Good day ladies and gentlemen and welcome to MKS Instruments Fourth Quarter 2014 Earnings Conference Call. At this time all participant lines are in a listen-only mode but later we will be conducting a question-and-answer session and instruction will follow at that time. [Operator Instructions]. As a reminder today's program is being recorded. I would now like to introduce your host for today Seth Bagshaw, Vice President and Chief Financial Officer. Please go ahead, sir.

Thank you. Good morning everyone. I’m Seth Bagshaw, Vice President and Chief Financial Officer and I’m joined this morning by Gerry Colella, our Chief Executive Officer and President. Thank you for joining our earnings conference call. Yesterday after market closed we released our financial results for the fourth quarter and full year 2014, as well as our improved 2015 operating model. You can access these releases at our Web site www.mksinstruments.com. As a reminder various remarks that we may make about future expectations plans and prospects for MKS comprise forward-looking statements. Actual results may differ materially from those indicated, by these forward-looking statements as a result the various important factors including those discussed in yesterday’s press release and in the Company’s most recent Annual Report on Form 10-K and the most recent quarterly report on Form 10-Q which are on file with the SEC. In addition these forward-looking statements represent the Company’s expectations only as of today. While the Company may elect to update these forward-looking statements, specifically disclaims any obligation to do so. A forward-looking statements should not be relied upon as a representing the Company’s estimates or views as of any date subsequent to today. Now, I’ll turn the call over to Gerry.

Thanks Seth. Good morning everyone and thank you for joining us on the call today. This morning I’ll start with the recap of our results for the full year as well as the fourth quarter of 2014. Following that I’ll give you an update on our progress towards the strategic initiatives, my team has been pursuing during 2014. And finally I’ll provide our outlook for the first quarter. Seth will follow me with further details and our financial results and then we’ll open the call for your questions. Starting with our 2014 results, our year-over-year business was up considerably from 2013 with annual revenue increasing 17% to $781 million while non-GAAP net earnings more than doubled. Sales for the semiconductor market increased 19% exceeding the recent industry projections of approximately 12% with semiconductor wafer fab equipment market, reflecting the increased importance of etch and deposition processes and our leadership position with our customers. Sales to our other markets combined were also strong increasing 12% from 2013. Fourth quarter revenue was above guidance at $203 million up 9% from the third quarter driven primarily by a 13% increase in the semiconductor market. I’m fortunate to be supported by a strong management team and highly dedicated and hardworking employees. Looking back at 2014 I’m proud of the progress we have made against the goals we’ve set for the Company. The team and I are focused on strategic initiatives with specific goals to continue to broaden our leadership in vacuum processing, measurably improve our profitability through the cycle, efficiently deploy capital to increase shareholder value and aggressively pursue opportunities created by current technology inflections. I’m pleased to report that in 2014 we made significant progress towards achieving these goals. For the successful acquisition and integration of Granville-Phillips, we’ve increased our leadership in vacuum…

Thank you, Gerry. I’ll start with the fourth quarter and full year financial results, then I’ll provide details on further improvements to our operating model and finally discuss our Q1 2015 guidance. Revenue for the quarter was $203 million, increase of 9% compared to Q3 revenue of $187 million and similar to Q4 2013 revenue of $204 million. Revenue for the quarter was above the high-end of our guidance range primarily due to shipments very late in the quarter to semiconductor OEM customers to meet their production schedules. Gross margin was 44.1% which is slightly below what our guidance for the quarter would have implied at the sales volume primarily due to unfavorable foreign exchange in charges for foreign customs audit. Non-GAAP operating expenses were $48.7 million slightly favorable due primarily to timing of expected hiring in certain product expenses most of which are expected to occur in Q1. As reminder non-GAAP operating expenses in the fourth quarter of 2014 were below what we expect the normalize levels due to seasonally higher vacations and the timing of certain project spending. In the first quarter of 2015 we expect our operating expenses to be at more normalized levels. Our non-GAAP operating margin was 20.1% of sales above our targeted operating model due to lower than normal operating expenses discussed above. In the fourth quarter we completed another targeted reduction in work force and incurred $500,000 in restructuring charges. Non-GAAP net earnings were $29.1 million or $0.54 per share compared to $22.8 million in third quarter and $22.3 million in the fourth quarter of 2013. Our non-GAAP tax rate was approximately 30% for the quarter, our GAAP tax rate was 12% and reflects the positive impact of discrete tax credits as a result of favorable audit settlements, recognition of certain foreign tax…

[Operator Instructions]. Our first question comes from the line of Krish Sankar from Bank of America Merrill Lynch. Your line is open.

I have two quick ones. Gerry, you said just quickly on the March quarter guidance, can you tell us how the composition looks like in terms of semi is going to be flat or slightly up, can you give some color on that? I also have a follow up.

Krish, I would say that the other advanced markets tend to relatively steady, overall we believe sequentially but we don’t necessarily give that guidance level of detail granularity by market. So I would think that my expectation would be is in the first quarter will be up a little bit again sequentially other advanced markets in the balance of fallout in semi.

I think I’m more encouraged by recent information I’m hearing about increasing CapEx spending for the VTS and Samsung, but strengthening position in memory DRAM and NAND, more work involved in FinFET and increasing yields in 3D, and we're starting to see strengthening in our business. And our lead times are very short, probably even sometime we surprise because we’re on a lot of Poll systems with customers, our lead times are very short. So I'm very bullish on Q1 and beyond based on what I’m reading and what I’m seeing from our customers.

I think also Krish to mention, in the fourth quarter we're above the high-end of our guidance. I mentioned in the prepared remarks that was driven primarily by late polls in the quarter. So as Gerry mentioned we’re on this Poll system with a major OEM customers, Poll based in the production requirements and we saw a sizeable uptick towards the end of Q4 as well.

And we’re getting the typical question when we start to seeing additional ramp of capacity planning, they’re asking our operations teams to put number of scenarios together about, if we increase by x percent again through ‘16 are we well positioned? So I’m very positively bias to what’s going on in the semi side as well as the other things we’re starting to seeing in other markets.

And then a follow up, given your strong cash position the fact you’re going to need to about continuing to look at acquisitions. I’m kind of curious if you look at MKS historically, your acquisitions mostly have been bolt-on acquisitions rather than a big -- like a merger of peers kind of an acquisition mentality. So is there still the mentality that you’re going to focus on more bolt-on and non-semi focus acquisition or is it different this time around?

I think that we’re open to any acquisition of any size it make sense. We’ve looked at various models where we can even leverage if needed in order to buy something of significant size. I think on the non-semi side you probably see us be more moderate in our view, companies that help us continue to add on to incrementally build the business whether it would be environmental monitoring or other side of that. But it’s something significant in our space comes on that’s transformational; we’re more than ready and willing to take that on and prepare.

Thank you. Our next question is from the line of Patrick Ho from Stifel Nicolaus. Your line is open.

Thank you very much. Gerry, can you provide some color on how MKS is handling some of the customer consolidation, for example the Applied Materials in Tokyo Electron deal. How this could work potentially to your benefit and what impact you may believe has on your margin profile on the longer term? How do you deal with all of this industry consolidation issue given that you’ve seen it now going on for several years? And if anything your gross margins have actually improved since these deals have occurred. How do you deal with this longer term?

Patrick, that’s a great question. I think this is a multi-pronged deal, so first the defense is being a technology leader and having the depth the experience and size, matters. No one is going to be moving things around for 5% to 10% cost reduction. So if you got the technology as we’ve had all along improving that you’re a provider of critical solutions to your customers and providing superior quality mobility, that’s the first difference. Secondly, integrated products which we offer, we have the luxury and wide and deep portfolio. We combine technology that provide a varied entry for competitors and also allow us to offer a great solution to customer at a very reasonable price point which provides very good margins for us, reduce the size, reduce the cost of the customer and continue to make good margin. And I think the larger the customers the larger the supply base they’re going to want have support them globally. We are strong and we are everywhere where our customers are growing. I believe it’s difficult, although we’re not taking IR competition the smaller regional suppliers to compete with the capability of MKS. And we’ve also focused on our end users. We have a lot of business with end users and they have lot of say about our capability and the type of products they want to see on the tools. So I think that’s kind of the way we look at it and I’m looking forward to larger customers to deal with. I think we’ve got the capabilities to support them unlike anybody else in our industry and our market share keeps growing. So while all this consolidation has been happening our market share is going up. On the margin side with the vast number of years we have…

And my follow up question, I know it’s hard to look at kind of the full year perspective. But in your non-semi business, where do you see I guess potential growth opportunities kind of on a year-over-year basis? What markets do you see I guess optimism or where you’re encouraged at for the full year you can grow that segment of the business again in 2015.

Well first of all it comes to light, not -- this is probably solar, we're starting interesting enough, it's small base but it continues to appear to be strengthening so it looks like that’s a good opportunity. LED has been reasonable, not sure what that will look like next year but it’s come off -- as we said life support, the patients out of bed and now getting up and eating and drinking on their own. So hopefully that continues to strengthen. We’ve got great position in China on LED with the equipment companies there. And as the business in China grows for LED and equipment we think that will strengthen for us over time. We’re also putting some investments in things like process and environmental monitoring. So things like stack emissions and cement plant emissions and chemical warfare detection. We're also making some investments in industrial microwave, so areas like food production and things like we’re now in the candy production business and pasta production business which is actually kind of cool. And so we think that’s some really good opportunity. But strength in semi too, but obviously that’s going to be a leader for us. But we keep building incrementally, quarter-over-quarter these are the markets and we’re pretty happy about all of them right now.

Thank you. Our next question is from the line of Tom Diffely of D.A. Davidson. Your line is open.

Couple more questions here. So first, when we looked at Lam’s results last night obviously very positive, so no surprise the OEM business is up 11% or so for you. What’s driving the fab business, there was a lot of strength in the quarter at that one?

Tom, its Seth. So primarily it was in an Asian geography, Korea was very strong for us in the quarter and we had strong growth with direct OEM to the direct fab sales and to also OEMs in Korea as well. And as you know a lot of the CapEx occurring last year and this year is in that marketplace. So, long story short Korea was strong for us in the quarter, very strong for the year, very strong last several years obviously, I think that way going forward as well.

We have products that are very strong in the OLED production that are unrelated to the end use of lot of direct sales to the end users which has been strengthening as well.

Is there seasonality in that number to the OEMs? Is there end of your contracts or budget flushes that you see?

No, nothing that we see.

No.

Were projects based and production volumes they need to support.

And when you look at the OEM business especially with Applied Lam. What is your sense of the inventory situation, are they building inventory in anticipation of ramp or they're burning down their inventory because things are growing so fast, any color there would be helpful.

Well, it kind of varies customer-by-customer. We have a lot of poll systems now with our OEM customers. So they’re on a pretty much -- as they build they consume on a regular basis. And then some other customers have a tendency to be lumpy, they’ll front end load a little bit, they don’t come back and take another chunk of product from the company. But I don’t get a sense that we’re seeing inventory build up because they’re continuing to develop, examine our capacity expansion, how we manage our supply chain for instability. So it’s pretty steady, I mean again they can lumps of times, we got a fairly decent push at the very end of the quarter. But I don’t think that has any material effect going forward, it’s just lumpy in the way they consume the product.

And then when you kind of step back and look at your semiconductor business growing 17% last year versus the industry at 11% and 12%. Your sense that you're kind of hedged up to the big gainers in the space, Lam grew by close to 20%, or is it that you’re actually gaining share, getting flats along the way.

I mean it’s a combination of both. I think we said in the script that we saw about 2% increase in market share in general. And I think we’re very well positioned with all of our customers and certainly with the move to a 3D NAND and multi-patterning and FinFET where there is more steps which is in our investor presentation, that obviously gives us much more opportunity as well. And it’s across the board for our products, it’s not a singular. We’re not a company, there's a singular product company. We’re the number one critical sub system provider that has a very wide and deep portfolio and they're taking advantage of that across the board.

And then when you look at I guess on the model side, when you look at the tax rate of 29% and coming down a little bit. What is the biggest driver for that decrease and is that sustainable overtime?

Tom, the answer is it is sustainable we believe. What’s driving, there is a fair amount of tax planning frankly last 12 to 24 months. If you go back even 2013 in the model, you see 33% rate, jump down to 31% this year and 29% going forward. So I call it tax planning, it’s been implemented that’s achievable in 2015 going forward. Again that rate does not included the R&D tax credit which will be now the point when that gets reestablished. And then we have other opportunities we think we're working on now, I think will hopefully effect the rate going forward and down again in 2016. But that's sort of in a project phase right now, and we’ll roll it out when that’s achieved. But basically to short the answer is, we are sustainable as based on the activities we’ve down to optimize international tax planning.

And then Seth final question, when you look at the cash you said 53% of it was U.S. based. On a go forward basis as you generate cash, what is the breakdown between U.S. based and foreign based?

It’s tough to say Tom, it depends on working capital and mix of customer or so. So, I know in the quarter it was probably 40% U.S. 60% outside perhaps, but it’s really hard to say because all the different dynamics. And we ship into a number of different jurisdictions with different payment cycles. So roughly 40, 60 is my rough guess right now.

Thank you. [Operator Instructions]. And I have a question from the line of Jairam Nathan from Sidoti. Your line is open.

Just on the operating model, if I kind of apply the percentages. Operating expense for the year did come much below I would say the model you have put in. So kind of wanted to understand how would -- I know you kind of talked about some seasonal changes in the fourth quarter but overall for 2015 it looks like you have put in some pretty good cushion there.

Well, I would say Jairam in terms of the -- obviously reductions are expense structure in 2014. I mentioned we also we're going reinvest a fairly sizable amount back into the business. So probably not all that’s in the fourth quarter it will take time to lay that in as we add resources in certain projects. I would say in Q1 the guidance is probably pretty consistent for the rest of the year in terms of polarization, it'll bounce around little bit due to the normal variable comp or foreign exchange for example. But if you take sort of Q1 and annualize, it’s probably pretty good model for 2015 at similar sales volumes.

Just another question was regarding EUV and it looks like the postponement of EUV has helped you and some other in the industry. What’s your content in an EUV -- when EUV kind of comes up. Is there a way you can increase that content by making acquisitions, and what’s your thoughts there?

There is not as much vacuum content in EUV, I don’t think it’s going to overtake the whole industry in our business, there will be a percentage of our business. And we’re obviously looking at what other content we can do there. One of the other areas we’re looking at is the back end. We think the back end could be a nice growth area. So we’ve got a team looking at organic or potential acquisition on the back end to pick up whatever we would see as a small impact of EUV. But I don’t think its material or game changing, but we’re always looking to see if there is more content we can put on the tool. But it’s just not as much back in there, but again it’s a small percentage comparatively we believe over time, and it’s the ways off, so if at all.

Thank you. That’s all the questions we have for today. I’d like to turn the call back over to the moderator for closing remarks.

Thank you everyone. 2014 was a great year for MKS and our team. We refined our vision, we defined our mission and we did deliver on our strategic initiatives and goals. We saw significant strengthening in our semiconductor business, while other advanced markets increased quarter-over-quarter through the year. We’re also very proud of our superior operating model and still see more room for improvement over the coming year. Please look out for an invitation to join us at our upcoming Analyst Day in New York on June 03rd. Thank you for joining us on the call today.

Ladies and gentlemen, thank you again for your participation in today’s conference. This now concludes the program and you may all disconnect your telephone lines. Everyone have a great day.