ASML Holding (ASML) 20-F2022 FY Annual report (foreign)

This Annual Report contains statements relating to our expected business, results 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 Annual Report and include statements with respect to our expected trends and outlook, strategies, corporate priorities and goals, expected semiconductor industry trends, expected trends in markets served by our customers, including expected growth in semiconductor demand, manufacturing

capacity, expected semiconductor market trends and market growth and drivers of such trends and growth, expected financial results, including expected sales, service revenue, gross margin, expected capital expenditures, R&D and SG&A expenses, effective annualized tax rate, annual revenue growth rate and outlook for 2023 and other statements under “Trend Information”, annual sales and gross margin opportunity and potential and growth outlook and for 2025 and 2030, sales model for 2025 and other statements under the section entitled “Long-term growth opportunities”, statements under the section entitled "Risk factors", expected trends in customer demand and demand for semiconductors including expected trends in end markets, including Memory and Logic, expected development of High-NA and expected timing to start shipment of High-NA systems

and high-volume production of High-NA systems, for semiconductor industry market opportunities, expected EUV and DUV and installed based management sales and the expectation about continuing role of DUV systems, EUV product roadmap, our supply chain strategies and goals, customer, partner and industry roadmaps, expected productivity and benefits of our tools, potential future innovations and system performance, expected shipments of our tools, including demand for and timing of shipments, statements with respect to DUV and EUV competitiveness, the development of EUV technology, revenue recognition, expected demand for wafers, expected impact of inflation, ESG strategy including our sustainability targets, goals and strategies, environmental, diversity and sustainability strategy, ambitions, goals and

targets, including circular procurement goals, targeted greenhouse gas emissions and waste reduction, recycling and refurbishment initiatives, investments and goals and energy-saving strategies and targets, including statements on targeting zero carbon emissions and indirect emissions from energy use across operations and reducing intensity of all other emissions in the value chain and the goals for timing thereof, statements with respect to Moore’s Law, cash return and dividend policy, our expectation to continue to return cash to our shareholders through share buybacks and dividends including our proposed dividend for 2022 and statements relating to our share buyback program, statements with respect to the expected impact of accounting standards and other non-historical statements. These forward-looking

Yet despite the positive numbers, the reality is that 2022 could actually have been even better. Our ability to meet customer demand continued to be impacted by a set of circumstances that were not fully in our control. The aftermath of COVID-19, the ongoing war in Ukraine and struggles among some of our supply chain partners to deliver according to our agreed plans due to material shortages have combined to cause significant turbulence and meant that we were unable to give our customers what they needed all of the time.

Although we have at times struggled operationally, from a strategic standpoint we have continued to deliver. Our comprehensive product portfolio is aligned to our customers’ roadmaps, delivering cost-effective solutions in support of all applications, from leading-edge to mature nodes. Among many highlights of the year, we shipped the first TWINSCAN NXT:2100i, received new orders for the TWINSCAN EXE:5200 and saw several customers adopt Alignment Optimization 12 Color.

While we had more unhappy customers than I would have liked, we have also experienced empathy and support. We have always kept customers fully informed of any delays to shipments, and they can see for themselves how our investments are set to increase capacity. Cranes stand across the skylines of our sites as our investment to increase our manufacturing capacity to 90 EUV 0.33 NA and 600 DUV systems by 2025-2026 begins to take shape, while we are also ramping our EUV 0.55 NA (High-NA) capacity to 20 systems by 2027-2028. And key partners such as Carl Zeiss are also busy adding capacity, doing everything they can to free the logjam in the supply chain.

It is true that some customers, concerned about the global economic environment, are choosing to delay shipments. But as evidenced by our order book, most are continuing to push us to get the tools they need and are eager to take up any spare capacity we can release to get deliveries even earlier than scheduled if possible.

We have also been working to improve the flexibility of our manufacturing capacity, our workforce and our supply chain to enable us to respond quickly and appropriately to the current waves of uncertainty.

Launched in 2021, our ESG strategy acknowledges and addresses the impact we have on society. It underpins our drive to be a responsible organization and a force for good in the world.

Of course, we are not unique in this. All responsible companies now dedicate significant resources to ESG matters, reflecting how the world is coming to terms with its major challenges, notably climate change and the energy transition. For us, ESG is about helping to create a responsible society – one where as many people as possible have a safe and healthy environment, a job, a home and access to food, good schools and quality medical care. These are important basic conditions for businesses to flourish and for economies to grow. As we outline in 'Environmental, Social and Governance - ESG at a glance', we have made good progress over the last 12 months.

We have always been very vocal about the fact that we’re running this company to a stakeholder model, not per se only a shareholder model. We have five stakeholder groups – our people, our customers, our suppliers, our shareholders and society. It is the balance between those five that actually makes a company credible. If you focus only on one or two of those stakeholders, the others are likely going to suffer. So we work very hard to get the balance right. We are not perfect and there remains much to do – but our ESG strategy is an important beacon that is lighting up the way ahead.

We can’t survive without our partnership ecosystem, and this goes right to the heart of our values – challenge, collaborate and care. We love being challenged, and we rise to challenges much better when we collaborate with others, from academia and research institutions to leading-edge companies from all over the world, creating trust and sharing both risks and rewards. Together, we are developing technology that can have a positive impact – caring for the ecosystem, for all our stakeholders and for our planet.

We work together in a strong global semiconductor innovation ecosystem with our suppliers and innovation partners, as well as with other equipment providers such as etch and deposition partners, to understand patterning and how we can provide the solutions that our customers, our customers’ customers and our end users demand.

As architects and integrators, we orchestrate this process – building on our values to help fill our innovation funnel and keep the ASML pipeline flowing freely. The Brainport Eindhoven innovation ecosystem, in which we operate from our headquarters in Veldhoven, is a good example of this level of cooperation, which is based on trust, transparency and a willingness to share expertise and knowledge.

It may be a cliché that people are a company’s greatest asset, but it is also very true – and the shortage of talent is a factor that is impacting every industry on the planet, including ours. To meet the chip industry’s ambitions, globally and within the European ecosystem, we need to significantly increase the inflow of engineering talent in the coming decade.

The governments of South Korea, the US, Taiwan and Japan are all investing heavily in chip-related education and vocational training. We need to see the Dutch and other European governments doing the same. At ASML, we’re playing our part. Education is a key pillar of our community engagement activities, and during 2022 we again supported programs to boost interest in technology among young people and increase local talent pools in [all the main] geographies where we operate.

In 2022 we welcomed 7,130 new people into ASML, so our efforts to attract talented individuals are paying dividends, supported by the fact that we’re able to offer them the opportunity to work at the cutting edge of technology. Today, we have more than 140 nationalities at ASML – but we know that young people move often and may not stick around for 20 years or so as previous generations did. So our challenge is to make sure that ASML is an attractive long-term option where people can contribute and enjoy the benefits of doing so and develop themselves. That is where our 'can do' culture is so important. We have a workplace environment here where people can drive innovation forward, inspire each other and help make sure that digital technology fulfills its potential.

At the 2023 AGM, Gerard Kleisterlee, the Chairman of our Supervisory Board, will step down after having served on the Supervisory Board since 2015. I would like to express our gratitude to Gerard for his valuable contributions as Chairman of the Supervisory Board and the Selection and Nomination Committee, and member of the Technology Committee. He has brought profound experience to the Supervisory Board during his eight years of service and has been a great source of guidance and advice for ASML. We wish Gerard all the best for the future.

When looking at our business environment, in the short term it is clouded by uncertainty due to a number of macroeconomic concerns including energy shortages, inflation, reduced consumer confidence and recession. On a geopolitical level, the bifurcation of socio-economic blocks – with the associated export and import controls – is threatening the development of the global village that contributed so much to a lot of the innovation we have seen in recent years. If countries or trade blocks withdraw into their own territories, then innovation will be less effective and more expensive.

Several news organizations reported end of January 2023 that the US, the Netherlands and Japan agreed to further restrict the export of semiconductor manufacturing equipment to China. We understand that steps have been taken that would cover advanced lithography tools as well as other types of equipment. The terms of this agreement have not been publicly disclosed and remain confidential for now. We expect that it will take many months for the governments to write and enact new rules. Combined with the current market situation, we do not expect these measures to have a material effect on our expectations for 2023.

Looking at the immediate future, we will have to deal with the shocks in the system, and I am confident that we will do so, supported by growing demand for semiconductors and semiconductor equipment. Over the next 12 months, I anticipate that we will yet again break records.

Teamwork, both within ASML and externally with our partners and suppliers, will be a crucial component if we are to achieve that ambition. By challenging, collaborating and caring, we will play a leading role in meeting customer demands, delivering the right technology at the right time to enable the semiconductor industry to thrive while taking to heart the interests of the communities around us.

Every moment of every day, people make use of technology that contains microchips. These are small but mighty devices, and fabricating the layers on even the simplest chip requires an elaborate process that few companies in the world have mastered. This can take months from start to finished product, as the silicon wafer travels through dozens of different machines in a chipmaker’s fab (semiconductor fabrication plant) before it finds its way into electronic products.

This multifaceted production process has led, over decades, to the semiconductor industry becoming a global ecosystem. This ecosystem includes specialized chip design companies, equipment and infrastructure suppliers and the chipmakers themselves.

As a crucial manufacturer of lithography equipment, ASML is a vital part of this ecosystem chain. The fabrication of the circuitry patterns on silicon wafers, made possible by our lithography systems, can be found in the factories of every major chipmaker in the world.

But our systems are just one part of a network and process involving numerous suppliers and the latest chipmaking equipment. Every step and every machine in the process is important. That’s why collaboration and innovation are key. At ASML, we collaborate to succeed – from the academics who help us understand and push the laws of physics, to our customers who identify new possibilities and the suppliers that translate our ideas into products and technology.

We innovate through partnerships. By developing our technology in close collaboration with our customers, we seek to build today what they need tomorrow. We develop our machines based on their input, and engage closely with them to help pursue their technology and cost roadmaps.

We also work closely with our suppliers, trusting them to manufacture parts and modules for our systems. Many of them are deeply involved in developing new technology and achieving the innovations we seek. With some of these so-called ‘farmout suppliers’, we work as co-investors.

Our partnership with Carl Zeiss SMT has spanned more than three decades, and we also hold an important strategic interest in the company. We apply the principle of ‘two companies, one business’, working together to drive operational excellence in innovation and technology.

We co-develop expertise through a wide network of technology partners, including universities and research institutions such as imec in Belgium and the technical universities in Twente, Delft and Eindhoven and Advanced Research Center for Nanolithography (ARCNL), all in the Netherlands.

With more than 14,000 of the brightest minds in the industry in our R&D department, ASML is uniquely placed to innovate the most advanced lithography systems in the world. We continue to invest heavily in R&D – in 2022, we spent €3.3 billion in this vital area, compared with €2.5 billion in 2021, while balancing our customers’ needs, product capabilities and technology solutions.

Our R&D teams focus on generating and exploring exciting new ideas and demonstrating their feasibility in the long term, as well as finding technological solutions to the challenges colleagues may face with any products and applications that have already moved into development.

Our researchers continuously scout for technological innovations and solutions – within the semiconductor industry and beyond – to assess if they can be applied in ASML’s technology roadmap to support our customers and help drive their own semiconductor device roadmaps.

We are one of the world’s leading manufacturers of chipmaking equipment, while our customers are the world’s leading microchip manufacturers. We enable them to create the patterns that define the electronic circuits on a chip, and consequently our success is inextricably linked with theirs.

That’s why we collaborate with our customers to understand how our technology best fits their needs and challenges. That means engaging with our customers at all levels: building partnerships, sharing know-ledge and risks, aligning our investments in innovation and increasingly focusing on the long-term challenges for the next five to ten years and beyond. We develop our

solutions based on their input, help them achieve their technology and cost roadmaps, and work together, often literally in the same team, to make sure our solutions fit together perfectly.

Engaging fully with customers is also an important part of working toward securing the full product portfolio that will sustain our company into the future – which includes increasing the adoption of EUV in high-volume manufacturing environments. In 2022, we received additional orders for the TWINSCAN EXE:5200, the high-volume manufacturing version of our EUV 0.55 NA (High-NA) platform. All current EUV customers have submitted orders for High-NA, demonstrating the demand for continuing shrink.

When we talk about customer intimacy, we mean the entire customer relationship across all channels, from the early stages of innovation onward. At each stage, we aim to foster trust, advocacy and continuous engagement, with the goal of achieving complete customer satisfaction.

We have built a structure of customer interactions across various channels in the organization to support and sustain our partnerships with customers. For example, we run regular meetings with our key customers to align our product development plans with their business goals and needs.

We market and sell our products directly to customers, without agencies or other intermediaries. Our dedicated Sales and Customer Management department is responsible for building and maintaining our customer relationships and ensuring all relevant ASML departments contribute to meeting customer needs. Our account managers, field and application engineers and service and technical support specialists are located close to our customers throughout Asia, the US and EMEA.

We know how essential it is for us to have well-trained engineers in the regions where we operate, so we offer training designed to boost the capabilities of our local customer service teams as well as enhance local technical expertise. Alongside good remote-control capabilities, this ensures that we continue to increase the self-sufficiency of the local field engineers.

While we maintained a high level of engagement with our customers throughout the pandemic, we were pleased that the physical interactions started to return to ‘normal’ this year. With travel restrictions, quarantine and workforce constraints coming to an end in many countries, we were able to hold physical meetings with more customers around the world, and they were able to visit us at the Veldhoven campus more and more.

However, some restrictions remained around the world during the year.

Our customer relationships have been important in trying to manage the significant ramp-up of demand in the first part of the year. The market remained strong, but the overheated nature of the market this year, combined with the challenges we experienced in delivering systems as fast as our customers needed, impacted the conversations we had with them. While we went through the delivery challenges together, we did our best to keep our customers fully informed of shipment status and progress in our capacity plans.

Given the shortages that built up in the early part of 2022, our customers still needed our equipment urgently. We have worked with them to achieve this, focusing on the dynamics of different customers in various areas in the industry. As part of our commitment to responding rapidly to our customers’ needs, we also introduced ‘fast shipments'.

Our Voice of the Customer program helps to ensure our employees hear firsthand about our customers’ needs and challenges. This is especially important for employees without direct access to customers. To reach as many of our people as possible, the program makes use of different channels of communication: live presentations and Q&As with senior customer representatives, recorded customer interviews, online articles and personal engagement with customer representatives.

While we still face the long tail of COVID-19 restrictions in some areas, we continue to run local Voice of the Customer initiatives and remote customer interviews. Our regular schedule of interactions continued throughout the year, and we are starting to reintroduce live presentations with larger audiences and combining remote with face-to-face interactions where we can.

We also ask our customers to rate our performance through our Customer Feedback Survey. Their direct ratings and frank comments provide valuable insight into how we can contribute to our customers’ successes and help them to overcome challenges. We carefully analyze the results, check the insights gained with each customer and then define targeted, continuous improvement plans with their input to ensure we take their priorities into account.

We have been busy deploying the improvement actions identified in our 2020 survey. This has helped us focus on truly understanding what customers need from us, and validating that we are on the right track with the right improvements. We have updated our customers regularly on the progress being made, and in September 2022 we sent out our latest survey. The results of the 2022 survey show us that our customers are satisfied with our teams, and products, performance and the business support we provide for them. They also ask us to closely listen to their feedback, provide them with shorter delivery times and continue pushing the technology forward in collaboration with them and in line with their needs.

For us, innovation is all about making a difference in the marketplace. Our goal is always to give customers the products and capabilities they need to deliver on the potential of technology for making a positive contribution to society. The hunger for computational power is endless. Energy transition, connectivity, healthcare and many more areas are all being transformed by digital technology – we do not directly create the tech that is making these developments possible, but we are important enablers.

So the most pleasing aspects of the last year have included seeing some of the ideas we have been working on in recent years become reality. For example, we made the first shipment of our latest DUV NXT technology, the TWINSCAN NXT:2100i. Furthermore, all our current EUV customers have now submitted orders for EUV 0.55 NA (High-NA). Customers will start their R&D in 2024-2025, aiming for high-volume manufacturing in 2025-2026.

We are 100% committed to advancing both EUV and DUV technologies in order to provide a balanced product portfolio. We have seen something of a transition in our R&D focus in recent years, with increased emphasis and resources dedicated to DUV, which will continue to be the industry workhorse and the technology of choice for many customers. We are now ramping up our development of solutions that are driving commonality, productivity and performance to new standards, underpinning the future of DUV.

Behind the scenes, we have been making good progress with our scanner and process control software solutions, as well as with our computational engine and optical and e-beam metrology and inspection solutions. And there is a lot more to come in the years ahead, as we continue to sharpen our focus on holistic lithography. Lithography systems are highly complex, so we aim to provide customers with a holistic, integrated approach that enables them to optimize the lithography process. To take the new half-dome mirror as an example, this provides the customer with around 100 different controls, in addition to the approximately 1,000 that we already offered. This year we enhanced our virtual computing platform that brings data together from every part of the lithography process, analyzes it and provides a feedback loop to control the performance of our tools and optimize what is a very complex process.

Looking beyond scaling and Moore’s Law, other metrics are also important in our industry – for example, energy-efficient performance (EEP), which was pioneered at TSMC, one of our key customers. EEP tracks energy efficiency, which is expected to increase threefold every two years.

As CTO, I’m always asking myself how I can best drive innovation at ASML and make sure the pipeline continues to be filled. And one of the most important factors in that is people. Our growth and ability to hire large numbers of new staff present challenges in their own right. We employ more than 14,000 FTE in R&D and are adding 7-8% to that number every year. So that’s 1,000 or more new people over a 12-month period, all of whom need to quickly learn about and buy into our culture before they can become part of our team.

Sustainability is another challenge that has moved rapidly up the agenda in recent years. The amount of passion and expertise that we are now able to bring to a topic like re-use and repair – not only internally within ASML but also externally among our partners – is very encouraging. As a group, we are acknowledging responsibility for our environmental footprint, which of course is increasing in line with the industry’s growth. We are constantly striving to improve EEP, but the fact remains that more lithography equipment at work in fabs will inevitably require more energy in total. It is going to be challenging to understand what it means to create a truly sustainable semiconductor industry.

The big picture for our sector continues to be dominated by the global shortage of semiconductors. With its ability to transform how we all live and work, digital technology sits at the heart of the macroeconomic landscape. Expanding application space and relentless innovation are expected to continue to fuel growth across semiconductor markets. Industry sources anticipate annual growth rates of 9% and more than a doubling of semiconductor revenue from 2020 to 2030.

The issues that restricted the supply chain during and after the pandemic surges of 2020 and 2021 are beginning to abate, and we are scaling up for capacity increases. With additional global demand for wafers expected to be over 780,000 wafer starts per month per year in 2030, we plan to increase our annual capacity to 90 EUV 0.33 NA and 600 DUV systems (2025-2026), while also ramping up EUV 0.55 NA (High-NA) capacity to 20 systems per year (2027-2028).

The convergence of wireless communication, telecom, media and cloud via connected devices continues to drive demand for advanced semiconductors across the globe. Growing populations, urbanization, the transition toward renewable energy using wind and solar power, and ongoing electrification to support smart mobility are creating increasing demand for advanced electronic devices.

The current trade environment presents significant challenges for the global semiconductor industry. Geopolitical tensions and increased protectionism are likely to continue. Recently steps have been made towards an agreement between governments that will further restrict the export of semiconductor manufacturing equipment to China. This agreement will be translated into legislation in the course of 2023 and, to our understanding, will be focused on advanced chip manufacturing technology, including but not limited to

advanced lithography tools. The pandemic has alerted governments around the world that global supply chains can create significant geographical dependencies on services, raw materials and end products.

Semiconductors are playing an increasingly important role in the growth and continuity of large industrial complexes, and the strategic importance of the semiconductor industry is only likely to increase.

Governments have turned their attention to securing sufficient semiconductor supplies to support their local industries, ensuring higher levels of technological sovereignty, and they are planning significant investments in the semiconductor industry. Industry forecasts indicate that the top three semiconductor manufacturers plan to invest over $300 billion in global capacity in the coming years.

The industry continues to manage its overall costs, though price rises could ultimately be passed on to the end market, resulting in an increase of prices of devices. Trade tensions and protectionism also introduce significant complexity throughout the supply chain and the processes required. The industry, like so many others in this trading environment, needs to review its global supply chain.

Climate change is an urgent matter for governments, companies and individuals around the world. It is a global challenge that requires a global response to limit global warming to 1.5°C. Technologies to counter climate change – from the energy transition to electrification, supporting smart mobility and agricultural innovation – all require semiconductors. For example, semiconductors are crucial in the generation, storage, distribution and consumption of electrical energy.

Internally, the semiconductor industry has an important role to play, as the manufacturing process alone consumes large volumes of energy and water resources.

Memory chips can store a large amount of data in a very small area. They are used in an increasing variety of electronic products like servers, data centers, smartphones, high-performance computing, automotive or personal computers and other communication devices. There are two main classes of chips typically made in dedicated Memory-chip factories: NAND chips that can store data even when a device is powered off, and DRAM memory chips that are used to efficiently provide data to the processor.

Logic chips, which process information in electronic devices, are produced by two groups of manufacturers. The first group, known as integrated device manufacturers (IDMs), designs and manufactures Logic chips. The second group comprises contract manufacturers known as foundries. Foundry manufacturers produce chips for ‘fabless’ companies that focus only on chip design and distribution, but do not manufacture microchips themselves.

Both Logic and Memory chips can vary greatly in complexity and capability. For example, the most advanced chips power leading-edge technology in AI, big data and automotive technology, while simpler, low-cost chips integrate sensing capabilities into everyday technology to create a vast loT.

We provide chipmakers with everything they need – hardware, software and services – to mass produce patterns on silicon through lithography. Our customers depend on our products to bring cutting-edge technology to life. To meet their needs, we invest in the future. We invest in research and development to create chipmaking machines that can deliver the smallest features and highest yields.

We invest in our factories and facilities around the world so we can meet increasing customer demand for our products and services, driven by strong growth rates across both advanced and mature semiconductor markets, continued innovation, more foundry competition and technological sovereignty. The number of machines we plan to deliver in the coming years continues to grow.

We also invest in our workforce, the people who give life to our values – challenge, collaborate and care. They come from more than 100 countries to work together and advance ASML's mission. Our values push us to invest in being a good neighbor and global citizen. From supporting our preservation to minimizing our environmental impact, our initiatives lay the groundwork for long-term sustainable growth.