Industry Segment Operations

3 Months Ended

Jan. 26, 2020

Applied’s three reportable segments are: Semiconductor Systems, Applied Global Services, and Display and Adjacent Markets. As defined under the accounting literature, Applied’s chief operating decision-maker has been identified as the President and Chief Executive Officer, who reviews operating results to make decisions about allocating resources and assessing performance for the entire Company. Segment information is presented based upon Applied’s management organization structure as of January 26, 2020 and the distinctive nature of each segment. Future changes to this internal financial structure may result in changes to Applied’s reportable segments.

The Semiconductor Systems reportable segment includes semiconductor capital equipment for etch, rapid thermal processing, deposition, chemical mechanical planarization, metrology and inspection, wafer packaging, and ion implantation.

The Applied Global Services segment provides integrated solutions to optimize equipment and fab performance and productivity, including spares, upgrades, services, certain remanufactured earlier generation equipment and factory automation software for semiconductor, display and other products.

The Display and Adjacent Markets segment includes products for manufacturing liquid crystal displays (LCDs), organic light-emitting diodes (OLEDs), equipment upgrades and flexible coating systems and other display technologies for TVs, monitors, laptops, personal computers, smart phones, and other consumer-oriented devices.

Each operating segment is separately managed and has separate financial results that are reviewed by Applied’s chief operating decision-maker. Each reportable segment contains closely related products that are unique to the particular segment. Segment operating income is determined based upon internal performance measures used by Applied’s chief operating decision-maker. The chief operating decision-maker does not evaluate operating segments using total asset information.

Applied derives the segment results directly from its internal management reporting system. The accounting policies Applied uses to derive reportable segment results are substantially the same as those used for external reporting purposes. Management measures the performance of each reportable segment based upon several metrics including orders, net sales and operating income. Management uses these results to evaluate the performance of, and to assign resources to, each of the reportable segments.

The Corporate and Other category includes revenues from products, as well as costs of products sold, for fabricating solar photovoltaic cells and modules, and certain operating expenses that are not allocated to its reportable segments and are managed separately at the corporate level. These operating expenses include costs related to share-based compensation; certain management, finance, legal, human resources, and research, development and engineering functions provided at the corporate level; and unabsorbed information technology and occupancy. In addition, Applied does not allocate to its reportable segments restructuring and asset impairment charges and any associated adjustments related to restructuring actions, unless these actions pertain to a specific reportable segment. Segment operating income also excludes interest income/expense and other financial charges and income taxes. Management does not consider the unallocated costs in measuring the performance of the reportable segments.

Net sales and operating income (loss) for each reportable segment were as follows:


	Three Months Ended
	Net Sales		Operating Income (Loss)

	(In millions)
January 26, 2020:
Semiconductor Systems	$	2,814	$	915
Applied Global Services	997		278
Display and Adjacent Markets	332		38
Corporate and Other	19		(189)
Total	$	4,162	$	1,042
January 27, 2019:
Semiconductor Systems	$	2,268	$	631
Applied Global Services	962		285
Display and Adjacent Markets	507		115
Corporate and Other	16		(123)
Total	$	3,753	$	908

Semiconductor Systems and Display and Adjacent Markets revenues are recognized at a point in time. Applied Global Services revenue is recognized at a point in time for tangible goods such as spare parts and equipment, and over time for service agreements. The majority of revenue recognized over time is recognized within 12 months of the contract inception.

Net sales by geographic region, determined by the location of customers’ facilities to which products were shipped to, were as follows:


	Three Months Ended
	January 26, 2020						January 27, 2019

	(In millions, except percentages)
China	$	1,272	31	%	$	968	26	%
Korea	508		12	%	572		15	%
Taiwan	1,365		33	%	656		18	%
Japan	351		8	%	651		17	%
Southeast Asia	72		2	%	160		4	%
Asia Pacific	3,568		86	%	3,007		80	%
United States	441		10	%	450		12	%
Europe	153		4	%	296		8	%
Total	$	4,162	100	%	$	3,753	100	%

Net sales for Semiconductor Systems by end use application for the periods indicated were as follows:


	Three Months Ended
	January 26, 2020		January 27, 2019
Foundry, logic and other	68	%	44	%
Dynamic random-access memory (DRAM)	15	%	21	%
Flash memory	17	%	35	%

	100	%	100	%

The reconciling items included in Corporate and Other were as follows:


	Three Months Ended
	January 26, 2020		January 27, 2019

	(In millions)
Unallocated net sales	$	19	$	16
Unallocated cost of products sold and expenses	(115)		(74)
Share-based compensation	(93)		(65)



Total	$	(189)	$	(123)

The following customers accounted for at least 10 percent of Applied’s net sales for the three months ended January 26, 2020, and sales to these customers included products and services from multiple reportable segments.


	Percentage of Net Sales
Taiwan Semiconductor Manufacturing Company Limited	29	%
Samsung Electronics Co., Ltd.	14	%