Business Segment, Geographic Area, Product and Significant Customer Information | 16) 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, which is used in the decision making process to assess performance. Based upon the information provided to the CODM, the Company has determined it has four reportable segments. Effective January 1, 2015, the Company changed the structure of its reportable segments based upon a change in the information that is provided to the Company’s CODM. The Company’s four reportable segments prior to the change in structure were: Advanced Manufacturing Capital Equipment, Analytical Solutions Group, Europe Region Sales & Service and Asia Region Sales & Service. The Company’s current structure still reflects four reportable segments; however, the composition of the segments has changed. The Company’s current reportable segments are Advanced Manufacturing Capital Equipment, Global Service, Asia Region Sales and Other. The primary change to the segment structure was to separate worldwide service from product sales and create a separate reportable segment known as Global Service. Product sales in the Advanced Manufacturing Capital Equipment segment remained with that segment. Asia product sales became a separate reportable segment. The product sales from the operating segments that made up the Analytical Solutions Group and Europe Region sales were combined into the Other segment and are not reported separately as they are individually immaterial and collectively below the separate segment reporting guidelines. The Company has reported corporate expenses and certain intercompany pricing transactions in a Corporate and Eliminations reconciling column. Due to these changes, the results presented under segment reporting for the three and nine months ended September 30, 2014 and as of December 31, 2014 reflect the current segments to conform to the current period segment reporting presentation with no impact to the consolidated results of operations. The Advanced Manufacturing Capital Equipment segment includes the development, manufacturing and sales of instruments and control products, power and reactive gas products, materials delivery 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 product sales, which are recorded at transfer prices in accordance with applicable tax requirements. The Global Service segment includes the worldwide servicing of instruments and control products, power and reactive gas products, materials delivery products and vacuum products, all of which are utilized in semiconductor processing and other similar advanced manufacturing processes. It also includes sales of custom fabrication services. The Asia Region Sales segment mainly resells products from the Advanced Manufacturing Capital Equipment and Other segments into Asia regions. The Other segment includes operating segments that are not required to be reported separately as a reportable segment and includes sales for products that are re-sold from the Advanced Manufacturing Capital Equipment into Europe regions as well as sales from other operating segments. 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 Other 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 and Eliminations. The CODM reviews several metrics of each operating segment, including net revenues and gross profit (loss). The Company does not maintain balance sheets for the majority of its operating segments and, as such, amounts have not been allocated to the reportable segments. The Company does not disclose external or intersegment revenues separately by reportable segment as this information is not presented to the CODM for decision making purposes. The following is net revenues by reportable segment: Three Months Ended Nine Months Ended 2015 2014 2015 2014 Advanced Manufacturing Capital Equipment $ 174,101 $ 146,360 $ 532,300 $ 458,337 Global Service 29,891 28,278 87,319 80,676 Asia Region Sales (1) 46,733 40,549 158,887 133,438 Other 19,289 21,444 59,301 61,520 Corporate and Eliminations (60,682 ) (49,833 ) (196,670 ) (156,123 ) $ 209,332 $ 186,798 $ 641,137 $ 577,848 The following is a reconciliation of segment gross profit to consolidated net income: Three Months Ended Nine Months Ended 2015 2014 2015 2014 Gross profit by reportable segment: Advanced Manufacturing Capital Equipment $ 76,026 $ 59,285 $ 237,267 $ 186,310 Global Service 10,498 9,985 30,466 28,065 Asia Region Sales (1) 7,151 5,021 21,887 20,417 Other 5,466 7,490 18,005 20,915 Corporate and Eliminations (4,912 ) (2,456 ) (17,552 ) (7,375 ) Total gross profit by reportable segment 94,229 79,325 290,073 248,332 Operating expenses: Research and development 17,217 15,827 51,464 46,866 Selling, general and administrative 33,396 32,365 97,532 99,195 Acquisition costs — — 30 499 Restructuring 562 1,223 1,569 1,970 Amortization of intangible assets 1,691 1,760 5,071 3,214 Income from operations 41,363 28,150 134,407 96,588 Net interest income 721 394 2,015 860 Income before income taxes 42,084 28,544 136,422 97,448 Provision (benefit) for income taxes 12,315 (573 ) 39,647 15,862 Net income $ 29,769 $ 29,117 $ 96,775 $ 81,586 (1) The Asia Region Sales segment does not represent total geographical Asia financial information. This sales operation only represents the sales from the resale of Advanced Manufacturing Capital Equipment and Other segment products in their respective regions. The Advanced Manufacturing Capital Equipment and Other segments both have sales in this region. Accordingly, total geographical sales include sales from multiple reportable segments. The following is capital expenditures by reportable segment for the three and nine months ended September 30, 2015 and 2014: Advanced Global Service Asia Region Other Corporate and Total Three Months Ended September 30, 2015: Capital expenditures $ 2,169 $ 265 $ 256 $ 150 $ 657 $ 3,497 Nine Months Ended September 30, 2015: Capital expenditures $ 5,313 $ 550 $ 349 $ 386 $ 2,233 $ 8,831 Advanced Global Service Asia Region Other Corporate and Total Three Months Ended September 30, 2014: Capital expenditures $ 1,239 $ 198 $ 229 $ 63 $ 378 $ 2,107 Nine Months Ended September 30, 2014: Capital expenditures $ 4,944 $ 787 $ 421 $ 1,600 $ 1,610 $ 9,362 The following is depreciation and amortization by reportable segment for the three and nine months ended September 30, 2015 and 2014: Advanced Global Service Asia Region Other Corporate and Total Three Months Ended September 30, 2015: Depreciation and amortization $ 4,240 $ 249 $ 86 $ 268 $ 681 $ 5,524 Nine Months Ended September 30, 2015: Depreciation and amortization $ 12,792 $ 759 $ 259 $ 846 $ 1,950 $ 16,606 Advanced Global Service Asia Region Other Corporate and Total Three Months Ended September 30, 2014: Depreciation and amortization $ 4,403 $ 280 $ 101 $ 307 $ 701 $ 5,792 Nine Months Ended September 30, 2014: Depreciation and amortization $ 10,857 $ 819 $ 301 $ 766 $ 2,014 $ 14,757 In connection with the implementation of the current segment structure, goodwill was allocated to each reportable segment on a relative fair value basis. The Company performed an interim quantitative impairment test as of January 1, 2015 and concluded that the fair values of each reporting unit exceeded their respective carrying values. Goodwill associated with each of our reportable segments is as follows: September 30, 2015 December 31, 2014 Reportable segment: Advanced Manufacturing Capital Equipment $ 174,344 $ 166,946 Global Service 19,826 19,728 Asia Region Sales — — Other 6,228 6,228 Foreign currency translation (836 ) (521 ) Total goodwill $ 199,562 $ 192,381 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: Three Months Ended September 30, Nine Months Ended September 30, 2015 2014 2015 2014 Instruments, Control and Vacuum Products $ 98,614 $ 93,027 $ 319,491 $ 284,934 Power and Reactive Gas Products 95,311 79,228 276,787 249,190 Analytical Solutions Products 15,407 14,543 44,859 43,724 $ 209,332 $ 186,798 $ 641,137 $ 577,848 Sales of Instruments, Control and Vacuum Products and Power and Reactive Gas Products are included in the Company’s Advanced Manufacturing Capital Equipment, Asia Region Sales, Global Service and Other segments because the products are sold through these segments. Sales of the Analytical Solutions Products are included in the Asia Region Sales, Global Service and Other segments because the products are sold through these segments. Geographic 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. Three Months Ended September 30, Nine Months Ended September 30, 2015 2014 2015 2014 Net revenues: United States $ 122,348 $ 107,583 $ 365,942 $ 332,892 Korea 27,760 20,540 87,181 70,806 Japan 14,699 14,798 49,001 46,141 Asia (excluding Korea and Japan) 24,833 22,539 79,259 68,304 Europe 19,692 21,338 59,754 59,705 $ 209,332 $ 186,798 $ 641,137 $ 577,848 September 30, 2015 December 31, 2014 Long-lived assets: (1) United States $ 56,570 $ 57,701 Europe 5,681 6,099 Asia 9,232 10,887 $ 71,483 $ 74,687 (1) Long-lived assets include property, plant and equipment, net and certain other long-term assets, excluding long-term income tax receivable. Major Customers The Company had two customers with net revenues greater than 10% of total net revenues in the periods shown as follows: Three Months Ended September 30, Nine Months Ended September 30, 2015 2014 2015 2014 Customer A 18 % 20 % 18 % 20 % Customer B 16 % 11 % 14 % 13 % |