21)

Business Segment, Geographic Area, Product and Significant Customer Information

The Company develops, manufactures, sells and services products that measure, control, power and monitor critical parameters of advanced manufacturing processes. The Company’s Chief Operating Decision Maker (“CODM”) utilizes consolidated financial information to make decisions about allocating resources and assessing performance for the entire Company. In addition, certain disaggregated financial information is also provided to the CODM. Based upon the information provided to the CODM, the Company has determined it has nine operating segments and four reportable segments.

The nine operating segments are PFMC Products, Controls Products, ASTeX Products, Granville-Phillips Products, ENI Products, HPS Products (Vacuum Products), Analytical Solutions Group, Europe Region Sales & Service and Asia Region Sales & Service.

PFMC Products, Controls Products, ASTeX Products, Granville-Phillips Products, ENI Products and HPS Products comprise a single reportable segment due to the similarities of the segments. This reportable segment, Advanced Manufacturing Capital Equipment, includes the development, manufacturing, sales and servicing of instruments and control products, power and reactive gas products and vacuum products, all of which are utilized in semiconductor processing and other similar advanced manufacturing processes. Sales in this segment include both external sales and intercompany sales (which are stated at agreed upon transfer prices). External sales of these products made in Europe or Asia are reported as sales in the Europe Region Sales & Service or Asia Region Sales & Service segments.

Analytical Solutions Group, Europe Region Sales & Service and Asia Region Sales & Service are each separate reportable segments. The Company has reported corporate expenses and certain intercompany pricing transactions in a Corporate, Eliminations and Other reconciling column. The Analytical Solutions Group includes gas composition analysis and information technology products and custom fabrication services. The Europe and Asia sales and service segments mainly resell and service the Advanced Manufacturing Capital Equipment and Analytical Solutions Group products sold in their respective regions.

MKS derives the segment results directly from the manner in which results are reported in its management reporting system. The accounting policies MKS uses to derive reportable segment results are substantially the same as those used for external reporting purposes except that a substantial portion of the sales of the Advanced Manufacturing Capital Equipment and Analytical Solutions Group segments are intercompany sales to the regions at tax-based transfer prices and certain significant costs, including stock-based compensation and management incentive compensation, are not allocated to the segments and are included in Corporate, Eliminations and Other. The CODM reviews several metrics of each operating segment, including net revenues and gross profit (loss).

The following is net revenues by reportable segment:


	Years Ended December 31,
	2014			2013			2012
Advanced Manufacturing Capital Equipment	$	639,623		$	526,027		$	479,751
Analytical Solutions Group		61,161			56,324			62,765
Europe Region Sales & Service(1)		55,115			48,518			51,440
Asia Region Sales & Service(1)		240,772			218,048			229,731
Corporate, Eliminations and Other		(215,802	)		(179,497	)		(180,179	)

	$	780,869		$	669,420		$	643,508

The following is a reconciliation of segment gross profit to consolidated net income:


	Years Ended December 31,
	2014			2013			2012
Gross profit by reportable segment:
Advanced Manufacturing Capital Equipment		260,669			187,685			171,308
Analytical Solutions Group		30,787			29,431			32,741
Europe Region Sales & Service(1)		15,467			13,600			15,156
Asia Region Sales & Service(1)		40,717			42,948			36,962
Corporate, Eliminations and Other		(9,874	)		(7,090	)		13,312

Total gross profit by reportable segment		337,766			266,574			269,479
Operating expenses:
Research and development		62,888			63,570			60,118
Selling, general and administrative		131,828			142,014			127,185
Litigation		—			—			5,316
Insurance reimbursement		—			(1,071	)		—
Acquisition costs		499			171			1,258
Restructuring		2,464			1,364			343
Amortization of intangible assets		4,945			2,139			1,036

Income from operations		135,142			58,387			74,223
Net interest income		1,251			914			913

Income before income taxes		136,393			59,301			75,136
Provision for income taxes		20,615			23,525			27,107

Net income	$	115,778		$	35,776		$	48,029

(1)

The Europe and Asia sales and service operations do not represent total geographical Europe and Asia financial information. These sales and service operations only represent the sales from the resale and service of Advanced Manufacturing Capital Equipment and Analytical Solutions Group products in their respective regions. The Advanced Manufacturing Capital Equipment and Analytical Solutions Group segments both have sales in each region. Accordingly, total geographical sales include sales from multiple reportable segments.

The following is capital expenditures by reportable segment for the years ended December 31, 2014, 2013 and 2012:


	Product Groups				Foreign Sales & Service Operations
	Advanced Manufacturing Capital Equipment		Analytical Solutions Group		Europe		Asia		Corporate, Eliminations and Other		Total
December 31, 2014:
Capital expenditures	$	8,634	$	1,763	$	183	$	690	$	1,913	$	13,183
December 31, 2013:
Capital expenditures	$	8,729	$	513	$	250	$	857	$	2,061	$	12,410
December 31, 2012:
Capital expenditures	$	11,817	$	1,228	$	132	$	886	$	3,642	$	17,705

The following is depreciation and amortization expense by reportable segment for the years ended December 31, 2014, 2013 and 2012:


	Product Groups				Foreign Sales & Service Operations
	Advanced Manufacturing Capital Equipment		Analytical Solutions Group		Europe		Asia		Corporate, Eliminations and Other		Total
December 31, 2014:
Depreciation and amortization	$	15,119	$	1,101	$	488	$	1,241	$	2,565	$	20,514
December 31, 2013:
Depreciation and amortization	$	11,836	$	1,252	$	348	$	1,177	$	2,489	$	17,102
December 31, 2012:
Depreciation and amortization	$	9,594	$	1,176	$	326	$	1,711	$	1,635	$	14,442

Total income tax expense is impracticable to present by reportable segment because the necessary information is not available or used by the CODM.

The following is segment assets by reportable segment:


	Product Groups				Foreign Sales & Service Operations
	Advanced Manufacturing Capital Equipment		Analytical Solutions Group		Europe		Asia		Corporate, Eliminations and Other			Total
December 31, 2014:
Segment assets:
Accounts receivable	$	15,296	$	5,335	$	6,503	$	39,046	$	40,182		$	106,362
Inventory		128,345		3,915		3,241		24,619		(4,951	)		155,169

Total segment assets	$	143,641	$	9,250	$	9,744	$	63,665	$	35,231		$	261,531


	Product Groups				Foreign Sales & Service Operations
	Advanced Manufacturing Capital Equipment		Analytical Solutions Group		Europe		Asia		Corporate, Eliminations and Other			Total
December 31, 2013:
Segment assets:
Accounts receivable	$	20,767	$	5,603	$	6,538	$	44,207	$	39,629		$	116,744
Inventory		117,822		4,391		4,254		25,094		(8,834	)		142,727

Total segment assets	$	138,589	$	9,994	$	10,792	$	69,301	$	30,795		$	259,471

A reconciliation of segment assets to consolidated total assets is as follows:


	Years Ended December 31,
	2014		2013
Total segment assets	$	261,531	$	259,471
Cash and cash equivalents and investments		592,232		650,022
Other current assets		41,529		30,143
Property, plant and equipment, net		72,776		77,536
Goodwill and intangible assets, net		238,770		163,999
Other assets		17,206		31,847

Consolidated total assets	$	1,224,044	$	1,213,018

Information about the Company’s operations in different geographic regions is presented in the tables below. Net revenues to unaffiliated customers are based on the location in which the sale originated. Transfers between geographic areas are at negotiated transfer prices and have been eliminated from consolidated net revenues.


	Years Ended December 31,
	2014		2013		2012
Net revenues:
United States	$	448,452	$	363,948	$	326,894
Korea		97,323		75,401		64,541
Japan		61,092		56,978		81,883
Europe		80,659		77,910		85,362
Asia (excluding Korea and Japan)		93,343		95,183		84,828

	$	780,869	$	669,420	$	643,508


	Years Ended December 31,
	2014		2013
Long-lived assets:(1)
United States	$	57,701	$	60,700
Europe		6,099		5,484
Asia		10,887		13,475

	$	74,687	$	79,659

(1)	Long-lived assets include property, plant and equipment, net and certain other assets, excluding long-term income tax receivable in the U.S.

Worldwide Product Information

Because the reportable segment information above does not reflect worldwide sales of the Company’s products, the Company groups its products into three groups of similar products based upon the similarity of product function. Worldwide net revenue for each group of products is as follows:


	Years Ended December 31,
	2014		2013		2012
Instruments, Control and Vacuum Products	$	383,863	$	341,375	$	324,939
Power and Reactive Gas Products		335,271		273,357		251,669
Analytical Solutions Group Products		61,735		54,688		66,900

	$	780,869	$	669,420	$	643,508

Sales of Instruments, Control Products and Vacuum Products, Power and Reactive Gas Products are included in the Company’s Advanced Manufacturing Capital Equipment Products segment as well as in the foreign sales and service operations because the products are sold through the foreign sales and service operations in their respective regions. Sales of the Analytical Solutions Group Products are included in the Analytical Solutions Group Products segment as well as in the foreign sales and service operations because the products are sold through the foreign sales and service operations in their respective regions.

Major Customers

The Company had two customers with net revenues greater than 10% of total net revenues in the periods shown as follows:


	Years Ended December 31,
	2014			2013			2012
Applied Materials, Inc.		19.1	%		17.0	%		14.5	%
Lam Research Corporation		12.9	%		12.3	%		10.1	%

Net revenues for each of our reportable segments include revenues from each of the two customers, which represent net revenues greater than 10% of total net revenues.