partners - Sustainable relationships with suppliers. We updated our human rights policy in 2017 to incorporate the latest developments of the Responsible Business Alliance Code of Conduct and to explain in more detail what we expect from our suppliers. Our policy now stipulates that compliance to human rights standards and other Responsible Business Alliance standards shall be included in our supplier agreements.

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Protecting privacy

In all countries in which we operate we aim for compliance with the legal requirements regarding the protection of our employees’ privacy, as well as the privacy of our customers and suppliers, and that of their employees in turn. Especially in Europe, legislation on these matters is developing fast. As such, we are implementing ASML’s binding corporate rules, or Privacy codes, on employee data as well as business partner data accordingly. Additionally, we are developing a program to increase privacy awareness globally within our company. We have a Privacy Officer who reports to our Senior Vice President Corporate Legal.

Our flexible labor model

The flexible labor model we have in the Netherlands comprises employees either on a fixed contract or a flex one. This model allows us to adapt to semiconductor market cycles, including providing support for potential 24 / 7 production activities as and when it is needed. Maximizing the flexibility of our technically-skilled workforce means we can reduce lead times, which in turn adds value for customers.

We used to have four categories of sourced labor in the Netherlands: flex (‘temporary’), consultant, outsourcing on-site, and outsourcing off-site. In total, 16 percent of our employees were flex workers at year-end 2017.

We changed our flexible labor model in 2017 and will now be able to reduce the volume of our flexible workforce by offering a high number of our current flex employees fixed contracts in the run up to January 1, 2019.

We identified 3 categories of flex workers: those hired to fill gaps in our fixed workforce and who will be offered a fixed contract after 1 year; those hired to temporarily increase our operational capacity, with flex contracts of a maximum of 2 years; and those with skills we need temporarily and who can stay on a flex contract for a maximum of 3 years. As we gradually implement this new flexible labor model, we expect the percentage of flex workers to decrease in the next few years and the percentage of employees on a fixed contract to increase.

Overtime

Protecting our employees from working overtime during peak times requires our constant attention. The nature of our business often requires employees to work significant amounts of overtime - something they are usually keen to do because they feel responsible for finishing projects on time. It is our policy to follow local rules regarding working hours. However we apply our own company standards when these are stricter. Our company standards are based on Responsible Business Alliance norms.

We improved our monitoring of employee overtime in 2017 to ensure we had a realistic picture of the situation. As a result, we noticed there was still a lot of overtime. In most cases, this concerned employees in the Netherlands who were temporarily working at an ASML or a client location abroad.

We are committed to eliminating excessive overtime and raising awareness about our standards. However, the workforce this mainly concerns is often highly motivated to work extra hours, making it very challenging for us to reduce overtime. As overtime remains an important issue for management, we will continue to implement appropriate measures to manage the situation.

Community involvement

As a global technology leader and employer, ASML plays an active role in the communities we operate in. By fostering close community ties we learn more about the world around us and raise awareness of our business, our industry and our interests. Our community involvement is also a way for us to fulfill our leadership role, as the community can benefit from our success and position.

Our community relations program, which falls under the remit of our CEO, is built on three pillars:


•	Making the local communities we operate in attractive places to live for our (international) employees and their families.


•	Promoting and providing technical education in local communities to strengthen the knowledge infrastructure.


•	Being a good corporate citizen and giving back to communities by supporting local charities and global education projects.

ASML INTEGRATED REPORT 2017 27

The following table provides an overview of some of our community programs and what they have achieved.



Pillars		Key programs		Results

Making communities attractive places to live	• •	Together with our partners in the Brainport Eindhoven region and key public stakeholders in The Hague, we developed the Brainport National Action Agenda, which invites the Dutch government to invest more in our high-tech region. An important part of this is creating a pleasant environment to live in, as we need to be able to attract talented employees from all over the world. Through our sponsorship program, we support several local organizations, such as The Hub and the Expat Center in Eindhoven, the Netherlands. We also support local events such as Veldhoven Tasting in Veldhoven, the Netherlands, Habitat for Humanity in San Diego, California in the US and Community Food events in Wilton, Connecticut and San Diego, California, both in the US.	• •	The Dutch government has recognized the unique and valuable contribution of the Brainport Eindhoven region. In collaboration with the new government, the Brainport National Action Agenda will be developed further, moving a step closer towards realization. We provided funds to PSV Eindhoven football club, the GLOW light art exhibition and the Muziekgebouw concert hall in Eindhoven. Approximately 3,000 ASML employees visit the PSV football stadium or Muziekgebouw every year. In 2017, we committed EUR 620,000 to our sponsorship program.
			• •

Strengthening knowledge infrastructure in local communities	• • •	We run an intensive technology promotion program to boost interest in technology among young people and increase the local and regional talent pool. As such, we also raise the awareness of career opportunities in a well-paid and fulfilling sector. We help technology startups through our active role in the Eindhoven Startup Alliance, mostly supporting high-tech business initiatives. We grant ASML Makers Awards to help develop good ideas into concrete prototypes and prototypes into products that can be produced locally.	• • • • • • •	The Science Camp in Korea is a three-year program run by 30 employees, aimed at providing science education to underprivileged children. To inspire young people with a talent for engineering, ASML China sponsored the Future Engineer Competition in Shanghai. This competition attracts around 1,500 elementary school and junior high school students. In the Netherlands, we organized Girls Day and the Dutch Technology Week. Middle school students from San Diego county joined us on-campus for half a day of technology-related experiments and activities. We have seen several high-tech hardware startups thrive and some scale up to become more mature businesses. We organized two Get in the Ring events, attracting startups from all over the world. Five winners were selected and will get support from ASML to develop their activities. At least four ideas that won an ASML Makers Award were brought to the next level, and one has been made ready for market introduction and production. ASML supports Eindhoven University of Technology’s research activities in the new and highly innovative field of integrated or smart photonics with an annual donation of EUR 122,000 for 5 years, ending in 2021.
	• • •		• • • • • • •

Being a good corporate citizen and giving back to communities	• •	Our volunteer work policy allows ASML employees to do eight hours of volunteer work annually during working hours. We provide financial support to projects related to education for underprivileged children and teenagers, mostly through the ASML Foundation.	• • • • • •	ASML employees in the Netherlands completed a total of 4,545 hours of volunteer work in 2017. Employees, family and friends got together on the San Diego campus to pack food for underprivileged families in San Diego and Haiti. The team packed 50,000 meals. The ASML Foundation is sponsoring the Hope Project - One Day Parent Program, an annual event organized by the YMCA Social Welfare Foundation, for a three-year period, providing financial support, and after-school and vacation classes to prevent underprivileged children from dropping out of school. In China, ASML Foundation sponsors the Shanghai Technology Innovator Program through the local charity A-dream, which helps implement the program. Targeting junior high-school students, this program aims to boost enthusiasm for optics technology through a 16-hour course on this topic.
			• • • • • •

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	The ASML Foundation The ASML Foundation focuses on the UN’s fourth Sustainable Development Goal: to ensure inclusive and quality education for all and promote lifelong learning. The ASML Foundation aims to increase the self-sufficiency of disadvantaged children through educational initiatives that develop their talents and help unlock their potential. Although closely linked to our company, the ASML Foundation operates independently. It is our charity of choice and in 2017, we donated EUR 650,000 to the foundation. The ASML Foundation mainly supports projects in the regions where ASML operates: Asia, Europe and the US. The projects it supports in the US mainly focus on preventing school drop-outs in underprivileged areas, while projects in Asia focus on education for girls to prevent child marriages and on vocational training for young people to help increase their self-sufficiency. In Europe, the foundation focuses on education for disadvantaged children and children lacking in education that suits their specific needs. In 2017, the ASML Foundation supported 9 projects in 6 countries. We encourage our employees to support the ASML Foundation, either financially or through volunteer work. For more information, see www.asmlfoundation.org.

People objectives



Theme	Objective	Target year	How we did

Talent management	2017 focus areas: a. Develop our employees to their full potential by having 100% individual targets defined, mid-year reviews performed and updated high quality Development Action Plans.	2017		The majority of employees have defined individual targets (as demonstrated by the 98% of completed People Performance Management reviews) and Development Action Plans (89% completed).
	b. Develop our employees to their full potential and enable them to contribute to our success by having individual targets aligned with the business priorities.			Business priorities were sufficiently cascaded down from senior management to employees.
	c. Systematically identify and develop future leadership through succession management, cross-sector / regional career moves and leadership development programs.			For details about succession management see Talent management above.

	Attrition rate high performers < overall employee attrition.	2017 - 2020		See People KPIs in the table below - our attrition rate of high performers is 1.8%, lower than our overall attrition rate of 4.4%.

	Promotion rate of high performers > overall promotion rate.	2017 - 2020		See People KPIs in the table below - our promotion rate of high performers is 37%, well above the overall promotion rate of 13%.

	2018 focus areas: a. Secure Workforce Management and Workforce Planning to support future growth. b. Execute recruitment strategy by implementing the new Applicant Tracking System, focused communication strategy on labor market and deploying a strengthening selection process. c. Strengthen onboarding activities on a global scale by further roll out of our pre-onboarding app, develop a social onboarding program and further deployment of the buddy program.	2018

Sustainable relationship with our people	Achieve an employee engagement score from our me@ASML engagement survey at least equal to the peer benchmark group score.	2017		We are slightly below the peer group benchmark. Seeking improvement, we discuss the me@asml results at team level across the company and define team specific action plans.
		2017

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People KPIs



KPI	2015		2016		2017

Average engagement score me@ASML survey ¹	n/a		7.0		7.0
Employee Attrition (in %)	4.2		3.9		4.4
Attrition rate of high performers (in %)	1.7		1.7		1.8
Promotion rate of high performers ²	n/a		35	%	37	%
Promotion rate - Overall ²	n/a		12	%	13	%
% of People Performance Management process completion	98	%	98	%	98	%
% of Development Action Plan completion	91	%	92	%	89	%


1.	Measured on a scale from 0 to 10. No survey was held in 2015.


2.	The promotion rate was measured for the first time in 2016.

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ASML Integrated Report 2017

Sustainable relationships with our customers

Our top priority is to provide our customers with the best-possible products and services. We work closely with them to ensure we understand their needs, priorities and challenges. The high cost of new chip-making equipment and factories is a major incentive for building partnerships, sharing knowledge and risks, and aligning our investments in innovation with those of our customers.

Staying close to our customers

Our sales teams market and sell our products directly to our customers, without the assistance of any agencies or other intermediaries. Our account managers, field and application engineers, service and technical support specialists are located throughout Asia, the US and Europe. We established an industrial site in Linkou and Tainan, Taiwan. This site serves as a supplementary engine to propel our long-term growth, providing customer support and training, logistics, refurbishment, technology and application development. We also produce all YieldStar systems at this site and enable sourcing of equipment modules, components and services in the region. In addition, the site acts as a training center to develop worldwide talent for our workforce and customers.

To support and sustain our partnerships with customers, we have a system of regular customer meetings in place. In 2017, we held 15 Executive Review Meetings, at which members of our senior management team and BoM discussed business and general issues with customers. We also held 12 Technology Review Meetings, at which our senior technology experts and CTO discussed technology plans and requirements with customers. These meetings are an opportunity for customers to set out a roadmap for their technology requirements, such as shrinking chip size. In 2017, we also held 11 Operational Review Meetings to review topics related to the operational activities of our customers. These meetings help to ensure our customers’ goals are aligned with our future product plans and also help to identify and close gaps. Besides these important planning sessions, we also held 33 face-to-face meetings between our BoM and customer representatives to discuss business.

Our Voice of the Customer program allows our employees to hear first-hand about our customers’ needs and challenges. This is especially important for employees who do not normally have direct access to customers. To reach as many of our people as possible, the program uses different channels of communication: live presentations and Q&As with senior customer representatives; recorded customer interviews; online articles, and personal engagement with customer representatives who are based near our offices in Veldhoven. In 2017, 8 of our customers representatives were based near Veldhoven. To share customer feedback with an even bigger audience at our company, we expanded our Voice of the Customer program in 2017 by adding customer feedback briefings. Our account teams used company gatherings, such as our ASML Day, as an opportunity to inform employees about the feedback we received from customers. Sharing this customer feedback more widely brings in more ideas from employees and helps us act on the feedback and make improvements.

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Our Customer Loyalty Survey is an important tool for gauging customer satisfaction and receiving feedback. Along with our Voice of the Customer program, the Customer Loyalty Survey provides us with direct feedback from customers that helps us prioritize our activities for the coming year. Conducted every two years, this survey asks our customers to rate our performance and also presents them with a number of multiple-choice questions on the most important areas of improvement for our account teams and business lines. The latest survey, from 2016, resulted in a satisfaction score of 75.4 percent, which met our target of 75 percent. Our next survey will be held in September 2018. According to an annual customer survey conducted by research specialists VLSI, we ranked 3^rd on the list of best suppliers of chip-making equipment with a score of 9.0 (2016: 8.9). Through our Customer Loyalty Survey, customers asked that we focus on quality improvements, product performance in a high-volume manufacturing environment, and providing timely solutions for install-base problems. In 2017, we continued using feedback from the survey to improve our service. Our account teams fine-tuned their priorities and also stepped up their efforts to proactively inform customers about any expected issues in order to find solutions at an earlier stage. We also continued our efforts to ensure customers receive spare parts at the right time and of the right quality, thereby minimizing the downtime of their chip-making operations.

Our customers look to us to help them reduce the cost of ownership. This means they want us to help them lower the overall cost for each microchip manufactured. This occurs primarily by creating technology that allows for shrinking the device, which is why shrink and EUV technology are so important in our technology roadmap. It also occurs by reducing the cost of acquiring, operating and maintaining our chip-making systems. In 2017, we once again made significant progress in bringing our EUV systems a step closer to high-volume production by shipping the first NXE:3400B system, see also Management Board Report - Products and Technology - Innovation is our lifeblood. We continued our program to upgrade our DUV immersion scanners, which enables customers to reuse their installed base, and through our Brion software, allowed them to take advantage of a faster and more efficient patterning process, thereby helping to reduce the overall cost of ownership. We also launched the latest YieldStar 375 system to allow our customers to upgrade their metrology platform.

In 2017, we integrated the sales teams of ASML and HMI to better serve our customers with our holistic lithographic solution including accurate patterning information metrology. Our CCIP, launched in 2012 to accelerate the development of EUV technology, came to an end at the end of 2017.

Sustainable relationships with suppliers

We rely heavily on our suppliers to develop, manufacture and deliver innovative parts for our systems, on time and with the right quality. It is our strategy to develop and manufacture those parts and modules that are unique for lithography in house, both from a manufacturing and a development competence perspective. If this does not prove possible, supplier partnerships are established and well maintained. Contract manufacturers or original equipment manufacturing suppliers are mainly responsible for delivering modules that require non-unique manufacturing or development competencies. It is crucial that we build a world-class supplier network. One of our major priorities is to work with our suppliers to reduce the total cost of ownership of our systems, while meeting our challenging quality standards.

We conduct risk assessments for all key suppliers every year, evaluating risk areas such as our suppliers’ financial health, performance issues, potential for supply disruptions (as a result of natural hazards or calamities), and situations where we depend on a single supplier for certain parts or modules. As suppliers operating in the same industry or market are typically exposed to similar risk, we evaluate suppliers’ risk and performance within the context of the supply market category, thereby enhancing efficiency. Whenever necessary, we mitigate risks by adjusting our sourcing strategy. We also require our suppliers to meet standards regarding quality, logistics, technology, cost and sustainability. We regularly evaluate our risk assessment and supplier profile methodology and will continue to invest in evolving the norms underpinning the supplier profile to better meet industry requirements.

As most of the raw materials required for our products are purchased and processed by our suppliers, we have limited exposure to price volatility of these materials.

Partnership with Carl Zeiss SMT GmbH

Carl Zeiss SMT GmbH is our single supplier, and we are their single customer, of optical columns for lithography systems. Carl Zeiss SMT GmbH is capable of developing and producing these items only in limited numbers and only through the use of manufacturing and testing facilities in Oberkochen and Wetzlar, Germany.

In 2017, 26.6 percent of our aggregate cost of system sales was purchased from Carl Zeiss SMT GmbH (2016: 27.6 percent; 2015: 26.2 percent).

Our relationship with Carl Zeiss AG 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 Carl Zeiss AG is run under the principle of ‘two companies, one business’ and is focused on continuous improvement of operational excellence. Pursuant to these agreements, ASML and Carl Zeiss AG have agreed to continue their strategic alliance until either party provides at least three years notice of its intent to terminate.

ASML INTEGRATED REPORT 2017 33

In 2017, we completed the acquisition of a 24.9 percent indirect interest in Carl Zeiss SMT GmbH for EUR 1 billion. We also agreed to support Carl Zeiss SMT GmbH’s R&D expenses, capital expenditures and other supply chain investments pertaining to High-NA technology over 6 years, beginning in 2016. The main objective of this partnership is to facilitate the further development of our EUV lithography chip-making systems. See Consolidated Financial Statements - Notes to the Consolidated Financial Statements - Note 10 Equity method investments.

Sustainability criteria

The sustainability criteria that we apply in our quality, logistics, technology, cost and sustainability assessment are based on the Responsible Business Alliance (formerly known as Electronic Industry Citizenship Coalition) Code of Conduct. This code covers, among other things, standards for human rights, anti-corruption and bribery, and for sound environmental practices. Compliance with the Responsible Business Alliance Code of Conduct is a prerequisite for doing business with us, and we actively pursue our suppliers’ adherence to this code. The requirement to meet human rights and other ethical Responsible Business Alliance standards is included in our supplier agreements, along with the right to audit to Responsible Business Alliance compliance. We conduct supplier audits to address risks identified in our regular risk assessments. These audits also help ensure suppliers deliver what we expect. Our objective is to conduct a more extensive review of the sustainability efforts of our business-critical suppliers. To this end, we aim to audit their sustainability performance according to a perceived level of risk. If a supplier does not conform to the required standards, it is our policy to discuss mitigating measures.



	Responsible Business Alliance Responsible Business Alliance members commit and are held accountable to a common Code of Conduct and utilize a range of Responsible Business Alliance training and assessment tools to support continuous improvement in the social, environmental and ethical responsibility of their supply chains. The Responsible Business Alliance used to be known as the Electronic Industry Citizenship Coalition and was renamed in 2017. See also www.responsiblebusiness.org.

In 2017, we continued our efforts to improve the quality of products our suppliers deliver. In particular, we focused on ensuring that spare parts shipped to our customers meet the highest possible standards and function well upon arrival. To that end, we discussed with suppliers the importance of carrying out additional quality checks before parts are shipped.

We collaborated with our suppliers to further develop our EUV systems, such as increasing the power of the EUV light source and further improving the quality of pellicles, i.e. the thin film protecting the mask or reticle used in EUV lithography.

Supplier Relationship Satisfaction Survey

We have been conducting an annual Supplier Relationship Satisfaction Survey since 2015 that has helped us set priorities to improve how we collaborate with our suppliers. Based on feedback from our 2016 Supplier Relationship Satisfaction Survey, we made our supplier meeting set-up more transparent so that ASML senior management is involved in a structural way.

The overall rating score of our Supplier Relationship Satisfaction Survey conducted in 2017 was 77 percent. This overall rating score covers both product related suppliers and non-product related suppliers.

In 2017, we made the Supplier Relationship Satisfaction Survey more efficient, shortening it by focusing on some key questions. We also recalibrated the scores for multi-year comparison. The weighted average satisfaction scores for 2017 showed a 2 percent increase for product related suppliers and a 2 percent decrease for non-product related suppliers, compared to 2016, see Partners KPIs in the table near the end of this section.

Across non-product related suppliers, the percentage decrease is mainly due to a lower rating in terms of the ‘mutually beneficial relationship with ASML’. We attribute this to our recent efforts to encourage competition in the non-product related supply market. We firmly believe that these efforts are a necessary and healthy step to have taken in our management of indirect spend.

For product related suppliers, the overall rating score increased for almost all individual topics. Insights into our long-term roadmap and the collaboration between ASML and the supplier were especially highly rated. It is important that we continue to improve how we collaborate with our suppliers and ensure that we speak to them with one voice. We believe that regular business reviews and aligning roadmaps and business priorities are key to making this happen.

ASML INTEGRATED REPORT 2017 34

One way in which we facilitate this and strengthen our relationship with suppliers is our Supplier Day in Veldhoven for our product related suppliers. In 2017, this brought together around 145 representatives from approximately 100 suppliers from across the globe to participate in workshops and attend presentations by our senior management, including our CFO and CTO. It also offers our suppliers the opportunity to familiarize themselves with our business strategy and targets. This year’s workshop focused on translating our priorities into concrete tasks that we need to complete and the contribution from our suppliers to meet these targets. Additionally, approximately 100 quality specialists from approximately 70 suppliers are invited twice a year to our ‘crossing events’. These are meetings organized by our Supplier Network Management unit and provide a platform to discuss operational improvements for our products, such as improvements in quality or production volume.

‘As-new’ program helps cut waste

As part of our commitment to the circular economy, we work together with customers and suppliers to remanufacture used system parts so that they can be reused as if they were new parts, see also Management Board Report - Products and Technology - Product stewardship. Our first pilot scheme under this ‘As-new’ program, conducted in collaboration with our customers and suppliers, demonstrated the positive environmental impact: waste was cut by 450,000 kilograms or 44 percent of materials. In addition, we were able to re-use packaging material. We discussed the program with more than 20 suppliers and decided to expand it to boost the circular economy model even further.

Conflict minerals

As of 2012, Section 1502 of the Dodd-Frank Act in the US requires companies to publicly disclose their use of conflict minerals originating from the Democratic Republic of the Congo or any neighboring countries. These include minerals mined under conditions of armed conflict and human rights abuses. The four main minerals concerned are tin, tantalum, tungsten and gold, also known as 3TG.

We closely monitor use of these materials in our supply chain. We encourage our suppliers and sub-suppliers to have policies and due diligence measures in place that will enable us to investigate if the products and components they supply us with contain any conflict minerals from the Democratic Republic of the Congo or adjoining countries. We have also developed our own due diligence process to identify and manage the sourcing of our components, focusing especially on 3TG. As such, we have been conducting due diligence reviews with relevant suppliers to trace the supply chain back to the smelter and will seek confirmation from the selected suppliers that potential 3TG minerals are responsibly sourced.

We are collaborating with both the Responsible Business Alliance (formerly known as the Electronic Industry Citizenship Coalition) and the Global e-Sustainability Initiative, as well as with other semiconductor and electronics companies, to address conflict-free mineral sourcing on an industry-wide level. The Responsible Business Alliance and Global e-Sustainability Initiative have provided us with the standards and templates we use in reporting and implementing our due diligence. As a member of the Responsible Business Alliance we support initiatives which foster better working conditions in raw material production, as well as the Responsible Business Alliance’s efforts to build a trustworthy system that ensures the social and environmental responsibility of mineral sources. We will continue to work with our suppliers on due diligence in the supply chain, supporting industry initiatives and taking appropriate action to fully comply with the SEC rules regarding the Dodd-Frank Act. We hope this concerted effort will dissuade perpetrators of violence and human rights violations and encourage transparent mineral sourcing.

Our Conflict Minerals Report is publicly available on our Website.

ASML INTEGRATED REPORT 2017 35

Partners objectives



Theme	Objective	Target year	How we did

Sustainable relationships with customers	Respond to customer feedback by improving the quality of spare parts upon arrival and addressing cost of ownership issues.	2015 - 2020		We continued initiatives taken at various levels within the organization to increase quality and address cost of ownership issues (e.g. Account teams have received / are receiving training on Cost of Ownership, Voice of the customer sessions, Quality as one of our Corporate Priorities).

	Continue to strengthen executive alignment.	2016-2020		In 2017, 15 Executive Review, 12 Technology Review and 33 face-to-face meetings took place in which members of our (technology) senior management, including board members, discussed business and general issues with customers.

	Additional emphasis on account teams driving customer quality issues through the organization.	2016-2020		Account teams are supporting the Voice of the Customer sessions to ensure customer feedback is widely shared at ASML.

	Achieve top 3 ranking among large suppliers of semiconductor equipment.	2016-2020		ASML ranked 3rd on the list of best suppliers.

Sustainable relationships with suppliers	Supplier due diligence for business critical and new suppliers.	2016-2017		A new risk profile has been rolled-out to all suppliers in scope. We will actively monitor adherence in 2018.

	More extensive review of sustainability efforts at our business critical suppliers.	2016-2018		10 additional theme audits covering sustainability in 2017 took place.

	Introduce revised supplier profiling to separate out performance, capability and risk indicators.	2017-2018		Guiding principles for new supplier profile defined, agreed and communicated to suppliers. Phased roll–out starting Q1 2018.

Partners KPIs



KPI	2015		2016		2017

Supplier Relationship Satisfaction Survey (overall rating score) ¹	77.5	%	77.4	%	77.0	%

Supplier Relationship Satisfaction Survey (overall rating score) Product related suppliers ¹	77.0	%	77.5	%	79.7	%
Supplier Relationship Satisfaction Survey (overall rating score) Non-product related suppliers ¹	80.3	%	77.1	%	74.9	%

Overall Loyalty Score (Customer Loyalty Survey) ²	n/a		75.4	%	n/a

VLSI Survey results ³
Large suppliers of chip-making equipment - score	9.0		8.9		9.0
Suppliers of Fab equipment - score	9.0		8.9		9.0
Technical leadership for lithography equipment - score	9.5		9.6		9.4


1.	The number of questions in the 2017 Supplier Relationship Satisfaction Survey was reduced from 44 to 26. We recalibrated the scores from 2015 and 2016 to match the 2017 structure, so that the results could be compared. The overall rating score covers both product related suppliers and non-product related suppliers.


2.	The Customer Loyalty Survey is held every two years.


3.	Measured on a scale from 0 to 10.

ASML INTEGRATED REPORT 2017 36

ASML Integrated Report 2017

Operational excellence

We have a long track record of innovation, having introduced several generations of cutting-edge chip-making systems that help our customers produce ever-smaller microchips (‘shrink’) at affordable prices. As a product matures, our customers increasingly focus on cost of ownership and customer experience. They look to us to reduce costs, deliver faster, and enhance their performance by solving any problems quickly and efficiently, limiting downtime. To meet their expectations, we set up a comprehensive and organized portfolio for structural improvement projects to achieve operational excellence. We aim to deliver products and services with the right quality, on time, at a competitive cost, in a safe work environment and with the optimum use of capital.

Efforts to enhance operational excellence are led by our Operations organization. As our industry evolves and our company grows, we need to ensure that our Operations organization and way of working are scalable, agile, effective and efficient. To achieve this, we carry on developing our Centers of Excellence network where we bring together and exchange expert knowledge and experience from across our business in order to support best-practice decision-making and execution. We are monitoring the maturity level of the competence centers rated on a scale of 0 to 5. Secondly, we work to adjust our basic processes to ensure they meet future needs and support them with state-of-the art IT systems. Thirdly, to achieve the cost, quality and delivery improvements we seek for our customers, we use the Lean principles to build a continuous improvement mindset. This means, among other things, that we seek to eliminate anything that does not add value for our customers. Lean also helps us define a clear end goal and foster a culture of continuous improvement. See also Non-Financial Statements - Non-financial Indicators - Operations and Other Appendices - Appendix - Property, Plant and Equipment.

One of the ways of gauging progress towards achieving operational excellence is measuring the number of employees we have reached with our initiatives to implement Lean principles. Our overall objective is to familiarize over 8,000 operations employees with our Lean way of working. We will do so gradually, targeting a specific number of employees each time. In 2017, we met our first target to reach a group of around 1,500 employees by year-end.

Quality

Quality is an integral part of operational excellence. While ASML has always been known for its innovation excellence, we also invest in our Quality Roadmap to safeguard the quality of our products and services. This roadmap aims to deliver products and services of the highest possible quality that meet customer needs by implementing a range of projects seeking continuous improvement across the entire ASML value chain.

In 2017, we also saw quality improvements in the supplier segment due to our Material Quality Performance Program.

Employee awareness of the importance of quality to our business was evident from our latest me@ASML survey; this year quality was listed as a top 5 priority for the first time. Two company-wide Quality Days were held to address quality issues, and promote our ASML Excellence vision to our employees.

Environment, health and safety

At ASML, we take responsibility for protecting our people and planet. We aim to invent, develop, manufacture and service our products in a safe and sustainable manner, striving towards zero incidents and zero emissions. Employee health and safety is crucial to creating a trusted working environment, where our employees feel respected and can thrive. Our corporate responsibility strategy is based on the premise that all workplace-related injuries and occupational illnesses are preventable.

We are working to reduce CO₂ emissions by ensuring all of our electricity usage will be ‘green’ by 2020. Other measures include the implementation of safety programs, and energy-, water-, and waste-saving projects.

How we manage environment, health and safety

Our line managers are responsible for day-to-day EHS management, with processes and policies set and overseen by the Corporate EHS Committee, a subcommittee of our Corporate Risk Committee. All employees can access our global online EHS incident reporting tool. It is mandatory to report incidents and unsafe / near-miss situations because this is the first step towards improving our EHS performance. We investigate all incidents to determine the root causes and take corrective actions to prevent them from recurring.

Our EHS Competence Center gathers the best-known practices, defines EHS standards for ASML, and helps managers across the business to implement these. Our EHS management system complies with ISO 14001 requirements and is structured based on the basic idea and purpose of ISO 45001. Since the early 2000s we hold certificates for ISO 14001 and again we have been recertified for the next 3 years. The renewal of the certificates gives ASML and our stakeholders the confidence that we will continue to be a learning organization, as well as improve results on environmental goals, and meet the requirements of involved regulatory bodies. We provide EHS training to employees to raise their awareness and operational skills and to familiarize them with EHS standards. Based on risk and hazard evaluations we gain insight into our main risk and hazard areas. We identify and manage our lines of defense and take appropriate action to mitigate risk.

ASML INTEGRATED REPORT 2017 38

How we did in 2017

Our ‘recordable incident rate’ in 2017 was 0.26, better than our target of 0.32. No work-related fatalities were recorded in 2017, just as in previous years. We register EHS-related incidents in line with the US Occupational Health and Safety Act. Given our ambition to have zero incidents, we will continue to take any necessary action to improve safety and remain focused on preventing incidents.

In 2017, contractors who work on our premises received a standardized set of EHS training. We organized a global ‘Have a safe day’ campaign to encourage discussion on safety topics and raise overall awareness. Managers used this day to again stress the importance of safety, urging employees to always speak up if they have any safety concerns. We also ran a global campaign on safe travel, to promote driving safely and urge employees to inform themselves about things such as vaccination requirements and potential risks when traveling abroad. Moreover, we put special focus on safety management in our leadership program for managers in our customer service department, the aim of which was to ensure managers take ownership of safety and promote safe behavior among their teams.

We are on track with our aim to only use electricity from renewable sources for all our operations by 2020. This priority objective is also one of our contributions to Guarantee of Origin (GO2) projects, including for example, the Vetteberget Wind Turbine project that started in 2017 and has a planned commissioning in 2018.

Enhancing energy efficiency is another priority. Our target for 2020 is to achieve an energy saving of 111 TJ, which equates to a 10 percent reduction of our 2015 energy consumption. We are on track to achieve this goal thanks to the energy efficiency initiatives we launched over the past few years.

We aim to cut the amount of waste we generate by 5 percent by 2020, compared to the amount of waste generated in 2015. Although we have made some good progress with this over the past years, we will have to accelerate our programs in the next two years to further reduce our waste production.

Several regulatory inspections were carried out at our locations across the world in 2017, none of which resulted in any significant EHS-related sanctions or fines. ASML was granted all legally required EHS permits required for our operations. In 2017, 3 environmental incidents were reported to the local authorities. Two were related to minor oil leakages (<1 US gallon) and one related to an engine coolant leak (5 US gallon). All took place at our production location in Wilton, Connecticut in the US. These spills caused no significant damage to the environment.

Environment, health and safety objectives



Theme	Objective	Target year	How we did

Employee safety	Reduce recordable incident rate by 15% compared to average of previous 3 years (which results in a target for 2017 of 0.32).	2017		Our recordable incident rate of 0.26 is better than our target of 0.32. We have an ambition to have zero incidents and will continue to take necessary action to improve safety.

Environmental efficiency own operations	100% Renewable electricity.	2020		We are on track. We achieved a 70.2% renewable electricity level in 2017 and have a plan in place to meet our 2020 target.

	10% Energy savings through projects.	2020		We are on track based on energy efficiency initiatives launched in prior years however work still needs to be done to identify further opportunities to meet our target for 2020 of achieving an energy saving of 111 TJ (10% of our 2015 energy consumption).

	5% Waste savings through projects.	2020		We ran some waste reduction initiatives though more needs to be done since we have only achieved 1.2% (since 2016) of our targeted waste savings (of 5% of our waste generated in 2015).

ASML INTEGRATED REPORT 2017 39

Environment, health and safety KPIs



KPI	2015	2016		2017

ASML recordable incident rate ¹	n/a	0.44		0.26
Renewable electricity (of total electricity purchased) ²	n/a	71	%	70.2	%
Energy savings world wide through projects (in TJ) ³	n/a	35.1		48.8
Waste savings world wide through projects ³	n/a	1.2	%	1.2	%


1.	The number of work-related injuries and illnesses, per 100 full-time workers. As from 2016 we use OHSA guidelines and therefore data previously reported in 2015 is not comparable and not included here.


2.	This was a new indicator in 2016.


3.	In 2016 we started a new master plan period which terminates in 2020. The savings reported are cumulated compared to base year 2015.

ASML INTEGRATED REPORT 2017 40

ASML INTEGRATED REPORT 2017 41

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	2016		2017
(in millions, unless otherwise indicated)	EUR	%¹	EUR	%¹

Sales
Total net sales	6,794.8		9,052.8
Increase in total net sales (%)	8.1		33.2
Net system sales ²	4,672.0		6,373.7
Net service and field option sales²	2,122.8		2,679.1
Sales of lithography systems (in units) ³	157		198
Profitability
Gross profit	3,044.5	44.8	4,076.7	45.0
Income from operations	1,657.7	24.4	2,496.2	27.6
Net income	1,471.9	21.7	2,118.5	23.4
Liquidity
Cash and cash equivalents	2,906.9		2,259.0
Short-term investments	1,150.0		1,029.3
Net cash provided by operating activities	1,665.9		1,798.6
Free cash flow ⁴	1,341.2		1,440.6


1.	As a percentage of total net sales.


2.	As per January 1, 2017, ASML presents net sales with respect to metrology and inspection systems as part of net system sales instead of net service and field option sales. The comparative numbers have been adjusted to reflect this change in accounting policy.


3.	Lithography systems do not include metrology and inspection systems.

Free cash flow is a non-GAAP measure and is defined as net cash provided by operating activities (2017: EUR 1,798.6 million and 2016: EUR 1,665.9 million) minus purchase of property, plant and equipment (2017: EUR 338.9 million and 2016: EUR 316.3 million) and purchase of intangible assets (2017: EUR 19.1 million and 2016: EUR 8.4 million). We believe that free cash flow is an important liquidity metric, reflecting cash that is available for acquisitions, to repay debt and to return money to our shareholders by means of dividends and share buybacks. Property, plant and equipment and purchase of intangible assets are deducted from net cash provided by operating activities because these payments are necessary to support the maintenance and investments in our assets to maintain the current asset base. Free cash flow therefore provides an alternative measure (in addition to net cash provided by operating activities) for investors to assess our ability to generate cash from our business. For further details about the purchase of property, plant and equipment and the purchase of intangible assets see Consolidated Financial Statements - Consolidated Statements of Cash Flows.

Operating results

Results of operations 2017 compared to 2016

The following discussion and analysis of our 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, see Management Board Report - Risk Factors.

Set out below are our Consolidated Statements of Operations data for the years ended December 31, 2016 and 2017:



Year ended December 31	2016		2017
(in millions)	EUR		EUR

Total net sales	6,794.8		9,052.8
Total cost of sales	(3,750.3	)	(4,976.1	)
Gross profit	3,044.5		4,076.7
Other income	93.8		95.8
Research and development costs	(1,105.8	)	(1,259.7	)
Selling, general and administrative costs	(374.8	)	(416.6	)
Income from operations	1,657.7		2,496.2
Interest and other, net	33.7		(50.3	)
Income before income taxes	1,691.4		2,445.9
Provision for income taxes	(219.5	)	(310.7	)
Income after income taxes	1,471.9		2,135.2
Profit (loss) related to equity method investments	—		(16.7	)
Net income	1,471.9		2,118.5

ASML INTEGRATED REPORT 2017 42

Set out below are our Consolidated Statements of Operations data for the years ended December 31, 2016 and 2017 expressed as a percentage of our total net sales:



Year ended December 31	2016		2017

Total net sales	100.0		100.0
Total cost of sales	(55.2	)	(55.0	)
Gross profit	44.8		45.0
Other income	1.4		1.1
Research and development costs	(16.3	)	(13.9	)
Selling, general and administrative costs	(5.5	)	(4.6	)
Income from operations	24.4		27.6
Interest and other, net	0.5		(0.6	)
Income before income taxes	24.9		27.0
Provision for income taxes	(3.2	)	(3.4	)
Income after income taxes	21.7		23.6
Profit (loss) related to equity method investments	—		(0.2	)
Net income	21.7		23.4

For further information, see Other Appendices - Appendix - Selected Financial Data and Other Appendices - Appendix - Results of Operations 2016 Compared to 2015.

Total net sales and gross profit

The following table shows a summary of sales data, units sold and gross margin for the years ended December 31, 2016 and 2017:



Year ended December 31	2016	2017
(in millions, unless otherwise indicated)	EUR	EUR

Total net sales	6,794.8	9,052.8
Net system sales¹	4,672.0	6,373.7
Net service and field option sales¹	2,122.8	2,679.1
Sales of lithography systems (in units) ²	157	198
Gross margin	44.8	45.0


1.	As per January 1, 2017, ASML presents net sales with respect to metrology and inspection systems as part of net system sales instead of net service and field option sales. The comparative numbers have been adjusted to reflect this change in accounting policy.


2.	Lithography systems do not include metrology and inspection systems.

We had another record year in 2017, with contributions from each of our wide range of product offerings; DUV, EUV and Holistic Lithography. It was also the year where the industry turned the corner on the introduction of EUV. We strengthened our partnership with Carl Zeiss AG by completing our acquisition of an indirect interest in Carl Zeiss SMT GmbH to secure the extension of EUV beyond the next decade.

Total net sales increased by 33.2 percent, driven by an increase in net system sales of 36.4 percent and an increase in net service and field option sales of 26.2 percent in 2017 compared to 2016. The increase in net system sales is mainly due to:


•	An increase from 4 EUV systems recognized in net system sales in 2016 to 11 EUV systems recognized in 2017.


•	An increase from 153 DUV systems recognized in net system sales in 2016 to 187 DUV systems recognized in 2017.


•	The inclusion of 12 months HMI net system sales in 2017, whereas 2016 only included 2 months.

The increase in net service and field option sales is mainly driven by an increase in the sales of productivity and focus upgrade packages in combination with a growing installed base.

Gross profit increased by EUR 1,032.2 million mainly due to an increase in sales.

Gross profit as a percentage of net sales increased from 44.8 percent in 2016 to 45.0 percent in 2017 primarily driven by a shift in product mix of systems towards more high-end systems, partly offset by higher EUV systems sales. Due to the accelerated investment in the EUV service infrastructure, we did not achieve a 0 percent gross margin on EUV over 2017. Nevertheless, even with more than tripled EUV net sales compared to 2016 we were able to improve our gross margin to 45.0 percent.

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 95.8 million for 2017 (2016: EUR 93.8 million).

ASML INTEGRATED REPORT 2017 43

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 1,259.7 million in 2017 as compared to EUR 1,105.8 million in 2016. R&D costs for both 2017 and 2016 were primarily focused on programs supporting EUV, DUV immersion, and Holistic Lithography. In 2017, R&D activities mainly related to:


•	EUV - Further improving availability and productivity focused on the final stages of development related to our NXE:3400B system, of which we shipped our first systems in 2017. In addition, we are extending our road map by including High-NA to support our customers with 3 nm logic.


•	DUV immersion - Mainly dedicated to the development of our next generation Immersion system NXT:2000i.


•	Holistic Lithography - HMI expansion and further development of YieldStar and process window control solutions.

Selling, general and administrative costs

SG&A costs increased by 11.2 percent mainly driven by the inclusion of HMI for the full year and an increase in the number of employees.

Interest and other, net

Interest and other, net decreased by EUR 84.0 million in 2017 compared to 2016. This decrease is mainly due to the recognition of EUR 55.2 million gain in 2016 on foreign currency revaluations of transactions and balances relating to the HMI acquisition in interest and other, net. Other drivers of the decrease are a full year impact of interest on the Eurobond issued in 2016 and lower yields on cash.

Profit (loss) related to equity method investments

The loss related to equity method investments, which consists of the result of our 24.9 percent equity interest in Carl Zeiss SMT Holding GmbH & Co. KG, was EUR 16.7 million for 2017 (2016: no amount). See Consolidated Financial Statements - Notes to the Consolidated Financial Statements - Note 1 General information / summary of significant accounting policies.

Net income

Net income in 2017 amounted to EUR 2,118.5 million, or 23.4 percent of total net sales, representing EUR 4.93 basic net income per ordinary share, compared with net income in 2016 of EUR 1,471.9 million, or 21.7 percent of total net sales, representing EUR 3.46 basic net income per ordinary share.

Liquidity and capital resources

Our principal sources of liquidity consist of cash and cash equivalents as of December 31, 2017 of EUR 2,259.0 million, short-term investments as of December 31, 2017 of EUR 1,029.3 million and available credit facilities as of December 31, 2017 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.

Our cash and cash equivalents decreased to EUR 2,259.0 million as of December 31, 2017 from EUR 2,906.9 million as of December 31, 2016 and our short-term investments decreased to EUR 1,029.3 million as of December 31, 2017 from EUR 1,150.0 million as of December 31, 2016.

We invest our cash and cash equivalents and short-term investments in short-term deposits with financial institutions that have investment grade credit ratings and in money market funds that invest in high-rated short-term debt securities of financial institutions and governments. Our investments are mainly denominated in euros and to some extent in US dollars and Taiwanese dollars.

Our available credit facilities amount to EUR 700.0 million as of December 31, 2017 and as of December 31, 2016. No amounts were outstanding under these credit facilities at the end of 2017 and 2016. The amounts available at December 31, 2017 and 2016 consisted of EUR 700.0 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. In 2017, we exercised our extension option, extending the maturity date to 2022. Outstanding amounts under this credit facility will bear interest at EURIBOR or LIBOR plus a margin that depends on our credit rating.

We have the following repayment obligations relating to our Eurobonds:


•	EUR 500 million in 2022.


•	EUR 750 million in 2023.


•	EUR 1,000 million in 2026.


•	EUR 750 million in 2027.

In 2017 we repaid EUR 238.3 million of the Eurobonds. We seek to ensure that our principal sources of liquidity will be sufficient to satisfy our liquidity requirements throughout every phase of the industry cycle.

ASML INTEGRATED REPORT 2017 44

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 other sources of liquidity are sufficient to satisfy our current requirements, including our expected capital expenditures and debt servicing. 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 Financial Statements - Consolidated Statements of Cash Flows and Notes to the Consolidated Financial Statements 4, 5, 15, 16, 26 and 27.

Trend Information

We expect that Moore’s Law will continue beyond the next 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 cost 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.

Amongst others but certainly due to high demand from the server market, DRAM system demand remains strong as our customers continue to migrate to sub-20nm nodes. Advanced nodes are more litho intensive and thus drive increased litho demand. In 3D NAND, litho demand is also strong as a number of customers continue to ramp new greenfield Fabs and scale vertically with so called stack-of-stacks. Additional lithography is required to connect these stacks, which further drives up litho intensity. When adding the NAND opportunity to the DRAM business outlook for next year, we see another strong memory year ahead.

Logic demand continues to be solid as customers ramp 10nm and start transition to the 7nm node. Litho intensity continues to increase with migration to more advanced nodes and further grows with the adoption of EUV at 7nm. EUV production ramp will accelerate in 2018 as customers are eager to realize the benefits of process simplification, cycle time reductions and yield improvement, ultimately resulting in cost benefits.

We expect continued solid growth in both sales and profitability in 2018. We plan to ship 22 EUV systems in 2018. Shipment profile however will be back-end loaded as our planned step up in move rate will effectively only have an impact in the second half of 2018.

Our expectations and guidance for the first quarter of 2018 can be summarized as follows:


•	Total net sales of around EUR 2.2 billion.


•	Gross margin of between 47 and 48 percent.


•	R&D costs of about EUR 350 million. The increase in R&D costs reflects continued accelerated investments in our portfolio.


•	SG&A costs of about EUR 115 million.


•	Effective annualized tax rate of around 14 percent.

For discussion on the main key performance indicators indicated above, see Management Board Report - Financial Performance - Operating results and Liquidity and capital resources.

The trends discussed above are subject to risks and uncertainties. See Special Note Regarding Forward-Looking Statements and Management Board Report - Risk Factors.

Business Risk and Continuity

The Corporate Risk Management function helps us accomplish our objectives by being systematic in our approach to setting standards and enable management to improve the efficiency and effectiveness of our governance, risk management, internal control and compliance. It also helps to identify opportunities to achieve the company’s objectives and enable continuous sustainable growth.

The BoM is responsible for ensuring that we comply with applicable legislation and regulations. It is also responsible for managing the internal and external risks related to our business activities.

ASML’s BoM has delegated its risk oversight to ASML’s Corporate Risk Committee. The Corporate Risk Committee is chaired by the COO and comprises senior management representatives from all sectors within ASML, including CEO and CFO. The Corporate Risk Committee acts as a central risk oversight body to review, manage and control risks included in the ASML risk universe. The Corporate Risk Committee approves the risk appetite (i.e. the acceptable level of risk), risk management policies and risk mitigation strategies. ASML’s risk universe is reviewed annually taking into account a broad range of internal and external information sources such as macro-economic and industry trends, relevant guidelines and legislation (e.g. the EU Directive on disclosure of non-financial and diversity information and the Dutch Corporate Governance Code) and stakeholders’ needs and expectations in all areas including corporate responsibility. ASML may have a different risk appetite for different identified risks and is geared towards mitigating the risks to a reasonable level.

ASML INTEGRATED REPORT 2017 45

Our risk management and control system is based on the identification of external and internal risk factors that could influence our operational, business continuity and financial objectives and contains a system of multidisciplinary assessments, monitoring, reporting, and operational reviews. For example:


•	Quarterly senior management meetings, which are conducted to assess ASML’s corporate initiatives which are launched in order to execute ASML’s strategy.


•	Monthly operational review meetings of the BoM with ASML’s senior management on financial performance and realization of operational objectives and responses to emerging issues.


•	Quarterly review of key operational risk areas by the Corporate Risk Committee.


•	ASML’s Anti-Fraud Policy, which facilitates the development of controls which will aid in prevention, deterrence and detection of fraud against ASML.


•	Internal control assessments performed by Internal Audit.


•	On a semi-annual basis, letters of representation are signed by ASML’s key senior management members. They confirm, among other, the following:


–	Compliance with local laws and regulations.


–	Enable preparation of US GAAP Consolidated Financial Statements.


–	Compliance with our Code of Conduct, Business Principles and related Corporate Policies.


–	Any material weaknesses and / or deficiencies (if applicable) in design and operation of internal controls over (non) financial reporting.

In the risk management process, the SB provides independent oversight on management’s response to mitigating critical risk areas based on bi-annual risk reviews while the SB’s Audit Committee provides independent oversight on the risk management process and timely follow-up of high-priority actions based on quarterly progress updates.

Two additional committees - the Disclosure Committee and Internal Control Committee - have been assigned to ensure compliance with applicable external reporting requirements and assessing effectiveness of related internal controls over financial reporting.

We have a Disclosure Committee to ensure compliance with applicable disclosure requirements arising under US and Dutch law and applicable stock exchange rules, US GAAP, IFRS-EU and the Sarbanes-Oxley Act. This Disclosure Committee is composed of various members of senior management, and reports to the CEO and CFO. The chairman of the Disclosure Committee reports to the Audit Committee about the outcome of the Disclosure Committee meetings. The Disclosure Committee gathers all relevant financial and non-financial information and assesses the materiality, timeliness and necessity for disclosing such information. The Disclosure Committee also advises the CEO and CFO on the effectiveness of the disclosure controls and procedures and the effectiveness of the internal control over financial reporting (Sarbanes-Oxley Act).

ASML INTEGRATED REPORT 2017 46

Our Internal Control Committee, which includes three members of the Disclosure Committee, advises ASML’s Disclosure Committee in respect of its assessment of ASML’s internal control over financial reporting under section 404 of the Sarbanes-Oxley Act. The chairman of the Internal Control Committee updates the Audit Committee, the CEO and CFO on the progress of this assessment and the chairperson of the Audit Committee includes this item in their report to the full SB.

All material risk management activities have been discussed with the Audit Committee and the SB. For a discussion of ASML’s risk factors, see Management Board Report - Risk Factors. See also Corporate Governance - Board of Management - ASML Reports.

We do not rank the individual risks identified in our Management Board Report, as we are of the opinion that doing so defies the purpose of a comprehensive risk assessment. Also, it would be arbitrary since all the risks mentioned have significant relevance for us and our business.

We define strategies to address these risks, which are taken into account when defining the corporate priorities in order to secure risk mitigation in our business processes. For example:

•

To address the rapid commercial and technological changes in the semiconductor industry as well as the increasing complexity in executing our product introduction roadmap we focus on partnerships, collaboration and sharing knowledge with our customers and suppliers. We work closely to align roadmaps, oversee execution and ensure we maximize customer value. See Management Board Report - Products and Technology and Partners.


•	To address our dependence on a limited number of suppliers we nurture high quality and collaborative relationships with our suppliers. We share our expert knowledge, including risks and rewards, so we all work together to achieve cost-effective shrink, boost innovation and enable our industry to grow. See Management Board Report - Partners.

•

To address risks related to intellectual property rights we have developed an intellectual property rights management mechanism to protect our intellectual property rights and to respect the intellectual property of other parties. To protect ourselves from incidents related to cyber security we have also set up a broad information security program addressing preventive, detective and responsive measures to security threats. See Management Board Report - Products and Technology.


•	To address the scarcity of staff with specific technical expertise we put effort into educating, training and retaining talent. In addition we promote initiatives that encourage young people to study science, technology and engineering. See Management Board Report - People.

ASML INTEGRATED REPORT 2017 47

Risk Factors

In conducting our business, we face many risks that may interfere with our business objectives. 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.

Our business will suffer if we or the industry do not respond rapidly to commercial and technological changes in the semiconductor industry

Our success in developing new products and in enhancing our existing products depends on a variety of factors, including the successful management of our and our suppliers’ R&D programs and the timely and successful completion of product development and design relative to competitors. 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 current or new competitors, or if our customers adopt new technological architectures that are less focused on lithography products, this may adversely affect our business, financial condition and results of operations. The success of our EUV technology, 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 24 months at equivalent costs, remains dependent on continuing technical advances by us and our suppliers. We invest considerable financial and other resources to develop and introduce new products and product enhancements, and if we are not successful in developing products that are adopted by customers, we may not recoup the significant investments we have made in such products or enhancements, including in EUV and Holistic Lithography. High-NA, in particular, which is a further extension of our EUV technology, requires significant resources for its R&D. If we are unsuccessful in developing High-NA or if competitors successfully introduce alternative technologies or processes, this could impact our business and we may be unable to recoup some or all of the investments that we have made, which could have a material adverse effect on our business, financial condition and results of operations.

We may incur increased costs related to inventory obsolescence, as a result of technological changes. Such inventory obsolescence costs may be higher with our newer technology products.

Due to increased complexity of our systems or alternative technologies, our customers may purchase existing technology systems rather than new leading-edge systems or may delay their investment in new technology systems to the extent that such investment is not economical or required given their product cycles. Some of our customers have experienced delays in implementing their product roadmaps, which increases the risk of a slowing down of the overall transition period (or cadence) for introduction of new systems and lengthening the period for a return on our investments.

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, which could have a material adverse effect on our business, financial condition and results of operations.

The success of new product introductions is uncertain and depends on our ability to successfully execute our R&D programs

Our lithography systems have become increasingly complex, and accordingly, the costs and time period to develop new products and technologies have increased, and we expect such costs and time period to continue to increase. In particular, developing new technology including a multi e-beam innovation as part of our Holistic Lithography solutions and EUV technology (including High-NA) requires significant R&D investments by us and our suppliers in order to meet our and our customers’ technology demands. 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. Furthermore, if our R&D programs are not successful in developing the desired new technology, our business, financial condition and results of operations could be materially and adversely affected.

We face challenges in managing industrialization of our products and bringing them to high volume production which could impact profitability

Bringing our products to high volume production at a value-based price and in a cost effective manner, depends on our ability to manage the industrialization of our products. Customer acceptance of our products depends on performance of our systems in the field. As our systems become more complex, the risk that our systems may not perform according to specifications or quality standards increases. If quality or performance issues arise, they may result in additional costs and may damage our reputation and reduce demand for our products. In particular, with respect to EUV, there are a number of development milestones that remain to be met, such as predictable availability and source power.

Transitioning our products to full-scale production also requires the growth of our infrastructure, including enhancing our manufacturing capabilities, increasing supply of components and training qualified personnel. Any delay or potential inability to meet these growth requirements due to manufacturing constraints, delays in our suppliers’ development roadmaps, or insufficiently increasing knowhow of our employees, could have a material adverse effect on our business, financial condition and results of operations.

ASML INTEGRATED REPORT 2017 48

The capability, capacity and costs associated with providing the required customer support function to cover the increasing amount of shipments and servicing a growing number of EUV systems that are operational in the field could affect the timing of shipments and the efficient execution of maintenance, servicing and upgrades, which is key to the systems continuing to achieve the required availability. The build-up of the service organization, its people and the complexity of the technology requirements will take time. It may also mean that we have to extend warranty beyond the agreed standard terms. This may delay the profitability of the service business and could also have a material impact on our reputation and relationships with customers.

We face intense competition

The semiconductor equipment industry is highly competitive. Our competitiveness depends upon our ability to develop new and enhanced semiconductor equipment, related applications and services that are competitively priced and introduced on a timely basis, as well as our ability to protect and defend our intellectual property rights. See Management Board Report - Products and Technology - Knowledge management and Protecting our intellectual property, Consolidated Financial Statements - Notes to the Consolidated Financial Statements - Note 19 Legal contingencies, and Other Appendices - Appendix - Government Regulation.

We compete primarily with Nikon and Canon in respect of systems. Each of Nikon and Canon has 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 particular, we have experienced increased competition from Nikon and Canon in existing technologies such as TWINSCAN XT systems, where end-market demand has increased. 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, 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 compete with providers of applications that support or enhance complex patterning solutions, e.g Applied Materials Inc. and KLA-Tencor Corporation. These applications effectively compete with our Holistic Lithography offering, which has become an increasingly significant part of our business. The competition we face in our applications business may be higher than for our systems, as there are more competitors and potential competitors in this market.

Our production is highly dependent on the performance of a limited number of critical suppliers of single source 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 our products as a result of delays in supply of these components and subassemblies.

The number of lithography systems we are able to produce may be limited by the production capacity of one of our key suppliers, Carl Zeiss SMT GmbH, which is our sole supplier of lenses, mirrors, illuminators, collectors and other critical optical components (which we refer to as optics). If Carl Zeiss SMT GmbH is unable to maintain and increase production levels or if we are unable to maintain our business relationship with Carl Zeiss SMT GmbH 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 Carl Zeiss SMT GmbH is to terminate its supply relationship with us or if Carl Zeiss SMT GmbH is unable to maintain production of optics over a prolonged period, we would effectively cease to be able to conduct our business. See Management Board Report - Partners - Sustainable relationships with suppliers. In addition to Carl Zeiss SMT GmbH’s current position as a supplier of optics, a number of other critical components are available from only a limited number of 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 or limiting our capabilities to react quickly to changing market conditions. 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.

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. Customer concentration can increase because of continuing consolidation in the semiconductor manufacturing industry. In addition, although Holistic Lithography constitutes an increasing portion of our revenue, a significant portion of those customers are the same customers as those of our systems. 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 2017, recognized net sales to our largest customer accounted for EUR 2,480.8 million, or 27.4 percent of net sales, compared with EUR 1,646.2 million, or 24.2 percent of net sales, in 2016. 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.

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Additionally, as a result of our limited number of customers, credit risk on our receivables is concentrated. Our three largest customers (based on total net sales) accounted for EUR 1,356.7 million, or 64.7 percent of accounts receivable and finance receivables on December 31, 2017, compared with EUR 655.3 million, or 51.8 percent on December 31, 2016.

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.

The semiconductor industry is 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, and certain key end market customers - Memory and Logic, exhibit different levels of cyclicality and different business cycles. Sales of our lithography systems, services and Holistic Lithography products depend in large part upon the level of capital expenditures by semiconductor manufacturers, which in turn are influenced by industry cycles and a range of competitive and market factors, including semiconductor industry conditions and prospects. Large capital expenditures of our customers also impact the available production capacity of the industry to produce chips thereby creating imbalances in the supply and demand of chips. Reductions or delays in capital expenditures by our customers or incorrect assumptions by us about our customers’ capital expenditures could have a material adverse effect on our business, financial condition and results of operations.

Our ability to maintain profitability in an industry downturn 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 not have negative 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. Furthermore, we have grown in terms of employees, facilities and inventories in recent years, so it may be even more difficult for us to reduce our costs in order to respond to an industry downturn.

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 systems (198 units in 2017 and 157 units in 2016), excluding metrology and inspection systems. As a result, the timing of shipment and recognition of system sales 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.

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 and applications. 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.


•	The steps we take to prevent misappropriation or infringement of our proprietary rights may not be successful.


•	Third parties may be able to develop or obtain patents for broadly similar or 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.

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.

In addition, our customers or suppliers may be subject to claims of infringement from third parties, alleging that our products used by such customers in the manufacturing 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 our customers or suppliers 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 to potentially strengthen or expand our intellectual property rights or limit our exposure to intellectual property claims of third parties, which could have a material adverse effect on our business, financial condition and results of operations.

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From late 2001 through 2004, ASML was a party to a series of civil litigation and administrative proceedings in which Nikon alleged ASML’s infringement of Nikon patents generally 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 Nikon Cross-License Agreement, ASML and Nikon granted to each other a non-exclusive license for use in the manufacture, sale, and use of lithography equipment, under their respective patents. The license granted relating to many of the patents of each party was perpetual, but the license relating to certain other of the patents expired at the end of 2009. Each party had the right to select a limited number of the other party’s patents where the license for such patents expired in 2009 to be subject to a permanent covenant not to sue in respect of patent infringement claims. In October 2016, the Patent Selection was completed.

In addition, the Nikon Cross-License Agreement provided that following the termination of some of the licenses granted in the Nikon Cross-License Agreement on December 31, 2009, there would be a standstill period during which the parties agreed not to bring patent infringement suits against each other. This standstill period ran 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. For more information on the Nikon Cross-License Agreement see Management Board Report - Products and Technology - Knowledge management and Protecting our intellectual property.

In April 2017, Nikon sued ASML in both the Netherlands and Japan, alleging that the manufacture, sale, and / or use by ASML of certain equipment infringes asserted Nikon patents, and requesting both damages and injunctive relief prohibiting the sale or manufacture of such equipment. Nikon also sued in Germany, Carl Zeiss SMT GmbH, a supplier to ASML of components that ASML sells with or as part of certain lithography equipment. Nikon alleges that the manufacture, sale, and / or use of certain of these Carl Zeiss SMT GmbH components infringe asserted Nikon patents, and also seeks damages and an injunction prohibiting Carl Zeiss SMT GmbH from manufacturing or exporting certain components. Certain of these proceedings may result in court judgments during early 2018. Nikon has also initiated proceedings in the United States District Court for the District of Arizona in which Nikon has requested that the court order ASML to provide certain information to Nikon.

In response to Nikon’s actions, ASML, in some cases jointly with Carl Zeiss SMT GmbH and / or its affiliates, filed several lawsuits against Nikon both in Japan and in a number of venues in the US, alleging patent infringement of certain patents owned by ASML and / or Carl Zeiss SMT GmbH and / or its affiliates.

We may incur substantial legal fees and costs in connection with these lawsuits, 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 this or any other patent litigation may include, without limitation, payment of significant monetary damages, injunctive relief prohibiting our 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 what its outcome might be, or whether any other patent suit, by Nikon or another third party, may arise.

If Nikon is successful in obtaining injunctive relief prohibiting ASML or Carl Zeiss SMT GmbH from manufacturing, exporting or selling systems or components, this could effectively prohibit ASML from selling some of its systems, and, if Nikon is successful in obtaining a damages award such damages could be significant and 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 cyber security, 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 cyber-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 of our information technology systems as well as the information technology systems of our suppliers, customers and other service providers that have led and could lead to disruptions in critical systems, unauthorized release, misappropriation, corruption or loss of data or confidential information (including confidential information relating to our customers, employees and suppliers). In addition any system failure, accident or security breach could result in business disruption, theft of our intellectual property, trade secrets (including our proprietary technology), unauthorized access to, or disclosure of, customer, personnel or supplier information, corruption of our data or of our systems, reputational damage or litigation. 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.

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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. For example, we are currently implementing a new enterprise-wide management system and infrastructure. 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.

We are subject to risks in our international operations

The majority of our sales are made to customers outside EMEA, see our Consolidated Financial Statements - Notes to the Consolidated Financial Statements - Note 21 Segment disclosure. There are a number of risks inherent in doing business in some of those regions, for example:


•	Unfavorable political, geopolitical or economic environments;


•	Increased exposure to natural hazards;


•	Potentially adverse tax consequences;


•	Unexpected legal or regulatory changes;


•	Failure to comply with regulatory requirements, including anti-corruption, anti-bribery and human rights standards;


•	Our inability to attract and retain sufficiently qualified personnel;


•	Our inability to protect of our intellectual property and information technology systems; and


•	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, 23.7 percent of our 2017 total net sales and 30.7 percent of our 2016 total 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. The risks we face by doing business in Taiwan increased with our acquisition of HMI. Our business in People’s Republic of China is expected to increase further, which increases our exposure in international operations. Furthermore, certain of our manufacturing facilities as well as customers are located in South Korea. In particular, 33.9 percent of our 2017 total net sales and 23.3 percent of our 2016 total net sales were derived from customers in South Korea. There are tensions with the Democratic People’s Republic of Korea (North Korea), which have existed since the division of the Korean Peninsula following World War II, which have increased significantly over the previous year. The worsening of relations between those 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.

Furthermore, we are increasing our presence in a number of new jurisdictions, including the People’s Republic of China and Russia. Our international operations are exposed to risks, including risks relating to compliance with anti-corruption and anti-bribery laws and regulations, attracting and retaining sufficiently qualified personnel, and the protection of our intellectual property and information technology systems. If these risks materialize, they could have a material adverse effect on our business, financial condition or results of operations.

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 US, in Pyeongtaek, South-Korea, in Beijing, China, in Linkou and Tainan, 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. In addition, some of our key suppliers, including Carl Zeiss SMT GmbH, have a limited number of manufacturing facilities, the disruption of which may significantly and adversely affect our production capacity.

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 has increased in recent years, 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 R&D on a timely basis, which could adversely affect our business, financial condition and results of operations.

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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 and High NA, and our service activities have increased our need for qualified personnel. Competition for qualified personnel is particularly 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.

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 and Taiwanese dollars, particularly following our acquisitions of Cymer in 2013 and HMI in 2016, and a small portion of our operating results are denominated in currencies other than the euro and the US or Taiwanese 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 at quoted prices.

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, in 2012 the OECD has embarked on a project to propose measures against so called Base Erosion and Profit Shifting or BEPS. Based on the BEPS reports the EU has proposed directives to counter base erosion and profit shifting which in turn will result in legislative proposals in EU member states. Similar legislative initiatives inspired by the BEPS reports have been taken in Asian jurisdictions in which ASML operates. Anticipating these legislative initiatives, ASML has implemented and will implement changes in its business flows to align ASML business flows with these anticipated initiatives.

In addition, in October 2017, the newly elected Dutch government issued a coalition agreement in which they outlined, among others, their tax policies for the next four years, which included an increase in the effective innovation box tax rate and a reduction in the general corporate income tax rate over a number of years. Furthermore, in December 2017, the US President signed the Tax Cuts and Jobs Act which significantly changed the US income tax code.

These initiatives have lead to substantial changes to tax legislation in the countries in which ASML operates. We currently expect only a minor tax effect but we are continuing to assess the impact of those initiatives.

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 the environment, health and safety could subject us to significant liabilities

Hazardous substances are used in the production and operation of our products and 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 systems (which use lasers and other potentially hazardous systems) can be 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 our health and safety practices we develop will be effective in mitigating 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.

In addition, we face risks related to the global transition to a lower carbon economy and / or climate change. Such risks may result in an increase in our cost of goods, including as a result of the imposition of carbon taxes or increased regulations on technology restrictions, which could have 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 have in the past and may in the future 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. Furthermore, as the industry is becoming more consolidated, anti-trust clearances may become harder to obtain, which could inhibit future desired acquisitions.

We may also face challenges with integrating any business we acquire into our organization.

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 there are indicators that the value of goodwill and indefinite-lived other intangible assets have been impaired. Furthermore, we have recorded our indirect interest in Carl Zeiss SMT GmbH as an equity method investment and, therefore, we must assess in each reporting period whether there are triggers that cause this investment to be impaired. Any reduction or impairment of the value of our indirect investment in Carl Zeiss SMT GmbH, goodwill or other intangible assets will result in additional charges against earnings, which could materially reduce our reported results of operations in future periods.

We may not declare cash dividends and conduct share buyback programs 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. In addition, as part of our plan to return excess cash to shareholders, we conduct share buyback programs from time to time. The dividend proposal and amount of share buyback programs 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. We may also suspend buyback programs from time to time which would reduce the amount of cash we are able to return to shareholders. Accordingly, the BoM may decide to propose not to pay a dividend or pay a lower dividend and may adjust the amount of share buyback programs with respect to any particular year in the future, which could have a negative effect on our share price.

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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 US 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 Corporate Governance - Board of Management and Supervisory Board, and Consolidated Financial Statements - Notes to the Consolidated Financial Statements - Note 26 Shareholders’ equity.

Materiality Assessment

Dialogue and sharing knowledge are important in all areas of an innovation-driven industry, and to that end, we continually and openly communicate with our main stakeholder groups through various channels, see Non-Financial Statements - Stakeholder Engagement and at different levels within our organization. We also analyze global trends, risks and opportunities. ASML’s materiality analysis uses all of this input to identify the issues that matter most to our stakeholders and to our business, which in turn contributes to our company vision, mission and strategy.

We define our stakeholders as those parties affected by our activities or those who have a direct interest in or who can influence our company’s long-term business success. We have identified 5 main stakeholder groups: customers, shareholders, employees, suppliers and society.

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In 2016 we performed a new comprehensive materiality assessment, considering the four GRI G4 principles for defining report content to re-assess the topics that are most important to our stakeholders and to sustain ASML’s long-term business growth. We based our materiality analysis on stakeholder feedback, a review of the industry and global trends that may affect us, relevant legislation, guidelines and standards (such as the GRI G4 and ISO 26000), a sector and media analysis, and analysts’ questionnaires (such as the Dow Jones Sustainability Index assessment and the Carbon Disclosure Project). This led to a list of relevant topics. To weigh the impact of each of these topics on ASML and our stakeholders, we discussed them with the most relevant internal stakeholders and surveyed representatives from all five stakeholder groups. The results of the assessment were validated and approved by our Corporate Risk Committee.

We identified 11 material themes that are most relevant to our stakeholders and directly contribute to our potential to innovate and excel. We also identified other issues that could affect our business. These include issues our stakeholders expect us to act on or issues that we have an impact on and therefore, as a company with a strong sense of corporate social responsibility, feel we need to address. These issues have been categorized under the ‘Responsible business behavior themes’. Each theme is the responsibility of one of our senior managers (referred to as the ‘theme owner’). The theme owner monitors progress for this theme in relation to agreed targets and ensures there are sufficient resources to meet the agreed targets and objectives. Insufficient progress is discussed during operational performance review meetings and escalated to our Corporate Risk Committee or during other relevant committee meetings where necessary.

We reviewed our material themes in 2017 and concluded that 2 specific focus areas should be emphasized: cyber security, see Management Board Report - Risk Factors - A disruption in our information technology systems, including incidents related to cyber security, could adversely affect our business operations and privacy, see Management Board Report - People - Human rights and labor relations. In our ongoing efforts to maximize the social and environmental impact of our products and activities, we also identified two specific areas for further investigation: the energy efficiency of our products, see Management Board Report - Products and Technology - Product stewardship and strengthening our support of the innovation eco-system, see Management Board Report - People - Community involvement.

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Sustainable Development Goals

We also support the 2030 ambition defined in the United Nations Sustainable Development Goals adopted by the United Nations in 2015. These goals aim to protect the planet and improve the lives of people everywhere. We have mapped out how our strategy and current efforts actively support these goals and the table below outlines the five most relevant United Nations Sustainable Development Goals to which we contribute.



Relevant United Nations Sustainable Development Goal	ASML Theme		Contribution to the United Nations Sustainable Development Goal		Section in this report

Ensure inclusive and quality education for all and promote lifelong learning	• • •	Talent management Community involvement Knowledge management	• • •	People development & training Technology promotion program & ASML Foundation Technical training	• • •	People People Products & Technology


Promote inclusive and sustainable economic growth, employment and decent work for all	• • •	Sustainable relationship with suppliers Responsible supply chain Sustainable relationship with our people	• • • •	Co-development with business critical suppliers Responsible Business Alliance (formerly Electronic Industry Citizenship Coalition) membership Place to Work, Meet, Learn and Share Employment creation	• • • •	Partners Partners People Highlights


Build resilient infrastructure, promote sustainable industrialization and foster innovation	• • •	Innovation Knowledge management Community involvement	• • •	ASML’s ‘open innovation’ concept Knowledge creation and sharing Strengthening local knowledge infrastructure	• • •	Products & Technology How We Create Value People


Ensure sustainable consumption and production patterns	• •	Product stewardship Environmental efficiency own operations	• •	Circular economy approach Waste savings	• •	Products & Technology Operations


Take urgent action to combat climate change and its impacts	• •	Product stewardship Environmental efficiency own operations	• •	Energy efficiency products Renewable electricity	• •	Products & Technology Operations

This Report focuses on the material themes which we disclose in a comprehensive manner. However, we also want to meet our stakeholders’ expectations, so for our responsible business behavior themes we seek to address the elements that especially interest them. This results in themes being addressed in different detail.

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Business Ethics and Compliance

In an international company like ours, with employees from over 100 different countries and a range of cultural backgrounds, it is crucial to provide clear guidance on ethical behavior. We do this through our Code of Conduct and Business Principles and our Ethics Program. We encourage our management to set the right example and create an environment in which our people and business partners feel comfortable to speak up if they experience or suspect a breach of our Code of Conduct and Business Principles. As a member of the Responsible Business Alliance (formerly known as Electronic Industry Citizenship Coalition), we adhere to this industry organization’s code of conduct and integrate its norms and values into our way of working. We are committed to achieving our strategic goals while conducting business in such a way that lawful, ethical and sound practices are ensured.

ASML’s Ethics Board, chaired by our CEO, oversees and implements our Ethics Program. The corporate Ethics Office, led by our Corporate Ethics Officer, is responsible for implementing and monitoring this Ethics Program. The program consists not only of providing computer based trainings on ethics, but also enrolls global classroom trainings throughout all layers of the company. In addition, the Ethics Office uses various other means of communication to reach out to employees, such as the yearly ethics week. The Ethics Office also actively promotes our company’s Speak Up policy and encourages employees to report any concerns relating to misconduct or suspected misconduct. As part of the Speak Up implementation, great efforts have been made and will continue to be made to further strengthen the global Ethics Liaisons network. Our ethics organization also includes ASML employees who act as Ethics Liaisons in all the countries we operate in. Ethics Liaisons are the trusted points of contact for each local office, offering advice on ethical issues and answering questions from colleagues.

Our Compliance Office, led by our Chief Compliance Officer, oversees, advises, monitors and supports ASML management in complying with laws, regulations and corporate policies. Although the Compliance Office is part of our legal department, it is integrated into the enterprise risk management framework and control system as applied by our Corporate Risk Management function. It is governed by the Corporate Risk Committee. We rely on the integrity and accountability of our senior management to comply with the laws. Our Chief Compliance Officer supports and advises the business in implementing measures to help managers fulfill their responsibilities.

Our Business Principles elaborate on our Code of Conduct and give employees greater clarity about the standards we expect them to follow and the behavior they should adopt. We update our code and principles whenever required to incorporate the latest legal and regulatory requirements. No changes were made in 2017. Our Code of Conduct and Business Principles can be found in the Governance section of our Website.

Our whistleblower Speak Up policy and our internal Ethics Investigation Procedure outline the steps employees are encouraged to take if they experience or suspect a breach of our business ethics. These documents also reassure employees that they can report a breach without fear of repercussions. For employees or external stakeholders who feel more comfortable remaining anonymous, we have a Speak Up system, which is run by an independent external service company. Like our Code of Conduct and Business Principles, our Speak Up policy is available on our Website for external stakeholders.

ASML INTEGRATED REPORT 2017 58

In 2017, we registered 230 Speak Up messages made by employees. The highest number of these Speak Up messages were related to our business principle ‘We respect people and planet’, more specifically these concerned issues such as bullying, harassment, problems with style and language of communication and HR related topics (appraisal, demotion, compensation and benefits). Other queries related to our business principle ‘We operate with integrity’, mostly in the form of questions (am I allowed to accept or give away) but we also received Speak Up messages relating to employees (potentially) crossing the line of what is acceptable, as well as potential conflicts of interest. We have looked into and addressed all Speak Up messages.

The increase in Speak Up messages compared to last year is mainly due to the growth of our workforce, an increase in awareness of our policy and a growing familiarity with the procedure for raising issues due to the specific worldwide efforts of the Corporate Ethics Office.

As in previous years, we did not incur any significant fines for breaches of ethical regulations.

Our global ethics awareness week in 2017 focused on raising awareness on diversity & inclusion and anti-discrimination, work-place harassment, and the right to privacy. We invited external speakers to give presentations on bullying and diversity. Managers also held sessions with their teams where they watched a video about these topics and discussed how to deal with any related issues. We started a review of our fraud policy in 2017 and highlighted fraud prevention, like the misuse of expenses reimbursements, in our ethics training sessions.

With respect to compliance, we continued our efforts to reduce the risk of bribery and corruption, with a particular focus on expanding our awareness measures in key geographical areas and business sectors. In addition, we moved the anti-bribery and corruption program into the Legal department under the Chief Compliance Officer. We will continue to provide in-depth training to each of our employees and provide enhanced training to those conducting business in higher risk countries, i.e. countries with a high ranking for corruption on the Transparency International Corruption Index.

ASML INTEGRATED REPORT 2017 59

ASML INTEGRATED REPORT 2017 60

Supervisory Board



	Gerard J. Kleisterlee (1946, Dutch) Member of the SB since 2015; first term expires in 2019 Chairman of the SB, Chairman of the Selection and Nomination Committee and member of the Technology Committee
l	Mr. Kleisterlee was the President and CEO of the Board of Management of Royal Philips N.V. from 2001 until 2011, after having worked at Philips from 1974 onwards.
l	Currently, Mr. Kleisterlee is the Chairman of the Board of Vodafone Group Plc. and Non-Executive Director of Royal Dutch Shell Plc.

	Antoinette (Annet) P. Aris (1958, Dutch) Member of the SB since 2015; first term expires in 2019 Member of Technology Committee and Remuneration Committee
l	Ms. Aris is Adjunct Professor of Strategy at INSEAD, France, a position she has held since 2003.
l	From 1994 to 2003 Ms. Aris was a partner at McKinsey & Company in Germany.
l	Currently, Ms. Aris is a Non-Executive Director of Thomas Cook Plc. and a member of the supervisory boards of ProSiebenSat.1 AG, Jungheinrich AG and ASR Nederland N.V.

	Clara (Carla) M.S. Smits-Nusteling (1966, Dutch) Member of the SB since 2013; second term expires in 2021 Chairperson of the Audit Committee
l	Ms. Smits-Nusteling was CFO and a member of the Board of Management of Royal KPN N.V. from 2009 until 2012.
l	Prior to that, Ms. Smits-Nusteling held several finance and business related positions at Royal KPN N.V. and PostNL.
l	Currently, Ms. Smits-Nusteling is a Non-Executive Director of the Board of Tele2 AB, a member of the Management Board of the Foundation Unilever N.V. Trust Office, Non-Executive Director of the Board of Directors of Nokia Corporation and lay judge of the Enterprise Court of the Amsterdam Court of Appeal.

	Douglas A. Grose (1950, American) Member of the SB since 2013, second term expires 2021 Vice Chairman of the SB, Chairman of the Technology Committee and member of the Selection and Nomination Committee
l	Mr. Grose was CEO of GlobalFoundries from 2009 until 2011.
l	Prior to that, Mr. Grose served as senior vice president of technology development, manufacturing and supply chain for Advanced Micro Devices, Inc. Mr. Grose also spent 25 years at IBM as General Manager of technology development and manufacturing for the systems and technology group.
l	Currently, Mr. Grose is a member of the Board of Directors of SBA Materials, Inc.

ASML INTEGRATED REPORT 2017 61



	Johannes (Hans) M.C. Stork (1954, American) Member of the SB since 2014; first term expires in 2018 Member of the Technology Committee and the Remuneration Committee
l	Mr. Stork is Senior Vice President and CTO of ON Semiconductor Corporation, a position he has held since 2011.
l	Prior to that, Mr. Stork held various management positions at IBM Corporation, Hewlett Packard Company, Texas Instruments, Inc. and Applied Materials, Inc., including Senior Vice President and CTO of Texas Instruments, Inc. and Group Vice President and CTO of Applied Materials, Inc. Further, Mr. Stork was a member of the Board of Sematech.
l	Currently, Mr. Stork is a member of the Scientific Advisory Board of imec.



	Pauline F.M. van der Meer Mohr (1960, Dutch) Member of the SB since 2009; third term expires in 2018 Member of the Audit Committee and Selection and Nomination Committee
l	Ms. Van der Meer Mohr was President of the Executive Board of the Erasmus University Rotterdam, the Netherlands from 2010 up until and including 2015.
l	Prior to that, Ms. Van der Meer Mohr was managing partner of the Amstelbridge Group, Senior Executive Vice President at ABN AMRO Bank, Head of Group Human Resources at TNT N.V., and has held several senior executive roles at the Royal/Dutch Shell group of companies in various areas.
l	Currently, Ms. Van der Meer Mohr is the Chairperson of the supervisory board of EY Netherlands LLP, a member of the supervisory board of Royal DSM N.V., Non-Executive Director of HSBC Holdings Plc, and Chairperson of the supervisory board of Nederlands Danstheater.

	Rolf-Dieter Schwalb (1952, German) Member of the SB since 2015; first term expires in 2019 Chairman of the Remuneration Committee and member of the Audit Committee
l	Mr. Schwalb was CFO and member of the Board of Management of Royal DSM N.V. from 2006 to 2014.
l	Prior to that, Mr. Schwalb was CFO and member of the Executive Board of Beiersdorf AG and he held a variety of management positions in Finance, IT and Internal Audit at Beiersdorf AG and Procter & Gamble Co.

	Wolfgang H. Ziebart (1950, German) Member of the SB since 2009; third term expires in 2019 Member of the Technology Committee and the Remuneration Committee
l	Mr. Ziebart was President and CEO of Infineon Technologies A.G. from 2004 until 2008.
l	Prior to that, Mr. Ziebart was on the Boards of Management of car components manufacturer Continental A.G. and automobile producer BMW A.G.
l	Currently, Mr. Ziebart is the Chairman of the supervisory board of Nordex SE and a member of the Board of Autoliv, Inc.

Company Secretary : Mr. Robert F. Roelofs

Appointed : 2002

Deputy Company Secretary : Ms. Angela J.F.M. van de Kerkhof

Appointed : 2017

ASML INTEGRATED REPORT 2017 62

Introduction

As ASML’s Supervisory Board we aspire to live up to the highest standards of corporate governance. We focus on the long term and on sustainable value creation, always acting in the best interests of the company and all its stakeholders. We do so by ensuring that our company pursues a strategy that secures our position in the industry, with the right people and policies in place for successful implementation of the company’s strategy. We uphold an appropriate system of checks and balances, provide oversight, evaluate performance and give advice where required. ASML is fully compliant with the revised Dutch Corporate Governance Code, which came into effect on January 1, 2017. In this Supervisory Board Report, we report on our activities in 2017 and provide the information required by the Dutch Corporate Governance Code.

Characterized by significant growth, 2017 was a very good year for ASML. It was the breakthrough year for our EUV technology. We shipped a total of 10 EUV systems to all of our major customers, showing that the industry has turned the corner towards using EUV in high-volume microchip production. We also made strides in the integration of HMI, launching the first product jointly developed with the engineering team of this pattern verification specialist which we acquired in 2016. With the strong support of our customers we approved an ambitious product development program for EUV High NA that will further enable the continuation of Moore’s Law well into the next decade. In this context we took our cooperation with Carl Zeiss AG a step further, acquiring a 24.9 percent indirect interest in our strategic supplier Carl Zeiss SMT GmbH. All of this puts us well on track towards achieving our stated 2020 ambitions.

Strong growth in a demanding high technology industry, however, is also very demanding on our people and organization and therefore we spent a significant part of our meetings with management discussing organizational development and future leadership requirements. We started a project for leadership assessment and development for our top 100 to ensure we have the bench strength required for the continuation of our successful journey. While we still have many technological and organizational hurdles to overcome, we are confident that ASML is very well positioned for the future.

Activities in 2017

In 2017, the SB discussed at length ASML’s corporate strategy, including its implementation and translation thereof into Corporate Priorities. EUV, DUV, Holistic Lithography and High-NA, were extensively reviewed and discussed throughout the year. With respect to EUV, the SB provided the BoM with support and advice relating to the further development of this technology as well as its industrialization. In DUV, the SB supported the BoM in its activities to further increase competitiveness and operational excellence. The growing pattern fidelity control business, including Holistic Lithography, was another topic to which the SB devoted a substantial amount of attention. This included monitoring the integration of HMI. The SB also reviewed the High-NA program from a technological and a commercial perspective, as well as the cooperation with Carl Zeiss SMT GmbH in this area.

A recurring item on the SB agenda is a review of the developments in the semiconductor market and in the customer domain, financial performance and the development of ASML’s share price and analyst perceptions.

Other topics addressed by the SB were the annual budget and the quarterly results and accompanying press releases, as well as the outcomes of the year-end US GAAP and IFRS-EU audits. The SB reviewed the financing of ASML, including the long term financial plan and ASML’s capital return policy and approved the BoM’s dividend proposal as submitted to the AGM in 2017. The SB also provided advice to the BoM in relation to the share buyback program, which was resumed in the third quarter of 2017 after having been paused since July 20, 2016. The SB also reviewed ASML’s annual and interim financial statements, including non-financial information, prior to publication thereof.

A substantial amount of attention was paid to a review of ASML’s risk landscape and the risk appetite as well as the risk mitigation measures taken. Part of a significant review on our risk management approach were the assessment and mitigation of supply chain related risks, as well as ASML’s quality program.

Furthermore, the SB looked into ASML’s organizational structure, which was extensively reviewed in light of the rapid growth of the company. People development was also a recurring agenda item in the SB meetings. In 2017, a detailed review was performed with regard to talent management and succession planning for the BoM and senior management.

Corporate responsibility strategy was another topic discussed by the SB. This included actions implemented or to be implemented to achieve sustainability targets set with respect thereto. Corporate responsibility was also addressed in the SB’s Remuneration Committee as it is a long-term qualitative target for the BoM.

Corporate governance developments were also discussed by the SB in 2017. This included a discussion on ASML’s implementation of the new Dutch Corporate Governance Code.

The SB also closely followed the developments in the legal proceedings between ASML and Nikon.

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In 2017, a delegation of the SB met with the Works Council twice in formal meetings. The topics of these meetings generally focused on the strategy and the overall performance of ASML, particularly in EUV, the composition of the SB and the BoM, the Remuneration Policy for the BoM, the alignment of remuneration policies for senior management and the job grades below that level, company culture, and our strategy and business-development process. Other topics included our values and culture, and long-term value creation. Finally, the SB and the Works Council reflected on their cooperation over the past years, as the Works Council’s term of office ended in October 2017.

An SB delegation and the Works Council also discussed the process of finding a successor for Ms. Van der Meer Mohr, who will step down per the 2018 AGM and for whose position the Works Council has an enhanced right of recommendation.

Meetings and Attendance

In 2017, the SB held 8 meetings. Of these meetings, 4 were held at the Veldhoven headquarters, 1 was an off-site meeting focused on strategy and 3 meetings were held via telephone conference. Besides these formal meetings and calls, there were several informal meetings and telephone calls among SB and/or BoM members.

The SB meetings and the SB committee meetings are held over several days, ensuring there is time for review and discussion. At each meeting, the SB members discuss among themselves the goals and outcome of the meeting, as well as topics such as the functioning and composition of the SB and the BoM.

The SB meetings and the meetings of the 4 SB committees were well attended. See table below for a full overview of SB members’ meeting attendance.

Most BoM members were present for the SB meetings. Besides the formal meetings, SB members were in regular contact with the BoM and its individual members.

Supervisory Board members’ meeting attendance



SB member	SB	Audit Committee	Remuneration Committee	Selection and Nomination Committee	Technology Committee

Annet Aris	8/8	n/a	5/5	n/a	5/5
Douglas Grose	8/8	n/a	n/a	4/4	5/5
Gerard Kleisterlee ¹	8/8	7/9	n/a	4/4	5/5
Pauline van der Meer Mohr	7/8	8/9	n/a	4/4	n/a
Hans Stork	7/8	n/a	5/5	n/a	5/5
Rolf-Dieter Schwalb	8/8	9/9	5/5	n/a	n/a
Carla Smits-Nusteling	8/8	9/9	n/a	n/a	n/a
Wolfgang Ziebart	8/8	n/a	5/5	n/a	5/5


1.	Mr. Kleisterlee is not a member of the Audit Committee, but attends the Audit Committee meetings whenever possible.

For further details on the structure, organization and responsibilities of the SB, see Corporate Governance - Supervisory Board.

Composition, Diversity and Independence

To ensure an appropriate and balanced composition of the SB, the SB spends considerable time discussing its (future) composition as well as its rotation schedule on an ongoing basis. The SB attaches great importance to its composition, independence and diversity in the broadest possible sense and strives to meet all the associated guidelines and requirements. We believe that all current members of the SB are fully independent as defined by the Dutch Corporate Governance Code. The current composition of ASML’s SB is diverse in terms of gender, nationality, knowledge, experience and background. It also meets the Dutch statutory requirements aimed at ensuring a balanced representation of men and women. The SB has formulated a diversity policy which is included in the Profile of the Supervisory Board as published on the Website.

In 2017 no new SB members were appointed. Per the 2017 AGM, the second SB terms of Ms. Van der Meer Mohr and Mr. Ziebart ended, as did the first terms of Ms. Smits-Nusteling and Mr. Grose. Ms. Van der Meer Mohr was nominated for reappointment because of her contribution to the SB, especially in the field of human resources, employee participation and with respect to audit and management development matters, as well as because of the preference the Works Council expressed with respect to her nomination. Mr. Ziebart was nominated for reappointment particularly because he proved himself to be a valuable contributor to the SB given his background and experience in various industries, including the semiconductor industry, and in various roles. In view of the rotation schedule, Ms. Van der Meer Mohr was appointed for a third term of 1 year and Mr. Ziebart was appointed for a third term of 2 years. Ms. Smits-Nusteling and Mr. Grose were both reappointed for a second term of 4 years.

Per the 2018 AGM, Ms. Van der Meer Mohr and Mr. Stork will retire by rotation. Ms. Van der Meer Mohr announced that she would not be available for reappointment. Mr. Stork has informed the SB that he is available for reappointment and the SB intends to propose to the General Meeting of Shareholders to reappoint Mr. Stork.

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For further information and background on the members of the SB, including details on nationality, gender and age , please see the SB members’ information in Supervisory Board Report - Supervisory Board.

Evaluation

The SB greatly values the structural and ongoing evaluation process as a means of ensuring continuous improvement of our way of working. Each year, the SB, assisted by the Selection and Nomination Committee, evaluates the composition, competence and functioning of the SB and its committees, the relationship between the SB and the BoM, its committees, its individual members, the chairpersons of both the SB and the committees, as well as the composition and functioning of the BoM and its individual members, and the education and training needs for the SB and BoM members. The SB conducted its annual self-assessment at the end of 2017. The self-evaluation was carried out by means of a web-based survey, as well as by one-on-one meetings between the SB Chairman and the individual members. The results of the self-evaluation were discussed at the start of 2018. This led to the conclusion that the SB continues to function well; some recommendations were made to further improve the effectiveness of the discussion in the boardroom; these recommendations will be implemented in the course of 2018.

The BoM also conducted a self-evaluation in 2017, focusing on the functioning of the BoM collectively as well as on the functioning of the individual BoM members. This self-evaluation was performed with the assistance of an external adviser, who conducted interviews with each of the BoM members. Furthermore, the BoM discussed its functioning in a meeting especially set up for this purpose. The conclusion of the self-evaluation was that ASML has a well-functioning BoM; some suggestions were made in relation to the effectiveness of the BoM meetings. These recommendations will be implemented in 2018.

Supervisory Board Committees

For information on the roles and responsibilities of the SB committees, see Corporate Governance - Supervisory Board - Composition and role of the four committees of the Supervisory Board.

Audit Committee

The current members of the Audit Committee are Ms. Smits-Nusteling (Chairperson), Ms. Van der Meer Mohr and Mr. Schwalb. The Chairman of the SB attends the Audit Committee meetings whenever possible. The members of the Audit Committee are all independent members of the SB. The SB has determined that both Ms. Smits-Nusteling and Mr. Schwalb qualify as an Audit Committee financial expert pursuant to Section 407 of the Sarbanes-Oxley Act and the rules promulgated thereunder, taking into consideration their extensive financial backgrounds and experience.

The Audit Committee held 9 meetings in 2017.

The Audit Committee’s focus in 2017 was, among other things, overseeing the integrity and quality of our financial reporting and the effectiveness of the internal risk management and internal control systems. The Audit Committee reviewed the Company’s annual and interim financial statements, including non-financial information, the quarterly results and the accompanying press releases as well as the outcomes of the year-end US GAAP and IFRS-EU audits. The Audit Committee extensively discussed relevant accounting principles (e.g. revenue recognition and the accounting for the indirect equity investment in Carl Zeiss SMT GmbH) and thoroughly reviewed new accounting standards for revenue recognition and lease accounting. The operational short and long-term performance was also discussed extensively, with a focus on various performance scenarios and their impact on ASML’s results, cash generation and financing and capital return policies.

The Audit Committee extensively discussed the effectiveness of the internal control framework in accordance with the US Sarbanes Oxley Act. This included monitoring the scoping, framework updates, control execution and control assessments. The Audit Committee discussed management’s assessment of the results from the test of design and test of effectiveness of internal controls over financial reporting.

Furthermore, the Audit Committee reviewed and approved the audit plans of the internal and external auditors, including scoping, materiality levels and the fees of the external auditor. The Audit Committee monitored the progress of the internal and external audit activities including review of observations identified as a result of the internal audit activities over the quarter, quarterly procedures performed by the external auditor, and the audit performed at year end by the external auditor. The Audit Committee oversaw the follow-up by the BoM on the recommendations made in the internal and external management letters. The Audit Committee also evaluated the external auditor at the end of 2017, including a review of their independence.

The Audit Committee closely monitored risk management and the risk management process, including the timely follow-up of high-priority actions based on quarterly progress updates. The Audit Committee looked into the fraud risk assessment as well as developments in the area of business ethics, including the Speak Up policy.

The Audit Committee reviewed and provided the SB with advice regarding the financing of ASML, including the long term financial plan and ASML’s capital return policy, the dividend proposal in respect of the 2016 financial year and the resumption of the 2016-2017 share buyback program in the third quarter of 2017. The Audit Committee (and the SB) fully support ASML’s principles regarding its current and future financing and capital return policies, which help ASML to respond to the cyclical nature of the semiconductor equipment industry.

The Audit Committee also discussed ASML’s tax policy and planning.

ASML INTEGRATED REPORT 2017 65

Another recurring agenda item in 2017 was ASML’s management of the IT landscape, IT security and special IT projects.

Other Audit Committee discussion topics were, among other things, revenue recognition, the accounting consequences of the 24.9 percent indirect interest in Carl Zeiss SMT GmbH and the HMI business combination. In 2017, the Audit Committee also performed a balance sheet review.

After each in person meeting, the Audit Committee held one-to-one meetings with the CFO, with the external auditor and with the internal auditor. The external auditor and the internal auditor attended all Audit Committee meetings, with the exception of one meeting, which was partly attended by the external auditor and the internal auditor.

With respect to the external auditor’s management letter over the 2017 financial year, the Audit Committee confirms that the management letter contained no significant items that need to be mentioned in this report.

Remuneration Committee

The current members of the Remuneration Committee are Mr. Schwalb (Chairman), Ms. Aris, Mr. Stork and Mr. Ziebart, each of whom is an independent, non-executive member of our SB in accordance with the NASDAQ Listing Rules. Mr. Schwalb is neither a former member of our BoM, nor a member of the management board of another company. Currently, no member of the Remuneration Committee is a member of the management board of another Dutch listed company.

In 2017, the Remuneration Committee held 5 meetings.

After the Remuneration Committee had recommended to the SB that they update the Remuneration Policy in 2016, a revised Remuneration Policy for the BoM was developed and submitted to the AGM in 2017. This revised policy was adopted and came into effect per January 1, 2017.

In the 2016-2017 time frame, the Remuneration Committee reviewed the group of companies used for reference for BoM remuneration and used this information to make a benchmark and perform scenario analyses. Where applicable, this was debated and used to make recommendations to the SB concerning the total remuneration package of the BoM and the variable remuneration consisting of an STI in cash and an LTI in shares as well for as the assessment of the shareholding positions of the BoM based upon the share ownership guideline of the Remuneration Policy. The Remuneration Committee also reviewed the Remuneration Report as part of the SB Report and Other Appendices - Appendix - Board of Management and Supervisory Board Remuneration, which details the remuneration of members of the SB and the BoM.

Working with the Audit Committee and the Technology Committee, the Remuneration Committee reviewed the STI and LTI targets for the BoM and proposed 2017 targets to the SB. It also provided recommendations to the SB regarding the achievement of the 2017 targets and related compensation levels for the BoM members over 2017.

A specialized external adviser assisted the Remuneration Committee in its BoM remuneration work. This external adviser does not provide services to the BoM.

The external auditor performs certain agreed-upon procedures with respect to the execution of the Remuneration Policy.

For further details see Supervisory Board Report - Remuneration Report.

Selection and Nomination Committee

The current members of the Selection and Nomination Committee are Mr. Kleisterlee (Chairman), Mr. Grose and Ms. Van der Meer Mohr, each of whom is an independent, non-executive member of our SB in accordance with the NASDAQ Listing Rules.

The Selection and Nomination Committee held 4 meetings in 2017.

During 2017 the current and future composition of the BoM, the SB and the SB committees were discussed at length, especially also in light of the succession of Ms. Van der Meer Mohr and the succession of Mr. Nickl, who has informed the SB that he will not extend his current contract that will expire on April 25, 2018. On January 17, 2018, we announced that the SB intends to appoint Roger Dassen as Executive Vice President and CFO to the BoM, effective June 1, 2018, subject to notification of the 2018 AGM. The Selection and Nomination Committee also discussed the intended nomination for reappointment of Mr. Stork, who will retire by rotation per the 2018 AGM as well as the intended reappointment of Messrs. Wennink, Van den Brink and Schneider-Maunoury, whose appointment terms will expire per the 2018 AGM. Other topics of discussion in 2017 were the functioning of the individual members of the SB and the BoM, the outcome of the SB’s self-evaluation in 2016, and the self-assessment as performed in late 2017. For further details on the self-evaluation see Evaluation above. The Selection and Nomination Committee also spent ample time discussing management development and succession planning of the BoM and senior management.

As part of its responsibility to monitor corporate governance developments, the Selection and Nomination Committee paid close attention to, among other things, the implementation of the new Dutch Corporate Governance Code, which became effective on January 1, 2017.

ASML INTEGRATED REPORT 2017 66

Technology Committee

The current members of the Technology Committee are Mr. Grose (Chairman), Ms. Aris, Mr. Kleisterlee, Mr. Stork, and Mr. Ziebart.

The Technology Committee held 5 scheduled meetings in 2017.

Important topics this year were the execution and implementation of technology programs with particular focus on EUV, DUV, High-NA and Holistic Lithography. The Technology Committee also discussed the technology targets and the achievements related thereto, and provided the Remuneration Committee and the SB with advice in this area.

To further increase its knowledge and understanding of technological developments relevant to ASML the Technology Committee spent a full day reviewing certain specific technological areas relevant for ASML and visiting the Advanced Research Center for Nanolithography, an organization ASML cooperates with in the field of fundamental research.

Remuneration of the Supervisory Board

For information on the remuneration of the SB, please see Corporate Governance - Supervisory Board - Remuneration of the Supervisory Board.

A Word of Thanks to ASML Employees

As a supervisory board, we appreciate that ASML’s employees are expected to deliver the impossible in a very dynamic environment with strong and sometimes sudden fluctuations in the customer demand for our cutting-edge technology. We would like to thank all ASML employees and their management, their suppliers and all those who work for ASML on a temporary basis, for their hard work. Your input and relentless focus has once again helped ASML achieve so much this past year.

The Supervisory Board,

Gerard Kleisterlee, Chairman

Douglas Grose, Vice Chairman

Annet Aris

Pauline van der Meer Mohr

Carla Smits-Nusteling

Rolf-Dieter Schwalb

Hans Stork

Wolfgang Ziebart

Veldhoven, February 6, 2018

ASML INTEGRATED REPORT 2017 67

Remuneration Report

The SB, on recommendation of the Remuneration Committee, determines the remuneration of the members of the BoM. In 2017, the SB revised the Remuneration Policy that had been in force since 2014 to reflect market developments and ASML’s growth. Adjustments mostly concerned changes to the group of reference companies and the mix of base and variable remuneration (see Supervisory Board Report - Supervisory Board Committees - Remuneration Committee). This revised Remuneration Policy was adopted by the AGM on April 26, 2017 and applies as from January 1, 2017 onwards.

In this Remuneration Report, an overview is provided of the Remuneration Policy for the BoM and the application thereof in 2017. For details regarding the remuneration of the BoM in 2017, see Other Appendices - Appendix - Board of Management and Supervisory Board Remuneration.

Remuneration policy

The Remuneration Policy supports the long-term development of the company in a highly dynamic environment, while aiming at fulfilling all stakeholders’ requirements and keeping an acceptable risk profile. More than ever, the challenge for us is to drive technology, to serve our customers and to satisfy our stakeholders. These drivers are the backbone of the Remuneration Policy. The SB ensures that the policy and its implementation are linked to the company’s objectives.

The objective of the Remuneration Policy is to enable ASML to attract, motivate and retain qualified industry professionals for the BoM in order to define and achieve our strategic goals. The policy acknowledges the internal and external context as well as our business needs and long-term strategy. The policy is designed to encourage behavior that is focused on long-term value creation, while adopting the highest standards of good corporate governance. The policy is aimed at motivating for outstanding achievements, using a combination of non-financial and financial performance measures. Technology leadership and customer value creation are the key drivers of sustainable returns to our shareholders.

The policy is built on the following principles:


•	Transparent - The policy and its execution are clear and practical;


•	Aligned - The Remuneration Policy is aligned with the policy for ASML senior management and other ASML employees;


•	Long term oriented - The incentives focus on long-term value creation;


•	Compliant - ASML adopts the highest standards of good corporate governance; and


•	Simple - The policy and its execution are as simple as possible and easily understandable to all stakeholders.

Reference group and market positioning

We offer a remuneration package that is competitive as compared to a relevant labor market. To define this market, a reference group is created, consisting of companies that are comparable to us in terms of size and complexity, data transparency and geographical area. For as long as ASML is positioned around the median of the group of companies with respect to size (measured by enterprise value, revenue and number of employees), the median market level may serve as a reference in determining the level of pay for the BoM.

The reference group consists of the following companies:



Reference group composition

AkzoNobel	Leonardo-Finmeccanica
Alstom	Linde
Continental	Nokia
Covestro	Philips Healthcare and Consumer Electronics
DSM	Schindler
Essilor	Shire
Evonik	Smith & Nephew
Gemalto	Solvay
Givaudan	UCB
Infineon Technologies	Yara International
Legrand

In principle, a benchmark assessment is conducted every 2 years. In the year without a market assessment, the SB considers the appropriateness of any change of base salary on the market environment as well as the salary adjustments for other ASML employees. To ensure an appropriate composition of the relevant labor market, the SB reviews the composition of the reference group in conjunction with the frequency of the benchmark. Substantial changes applied to the composition of the reference group will be proposed to the shareholders.

ASML INTEGRATED REPORT 2017 68

Total direct compensation

The remuneration levels are determined using the total direct compensation. Total direct compensation consists of base salary, an STI and an LTI. Each component and corresponding performance measures are described in this section.

Other remuneration elements are pension and expense reimbursements. The latter may include company car costs, travel expenses, representation allowances, housing costs (gross amount before taxes), social security costs, and health and disability insurance costs.

Base salary

The policy prescribes a benchmark that will be conducted for the total direct compensation level. The base salary of BoM members is derived from this level.

Variable income

The performance parameters are set by the SB and consist of financial and qualitative measures. The SB may adjust the performance measures and their relative weighting of the variable income based on the rules and principles as outlined in this policy, if required by changed strategic priorities in any given year.

The SB assesses the extent to which performance standards are met at the end of a performance period.



Variable compensation (on-target)	Presidents	Other Board members

STI	65%	65%
LTI	100%	85%
Total variable compensation as % of base salary	165%	150%

In order to comply with the highest standards of Corporate Governance, the appropriate claw-back and change-in-control provisions are incorporated in the employment contracts and management services contracts of all members of the BoM.

The SB has the discretionary power to adjust the incentive pay-out upward or downward if it feels that the outcome is unreasonable due to exceptional circumstances during the performance period (‘ultimum remedium’). Scenario analyses of the possible outcomes of the variable remuneration components and their effect on the remuneration of the BoM are conducted.

Short-term incentive

The STI refers to the annual performance-related cash incentive that is applicable to all members of the BoM. The target level of the STI is set at 65 percent of base salary for all members. In case of excellent performance the maximum opportunity amounts to 150 percent of target.

In order to achieve alignment in the remuneration structure of the BoM and other ASML employees, the policy includes a modifier on the STI pay-out that is connected to the profit-sharing program for employees. In applying the modifier, the SB will take into account the pay-out under the profit-sharing scheme for all ASML employees. The modifier enables the SB to discretionarily adjust the STI pay-out of the BoM upward with 10 percent or downward with 20 percent of base salary.

For the STI the following criteria are set:



Performance Measure	Weight

Qualitative
Technology Leadership Index	20%
Market position	20%