Letter to the Shareholders

Dear shareholders,

Last year, our company was for several months in the public eye. The planned takeover by Grand Chip Investment GmbH (GCI) was intended to secure the company’s access to the major Chinese market while also ensuring that all of the company’s product portfolio could be brought to market maturity. Following the US President’s order that prohibited the acquisition of AIXTRON’s United States business by the bidder, and the withdrawal of the investor, AIXTRON acted to realign its corporate strategy with the aim of sustainably regaining profitability and generating positive operating earnings for the 2018 fiscal year. Now it is a matter of implementing this strategy.

The great media interest in the transaction tended to overshadow the fact that our company once again made important progress in its operating business in 2016. Following a difficult start to the year, we subsequently met the financial targets communicated at the beginning of the year. The strong performance in the second half, in which we met our target of generating positive earnings, enabled us to further improve the company’s full-year results, even if we did not yet return to profitability due to ongoing high research and development costs.

Although the market climate remained difficult, our total revenues of EUR 196.5 million matched the previous year’s level. Strong revenues in the optoelectronics, power electronics, and silicon businesses made a key contribution in this respect. At EUR 225.1 million, total order intake reached its highest level since 2011.

AIXTRON pressed successfully ahead with the process of diversifying its technology and product portfolio already initiated in previous years. Optoelectronics (excluding LED) and power electronics systems now account for 48%, and thus almost half of the AIXTRON Group’s system revenues. Year-on-year, we also increased the share of revenues attributable to our silicon industry business from 19% to 21%. Revenues with LED systems, including those used to produce red-orange-yellow (ROY) LEDS and UV LEDS, remained stable at 26%. We are particularly pleased that, based on our own calculations, the strength of our optoelectronics business made us the global market leader for MOCVD systems once again in 2016.

Continuous improvement in margins

Given stable operating expenses, the further improvement in key earnings figures was driven in particular by the increase in the gross margin to 29% (2015: 25%; 2014: 20%). This margin growth was due above all to greater efficiency in the company’s production and customer service activities, a development also reflected in lower write-downs on inventories.

Although substantial sums continued to be expended on research and development (2016: EUR 54.0 million), operating expenses stabilized at just under 40% of revenues. This reflects the approach adopted in recent years to ensure strict cost awareness.

Against this background, we further reduced the company’s losses. On a full-year basis, we achieved further improvements in major key figures such as EBIT (+20%) and EBITDA (+52%). The overall positive EBITDA of EUR 12.1 million generated in the second half of 2016 marks a substantial improvement both on the first half of the year and on the equivalent period in the previous year.

We also made progress with several balance sheet items. We targeted our investments very closely and significantly reduced our surplus stock, particularly in the case of AIX R6. Receivables rose due to the high volume of product deliveries in December 2016. The resultant substantial inflow of funds in the first weeks of this year will thus benefit the free cash flow for 2017. AIXTRON’s equity ratio rose to 85% at the end of the fiscal year and the company still does not require any external bank financing.

Realigning AIXTRON

Since December 2016, when it became apparent that the planned takeover by Grand Chip Investment (GCI) would not take place, AIXTRON has been focusing its corporate strategy on ensuring that its technology portfolio is optimally structured and positioned. Consistent with this, AIXTRON is currently investigating various options for reducing the up-front costs needed to develop the company’s future-oriented technologies. These options include looking for suitable partners and into joint ventures and other alternatives. All these measures are intended to enable AIXTRON to sustainably return to profitability and to post positive operating earnings for the 2018 fiscal year.

Targeted investments in future-oriented technologies

We are focusing our research and development on future-oriented technologies for applications such as power semiconductors, new logic processors, and organic light-emitting diodes (OLEDs). To this end, in recent years we have more than doubled the share of our total research and development expenses attributable to these technologies from around 30% (2014) to more than 60% (2016). This way, we are creating a basis to position these technologies with innovative products in the semiconductor and display markets in the years ahead. The technology and product development processes we have implemented for this purpose ensure that the resources available are put to efficient and effective use.

Broad technology and product portfolio stabilizes revenue base

On product level, we are witnessing ongoing demand growth for our planetary reactor systems, which are used above all in optoelectronics and power electronics. One main reason for the success of this technology is to be found in the advantages it offers in terms of uniformity and quality requirements, factors that provide our customers with substantial benefits when processing the wafers thereby produced.

Key growth drivers for the optoelectronics business were due above all to the ever greater role played by technological megatrends, such as big data, cloud computing, virtual and augmented reality, and the new 5G mobile network technologies. With the systems we offer for applications such as laser, RF chips, infrared LEDs, sensors, and photovoltaics, we enable companies in the communications, IT, and automobile industries to meet the needs created by these megatrends. Having further raised its share of revenues to 34% in 2016, optoelectronics now accounts for more than a third of AIXTRON’s revenues. Given our strong market position, this area also harbors further growth potential for the years ahead. Current applications include automobile sensors (for alertness assistants or distance sensors), lasers and high-frequency devices for communications (for 3D sensor technology, broadband, or mobile data communications) and lasers for top-speed data communications (for video streaming, online shopping, or autonomous driving).

Revenues in our power electronics business decreased slightly in 2016. We nevertheless expect demand for our award-winning AIX G5 planetary reactor systems to remain robust in the current fiscal year. This is because the transition from R&D to production is gaining momentum at ever more of our customers. Not only that, the number of applications is also rising consistently, especially in the automobile, industrial and consumer goods sectors. We are currently witnessing initial practical applications for wide band gap modules based on gallium nitride (GaN) and silicon carbide (SiC) in fast chargers for mobile devices, renewable energies, and electric vehicles and trains. Moreover, these high-performance and high-frequency-capable devices are also set to play an ever greater role in future in the fields of electro-mobility (charging stations, autonomous driving), in wireless charging applications, and the upcoming 5G mobile network standard.

The market for LED systems remains challenging, but also offers opportunities. Given the competitive pressure surrounding lighting applications, customers are making every effort to achieve significant throughput growth by working with new production processes in their chip production. Although individual customers have reacted by investing less in capacity expansion or in more productive substitute requirements, AIXTRON nevertheless benefited by selling its AIX R6 stocks. In the past year, customers qualified Chinese competitors for the first time, in particular in the production of GaN LEDs for lighting applications. Against this background, AIXTRON is now successfully focusing on red-orange-yellow LED production systems and on those for specialist applications, such as micro-LED displays or UV LEDs for use in water disinfection. Here, we will further expand our position by offering innovative LED applications.

In our silicon semiconductor business, our memory chip activities benefited in 2016 from increased demand for flash memories. These memory modules are used in memory cards, USB sticks, and MP3 players. We have long supplied our systems technology to one of the world’s leading manufacturers. In 2016 we also successfully completed the qualification process at a further new customer.

Our MOCVD technology for III-V-on-silicon applications (TFOS) enables processor manufacturers to develop high-performance devices. In the past year, we made progress in this area by supplying another TFOS system to a prestigious chip manufacturer. We will enhance our TFOS technology to enable the ever closer integration of day-to-day technology and machines in the Internet of Things (IoT) to be supported in future as well. AIXTRON’s success here will crucially depend on the time at which these new materials are introduced into the production of next-generation processors.

In our organic electronics business, we made further progress in marketing our OLED technology in the past fiscal year. We took a decisive step forward by supplying a Beta system with Gen1 (200 x 200 mm) configurations to a major display manufacturer to demonstrate our production processes on site. This way, we have moved significantly closer to obtaining the first order initially targeted for 2016. To this end, we will be working closely together with the customer, as the process of adapting our technology to the manufacturer’s current production processes will require not only a shared understanding of the technology involved, but also a certain amount of time.

Revenues with our systems for graphene and nanomaterials such as carbon nanotubes and carbon nanowires showed a slight slowdown following the strong performance seen in recent years due to a major project promoted by the EU. However, we will continue to build on the potential harbored by these technologies, which are set to be used in future for applications such as displays, batteries, semiconductors, and many others. Here, we are in close contact with numerous customers.

Internal processes and instruments ensure productivity and transparency

One major focus at AIXTRON in the years behind us involved defining and introducing key processes and instruments in the fields of Research & Development, Supply Chain, Controlling, Personnel Development, and Communications. These have enabled us to achieve fundamental improvements in terms of productivity and transparency.

NASDAQ delisting executed

We decided at the end of last year to withdraw from NASDAQ, the US technology exchange. In 2016, NASDAQ trading accounted for less than 5% of global trading volumes in AIXTRON common stocks, while the remaining trading volumes were handled almost exclusively via the company’s listing on the Frankfurt Stock Exchange. Given these relatively low trading volumes on the NASDAQ, we concluded that the disadvantages resulting from the complexity, costs, and effort required to maintain the dual listing, including U.S. Securities and Exchange Commission (SEC) reporting obligations, outweighed the benefits of the listing and the registration in the United States. The delisting of AIXTRON’s shares became effective at the beginning of January 2017.

AIXTRON reports on sustainability for the first time

AIXTRON is for the first time publishing a sustainability report based on the guidelines issued by the Global Reporting Initiative. This way, we are documenting our clear commitment to transparency, sustainability, and our corporate responsibility. Our business activities are guided by responsible corporate management based on integrity, and adherence to compliance principles. This is true both of our activities within the company and of our dealings with our business partners.

Thanks to AIXTRON’s shareholders, employees, and Supervisory Board

As this is my last Annual Report as the CEO of your company, I would like to take this opportunity to offer my particular thanks to AIXTRON’s shareholders and employees as well as to the Supervisory Board.

At first, I would like to thank our employees. Over the past years, we made changes at the company that were by no means always easy, but which were necessary. Despite uncertainties, it was our employees and their commitment that enabled us to successfully implement and press ahead with these changes.

On behalf of Dr. Schulte as well, I would also like to thank the Supervisory Board for its active support and for working with us on a basis of trust in the past years, and in particular during the intense period of transaction-related negotiations in recent months.

I would also like to extend my sincere thanks to the company’s shareholders, who have supported and accompanied the ongoing process of change at AIXTRON. Even without the planned takeover, by implementing the strategy agreed with the Supervisory Board we have initiated the right steps to build on partnerships, joint ventures, and other measures and regain profitability in 2018.

I am leaving AIXTRON confident that, with the strategy it has adopted, the innovative products it can offer to numerous key future markets, the processes it has put in place, its strong customer relationships, highly qualified employees and clear results focus, the company is on the road towards sustainable profitability.

Yours,
Martin Goetzeler

The Executive Board



 
     
Martin Goetzeler
Chief Executive Officer
  Dr. Bernd Schulte
Chief Operating Officer
     

Sustainability Report

Our corporate social responsibility strategy

For AIXTRON, Corporate Social Responsibility (CSR) means reconciling economic, environmental and social requirements within the scope of its business activities. The integration of sustainability into all areas and processes of the company is strived for. Based on a materiality matrix, AIXTRON is currently developing a company-wide CSR strategy. Dialogue with key stakeholders, such as customers, employees, shareholders and policy makers, as well as scientific and non-governmental organisations, forms an essential basis of this process.

Building on the three-pillar model for sustainable development, the CSR strategy defines selected fields of action with the thematic focus areas of economy, ecology and social issues. Social, environmental and governance factors will be considered in the core business.

AIXTRON strives to continue its social commitment in the future and, if possible, intensify it by targeted support. AIXTRON will focus on supporting social and environmental projects.

Values, principles, standards and code of conduct

Values
AIXTRON´s values are the basis of the entrepreneurial activity. They determine how the company deals with each other, as well as with the customers and partners. AIXTRON strives to achieve always a leading position by means of goal-oriented action, acts in a forward-looking manner and actively provides impetus for future development. Open and direct communication ensures a healthy corporate culture in which the group meet their responsibilities.

Leadership principles
The leadership principles are important elements of AIXTRON's leadership culture and provide an important framework for all company executives. They require all managers to identify the customer needs and then derive clear, success-oriented corporate goals from these. Decisions are made sustainably in order to secure the group´s future. AIXTRON's managers are keen to act as role models, to encourage their employees to take responsibility. They also endeavour for continuous improvement through a partnership-based and constructive feedback culture.

Conflict Minerals
AIXTRON commits itself and its suppliers to ethical and moral standards for the purchase and usage of conflict minerals (gold, tantalum, tin and tungsten). AIXTRON is continuously striving for transparency regarding the origin of these minerals.

Environmental and energy management

Energy management
For AIXTRON, the responsible handling of energy is both ecologically and economically equally important. Among other things to optimise energy consumption, in 2013 a systematic energy management was introduced, which was certified according to ISO 50001 in 2014. (Further information are available under “1.4. Business model”). Because of the required heating temperatures of the MOCVD systems, their operation is very energy-intensive. This causes appreciable consumption of electricity and gas every year. Ensuring clean room conditions in the laboratory a considerable amount of work is involved.

AIXTRON has achieved a reduction in energy consumption and associated costs by implementing targeted measures to make energy use more efficient. In the past two years, this has led to a reduction in energy consumption about 21% (2014: 19,178,660 kWh; 2016: 15,207,294 kWh) and in CO2 emissions from 4,219 tonnes of CO2 in 2014 to 3,346 tonnes of CO2 in 2016, which corresponds to a saving of around 1,600 tonnes of CO2 over both years.

EnergyEfficiency network
In the future, AIXTRON will initiate and implement projects to further reduce energy consumption where possible. For this purpose, AIXTRON has teamed up with several companies from the Aachen region for the "EnergyEfficiency Network". Under the guidance of the Chamber of Industry and Commerce (IHK) Aachen, energy experts from the participating companies will exchange knowledge for three years under expert supervision. The goal is the continuous improvement of the energy footprint in the respective companies.

Environmental Protection
AIXTRON preserves resources on its way to the paperless office: At AIXTRON Ltd., UK, the usage of paper was reduced from 108,000 sheets of paper per Quarter in 2011 to 59,000 sheets of paper per Quarter in 2016.

Social commitment

AIXTRON is part of a social development which requires a growing network and an ongoing dialogue with its environment. Because of its values, AIXTRON strives to create a good neighbourly environment as an active partner in order to meet its social responsibilities and to actively shape its role in society.

Employees
The performance and motivation of the employees is the prerequisite for AIXTRON's success. Without the highly-qualified employees, the company would not be able to develop the latest technologies by transferring current research results into marketable products.

Code of Conduct
The Code of Conduct worldwide governs the principles of how management deals with employees, as well as how employees relate to each other. However, this also provides an orientation framework for topics such as conflicts of interests, involvement in public affairs, dealing with corporate assets and confidential information, behaviour in competition, protection of the environment, etc. Compliance with the AIXTRON code of conduct is binding for all employees of AIXTRON and is an essential part of company culture.

Employee selection and culture
For information on the employee selection see the management report under “1.10. Employees”

Innovation management
As part of its innovation management process, AIXTRON has a world-wide employee suggestion scheme. This allows all employees the opportunity to submit their suggestions for improvement. These are remunerated appropriately by the company. Since its introduction in autumn 2014, more than 300 proposals for improvement have been submitted, of which nearly 100 have been accepted and implemented. The number of proposals submitted and approved has steadily grown since the launch.

Temporary work at AIXTRON SE
AIXTRON is dependent on the use of temporary workers due to times of drastic fluctuations in demand. AIXTRON cooperates exclusively with well-known engineering service providers and temporary employment agencies. AIXTRON ensures an equivalent remuneration of temporary employees compared to AIXTRON’s employees in comparable functions.

In addition to the same payment, AIXTRON also upholds the principle of equal treatment of temporary workers and permanent employees, for example in the case of premiums, the use of the canteen, or in relation to participation in company events.

Last year, the average number of agency workers was 10, and varied between 1 and a maximum of 19 temporary workers. If, in individual cases, the temporary employment lasts for longer than 12 months, a re-examination of employment takes place.

Education
In Germany, AIXTRON also invests in the future viability of the company through the systematic training of young people. AIXTRON offers prospects for young women and men in various training courses and dual studies - from computer science, through industrial clerk, to the dual studies of business management, or the mathematical-technical software developer. Again and again, trainees from AIXTRON are honoured for their outstanding performance by the IHK Aachen.

In financial year 2016, the group employed a total of 11 trainees and students in dual courses. It is important for AIXTRON to provide young people with a prospect after successfully completing their education. For this reason, the company was able to accept all trainees and dual students who wanted to remain in the company in the past years.

Further education
Further education and qualifications have an important role in AIXTRON. A continuous learning process is an essential prerequisite for AIXTRON to continue developing technologically sophisticated products in the future. In 2016, all AIXTRON employees participated in an average 19 hours each of further training.

Employee discussion
As an important management instrument, AIXTRON has regularly held employee meetings for many years. One goal of the discussion is for management and employees to give each other feedback and discuss measures with which the cooperation can be further improved. Another important component of the employee discussion is training planning for employee development.

Trusting cooperation
Team work based on trust and partnership between the employer's and the employees' representatives is an essential part of the corporate culture and is in keeping with AIXTRON´s conception of a constructive relationship.

Leadership & Team development
Leadership skill has a great impact on the company's success. Therefore, AIXTRON promotes these skills through a specific leadership program, in which executives receive coaching on management and team development techniques.

Cooperation is an essential part of the work within the company. In order to promote teamwork, AIXTRON has chosen the team management system as a valid and effective tool to enable teams to analyse, to develop and improve their own performance. At present, this tool is being introduced and implemented permanently and company-wide at AIXTRON. All the employees have gone through team development workshops for this that support the development of the respective teams. The goal is to establish high-performing teams throughout the company. In addition, employees receive important stimulus for their own professional development.

Support for charitable organisations
AIXTRON supports several charitable organisations. For example, in the USA, the group supported charitable purposes by giving gifts to disadvantaged children, but also by donating food baskets or money to families where sufficient food supplies could not be guaranteed.

AIXTRON has deliberately refrained from sending printed Christmas cards for a long time. For years, AIXTRON has been donating the money put aside for this purpose to a charitable society for the care of children with cancer in Aachen.

In addition, AIXTRON's employees, in cooperation with the Institute for Transfusion Medicine (Hospital Aachen), support the provision of health care by donating blood. In addition, the financial compensation for the blood donation is donated completely by the staff to charitable institutions.