MKS Inc. (MKSI) Q4 2014 Earnings Report, Transcript and Summary

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 processing and we are now the worldwide market leader for both direct and indirect gauges for the semiconductor and related vacuum markets. In the most recent critical subsystems market share report MKS products gained nearly 2% market share in our served markets and we anticipate this trend to continue. We continue to work closely with OEMs and end users around the world as they developed new tools and address critical, technical challenges. Throughout the year we’ve strengthened our leadership position in critical vacuum subsystems with the introduction of new products and pressure control, gauging, valves, flow our power, remote plasma sources, microwave power, reactive gas, fluid management, heating and controls and we’re very committed to continuing the expansion of our market leadership year-over-year. We are laser focused on managing the business for sustainable and profitable growth and demonstrated out commitment to continually improving our profitability. In 2014 while revenue was up 17% our non-GAAP net earnings more than doubled from 2013. This was driven by margin expansion and operating cost reductions. This improvement was accomplished while continuing to invest in other high growth markets. We have updated our operating model to reflect the improvements we’ve already made and we continue to identify opportunities to improve our financial performance. We believe we can further improve our profitability despite the rapidly consolidating customer base. In fact we see the consolidation of our customers as an opportunity to increase share and add scale to our business. We continue to execute on our commitment to efficiently deploy capital and to create shareholder value. In the last 24 months we successfully acquired and integrated three companies with critical technologies which expand our portfolio. We are constantly seeking and evaluating additional M&A opportunities and we have a robust M&A pipeline. We are confident that we will continue to successfully identify, acquire and integrate at other technology based companies. During the year we repurchased $20 million of our stock and also increased our dividend, this is the second increase since initiating a regular dividend in 2011. In the semiconductor market, the industry is facing several technical inflection points as they address the challenges delayed EUV lithography, the ensuing reliance on multi-patterning and the rollout of 3D structures. I’m pleased to report that in 2014, we achieved critical wins which address these technical inflection points for Etch, Strip, ALD, CVD and EPI tools. Our market leading products -- power, advanced solid state microwave, remote plasma generators, pressure, flow, analysis and other products that have had significant wins in major OEMs in the U.S., China, Japan and Korea. Korea is an area of strong end user growth in emerging OEMs. Our success in Korea has been bolstered by our investments in local application support as well as our acquisition of Plasmart, a technically respected Korea based company developing advanced [management] solutions which complement a leading RF power supply products. We’re proud of our execution on major initiatives and are focused on what is needed to take MKS to the next level. I’d like now to share some insights into our markets and applications and provide examples of some recent successes which help illustrate the breadth of opportunities in many of exciting growing markets we serve. Consumer demand for fast and more capable, portable devices, a lower power consumption and long battery life continue to provide a strong growth engine to electronics industry and ultimately to our semiconductor business. To satisfy these demands, critical dimensions of semiconductor device has much decreased while pattern density must increase significantly increasing the complexity and technical challenges of chip manufacturing. Conventional lithography scaling has stalled and the industry is relying on multi-patterning to achieve sub-28 nanometer dimensions. The process of multi-patterning results fine lines and spaces using existing lithography capability but with many additional depositions in excess the shift from planer to 3D devices is also progressing and we will also require more Etch deposition and process control. MKS has a broad portfolio of leading technologies and strong content in Etch, deposition and other key semiconductor manufacturing processes. Our customers recognize our wide and deep portfolio to address these challenges as well as MKS as the market leader. I’m pleased to report that in the fourth quarter we achieved multiple design wins putting our new pulse RF generators, flow control, pressure measurement control as well as our new fiber glass heaters, and integrated excellent management subsystems, and we continue to see follow-on orders for numerous other products. In addition to growing our semiconductor business, our strategy is to leverage our technologies to other advanced growing markets which like semiconductor manufacturing require our technology in vacuum, power, pressure, flow, control and analysis. These other adjacent markets include thin film coatings, light emitting diodes, drug development and production, medical, industrial, energy, environmental, food and beverage and other critical applications. I’m pleased to report that sales of all these other markets increased from the fifth consecutive quarter in fourth quarter 2014 revenues to $61 million. One of these markets thin film coating encompasses a vast array of end users ranging from optical coating for glasses, Mg coating on windows, as well as coating food packing to maintain freshness. In the thin film market, one application is deposition of durable materials such as diamond or diamond like coatings to increase the wear and hardness of product such as machine tools. Coating companies use plasma based vacuum processing to create diamond coatings. I’m pleased to report that in the quarter we had design wins with multiple diamond coating OEMs for our pressure measurement, flow and control products as well as for our microwave generators from our recent acquisition Alter. We continue to make inroads in environmental marketing market, applications here run the spectrum of continuous emissions monitoring for exhaust gases, to engine development to reduce the emissions to safety monitoring for hazardous materials in the air. This quarter I’m pleased to report that our multi-gas analyzer successfully displaced an incumbent supply of gas measurement instruments and a global leader in automotive analyses. We were selected because the solution was complete and fully integrated, because of the ability of the core multi-gas analyzer to rapidly save it both real and model exhaust gases. In past calls I’ve spoken about the success of our multivariate analysis, process monitoring, design of experiment software in a biopharmaceutical market, we continue to expand penetration in this market. In this quarter I’m pleased to report two instances of follow-on orders from two leading global biotech companies. The first company has concluded internal trials and initiated worldwide rollout of our real-time predicted process monitoring software for the biological manufacturing processes in both their upstream and downstream processing. The second company has given us follow-on orders for their eight installation of multivariate software to monitor and control their processes. This shows the strength and value of our multivariate solutions. These are just a few brief examples but they illustrate how our technologies are helping our customers solve challenges in the very and exciting applications in markets we serve. Looking ahead to the first quarter demand from our core market continues to be healthy, based on this and looking at current business levels we anticipate the sales in the first quarter may range from $195 million to $215 million and these volumes our non-GAAP net earnings could range $0.45 to $0.60 per share. At this point I’ll turn the call over to Seth to discuss our results and expand our guidance.

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 credits and a temporary reinstatement of 2014 research credit in the fourth quarter. GAAP net income was $34.2 million of $0.64 per share. Now turning to the balance sheet. Cash investments increased by $22 million in the quarter to $592 million or approximately $11.14 per share. Approximately 53% of our cash investments are in the U.S. and the balance in our international operations. Total book value net of goodwill intangibles increased to $843 million or approximately $15.86 per share. In terms of working capital days sales outstanding continued to improve and were 48 days at the end of the fourth quarter compared to 52 days at the end of the third quarter. Inventory churns also improved to 2.9 compared to 2.8 in the third quarter. Capital additions for the quarter were $3.8 million, depreciation and amortization expenses were $5.8 million and non-cash stock compensation was $2.6 million. During the quarter we paid a cash dividend of $8.8 million or $16.5 per share. Now I’ll go through more detail regarding the composition of revenues for the fourth quarter. Sales to semiconductor market were $142 million or increase of 13% compared to third quarter and represented 70% of fourth quarter revenues. With the semiconductor market sales to semiconductor OEMs increased 11% from the third quarter and comprised 56% of total sales. Sales to semiconductors fabs increased 19% in the quarter and comprised 14% of total sales. Sales in our other advanced markets increased by 1% for the third quarter of 2014; it was $61.3 million representing 30% of total revenue. Sales in these markets have increased sequentially in each quarter in 2014 and in Q4 with the highest level since the second quarter of 2012. We mentioned before sales in these markets can vary from quarter-to-quarter. Geographically sales in the U.S. were 57% of total sales, sales in Asia were 33% and sales in Europe were 10%. Sales to our Top 10 customers represented 50% of total sales, sales to Applied Materials and Lam Research comprised 18% and 13% of fourth quarter sales respectively. Our headcount at the end of the Q4 was 2,371, up slightly from 2,350 at the end of the Q3 primarily due to increases in manufacturing related labor. To recap our results to 2014, sales for the full year was $781 million, an increase of 17% from $669 million in 2013. Sales of the semiconductor market were $544 million increasing 19% reflecting the strong growth in semiconductor OEM spending in 2014. Sales to other advanced markets also increased by 12% and were $236 million. The increase in these other advanced markets reflects increases across a number of markets and was further helped by our acquisition of Granville-Phillips that occurred late in the second quarter. Excluding our acquisition of Granville-Phillips, our sales to the semiconductor market increased 17% and sales to all other markets increased 8% from the previous year. Sales to our top 10 customers totaled 50% of revenue in 2014 compared to 47% in 2013 and sales to Applied Materials and Lam Research comprised 19% and 13% of 2014 revenue respectively. During the year we deployed over $140 million in capital for the acquisition of Granville-Phillips, shareholder dividends and share repurchases and generated approximately $90 million in free cash flow. As Gerry mentioned, we stated before we’re committed to both making continuous improvements in our financial performance in all phases of the operating cycle as well as making additional investments to leverage high growth opportunities. Throughout 2014, we took a number of actions including transferring additional manufacturing and service functions to lower cost regions, target reductions in workforce as well as other activities. The annualized savings of these cost reductions is approximately $13 million in manufacturing overhead, research and development as well as selling general and administrative functions. Of these annualized savings we will reinvest approximately $6 million into various growth initiatives that will further strengthen, product development functions, marketing business development activities as well as sales channels into other advanced markets. The time of these investments will vary; we've reduced our permanent cost structure by approximately $7 million in the last 12 months. As a result of this net reduction in our cost structure plus other profit improvement initiatives and the reduction in our effective tax rate in 2015, we’ve improved our non-GAAP earnings per share model by approximately 14% from a 2014 operating model and approximately 26% from a 2013 operating model assuming similar sales volumes. Furthermore with the acquisition of Granville-Phillips we both increased our market share and add $0.11 per share to a 2015 operating model. We’re confident these actions will position us to both improve our financial performance and to redeploy critical resources to fund our growth initiatives. We’ve posted the 2015 operating model in the investor presentation section of our Web site; we’re also valuing other opportunities that we believe continue to improveme our financial performance. Now I’ll turn to the Q1 2015 guidance. Based upon current business levels, we estimate that our sales in the first quarter could rise from $195 million to $215 million based upon expected sales range, our Q1 gross margin could range from 43.5% to 44.5% reflecting these volumes and expected product mix. Q1 operating expenses could range from $50.5 million to $51.5 million. In the first quarter, R&D expenses could range from $17.1 million to $17.5 million and SG&A expenses could range from $33.4 million to $34 million. The range of operating expenses in the first quarter reflects seasonally higher fringe cost in the quarter, more normalized work schedules in the U.S. and a continued investment in certain key research and development projects. As I mentioned on previous calls the timing of these projects is depended upon variety of factors and could vary from quarter-to-quarter. In the first quarter, amortization of intangible assets expected to be approximately $1.7 billion, net interest income is estimated to be approximately $400,000. We expect our first quarter income tax rate to be approximately 29%, reflecting an anticipated geographical mix of taxable income, gain includes the impact of the exploration of U.S. research and development tax credit at the end of 2014. Given these assumptions, first quarter non-GAAP net earnings could range from $24.3 million to $32 million or $0.45 to $0.60 per share and GAAP net income could range from $23.1 million to $30.8 million or $0.43 to $0.57 per share on approximately 53.6 million shares outstanding. This concludes our prepared remarks. We’ll now open the call for questions.

[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 myopically focused our engineering on cost competitive designs. We’ve also significantly lowered our warranty costs to quality and reliability. So you provide the customer great solution, you provide good margin for your own well being and you also drop the cost of warranty. We also can do bundling with customers and bring in new integrated products that they see at good pricing while we can maintain margins. The other thing is we’re operationally excellent; we’ve significant low cost country operations. We have a large operation in Shenzhen; we expanded significantly our capability in Mexico. And we have multistage approaches to moving products to low cost country. The other thing is we have exceptional procurement practices. I started the MKS 32 years ago in procurement, and we put in place a number of practices which enabled us to be a significant player on the supply side, and now we have scale and scope to go along with it and we have deep reaches into low cost region on the material side. And lastly last year one of the things that I looked at was we need to reverse the trend of expenses and cost of the company and we put together our profit and cash recovery team. And you’re seeing the results of the doubling of the profit in single year, the improvement of margin, improvement of operating income, growing EPS and while we’re still investing. So I think we’re myopically focused on sustainable and profitable growth and we’ve got the resources and the focus and the initiatives in order to accomplish that. So, I’m very confident about both maintaining margin while helping our customers out and also increasing share as the evidence is proven out.

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.