# Applied Materials, Inc. (AMAT) — Narrative, FY2026 Q2 Sources: Form 10-K for the fiscal year ended October 26, 2025 (filed December 12, 2025, accession 0001628280-25-056742); Form 10-Q for the quarter ended April 26, 2026 (filed May 21, 2026, accession 0001628280-26-037227); Forms 8-K accession 0001628280-26-035071 (May 14, 2026), 0001628280-26-007444 (February 12, 2026) and 0001628280-25-043753 (October 2, 2025). --- ## Business *From the FY2025 Form 10-K, accession 0001628280-25-056742.* Applied Materials is the largest supplier of materials engineering equipment used to make semiconductors. It designs, builds, sells and services the wafer fabrication tools chipmakers use to turn patterns into device structures — deposition, etch, rapid thermal processing, chemical mechanical planarization, ion implantation, metrology and inspection, and wafer-level packaging. Incorporated in Delaware in 1967; fiscal year ends on the last Sunday in October. Approximately 36,500 regular full-time employees across 25 countries as of October 26, 2025 (about 46% Asia-Pacific, 42% North America, 12% Europe/Middle East). More than 23,500 active patents. **Two reportable segments.** - **Semiconductor Systems** — capital equipment for chip fabrication. The company positions its differentiation on breadth: combining and co-optimizing steps across patterning, transistor and interconnect, process control (optical and eBeam) and advanced packaging (heterogeneous integration of multiple die) rather than selling single process steps. Sales are tracked across three end markets: foundry, logic and other (leading edge defined as 7nm and below; non-leading-edge serves IoT, communications, automotive, power and sensors); DRAM; and NAND. FY2025 revenue $20,798M (73% of total), operating income $7,379M (35.5% margin). - **Applied Global Services (AGS)** — services, spares and factory automation software sold against the installed base, increasingly under multi-year subscription service agreements, which management describes as a more predictable revenue stream. FY2025 revenue $6,385M (23% of total), operating income $1,792M (28.1% margin). Through fiscal 2025 AGS also sold 200mm and other equipment into non-leading-edge markets; **effective Q1 FY2026 the 200mm equipment business moved to Semiconductor Systems**, and corporate support costs are now fully allocated to the reportable segments (prior periods recast). - **Corporate and Other / Other** — display equipment and other non-reportable businesses plus unallocated costs. FY2025 revenue $1,185M (4%), operating loss $(882)M. As of October 26, 2025 management no longer treats Display as a separately reportable segment. **Backlog** at October 26, 2025 was $15,002M: Semiconductor Systems $7,105M (47%), AGS $7,141M (48%), Corporate and Other $756M (5%). About 31% is not expected to be filled within 12 months. Backlog is subject to amendment, cancellation and changes in export rules. **Customer and geographic concentration.** In fiscal 2025 two customers accounted for approximately 19% and 15% of net revenue, and roughly 89% of net revenue came from customers outside the United States (88% in the April 2026 quarter). Manufacturing and supply chain are distributed across the U.S., Singapore, Japan, China, Korea, Taiwan, Israel and elsewhere; some key parts come from a single qualified supplier. RD&E is concentrated in the U.S., India and Israel. **Competition.** Competitors range from single-product regional players to global diversified equipment makers; in AGS, from third-party service providers and customers doing their own service. Management flags rising competition from domestic Chinese equipment makers benefiting from local incentives and funding, and notes that U.S. export controls restricting sales into China can also advantage non-U.S. competitors. Competitive position rests on technical differentiation, productivity, cost of ownership and global support, and requires sustained heavy RD&E spend. --- ## Risk factors *Condensed from Item 1A of the FY2025 Form 10-K (accession 0001628280-25-056742) as updated and superseded by Item 1A of the Q2 FY2026 Form 10-Q (accession 0001628280-26-037227).* **Cyclicality and AI-demand forecasting.** The semiconductor equipment industry is historically cyclical. AI is now the dominant demand driver, and management states plainly that the timing and amount of AI-related customer investment can change significantly and is difficult to forecast. The company must commit to build plans, inventory and capacity ahead of demand; failing to meet customer demand risks lost business and customer trust, while building for demand that does not materialize risks excess and obsolete inventory, underutilized capacity and margin pressure. **Export controls and China.** A majority of products go to customers outside the U.S., with China, Taiwan and Korea the largest concentrations. Successive U.S. export rules on semiconductor technology sold into China have already limited the addressable market, cut revenue and increased exposure to Chinese domestic competition. Licenses may be delayed or denied. Entity List additions and rule expansions can disrupt shipments and services at short notice. This risk has already been quantified once: the BIS Affiliates Rule issued September 29, 2025 was estimated to reduce Q4 FY2025 revenue by roughly $110 million and **fiscal 2026 revenue by roughly $600 million** (Form 8-K, accession 0001628280-25-043753). **Export-controls compliance settlement.** Following subpoenas received since 2022 from the DOJ, SEC and Commerce Department's Bureau of Industry and Security relating to certain China customer shipments, the company settled with BIS on February 11, 2026 for $253 million, paid in full in Q2 FY2026, plus internal audits of the export controls compliance program and ongoing compliance training and reporting. The settlement includes a **suspended denial order** that is waived three years after issuance provided the audit requirements are timely completed — failure to comply would prohibit exporting certain products from the United States. The DOJ and SEC closed their respective inquiries with no enforcement action (Form 8-K, accession 0001628280-26-007444). **Tariffs and trade policy.** New and reciprocal tariffs raise input costs, raise the landed cost of Applied's tools for customers, complicate the supply chain and can delay customer capital plans. China's 2025 export controls on rare earth minerals used in certain products are cited specifically, with the possibility of expansion. **Customer concentration.** A small number of customers drive a substantial share of revenue; tools are configured to customer specification, so reschedules and cancellations carry significant non-recoverable cost. A single customer's decision — or a shift in government policy affecting one geography — can swing results materially. **Supply chain.** Single-source and limited-source parts, export/import licensing delays, transportation constraints, cybersecurity incidents at suppliers, and restricted materials (rare earths, hydrofluorocarbons, PFAS) can interrupt production and delivery. Shorter order-to-ship cycle times make results dependent on quarter-end production and delivery. **Competition and technology inflection risk.** Success depends on anticipating technology inflections and securing development-tool-of-record and production-tool-of-record positions. The company also cites execution risk on completing its EPIC (Equipment and Process Innovation and Commercialization) Center and other major infrastructure projects on schedule and on budget, and realizing their anticipated benefits. Capital allocated by customers to segments Applied does not serve — lithography is named — or where its share is low, does not benefit Applied. **Taxes.** Global minimum tax regimes (OECD Pillar Two) are expected to **materially increase foreign taxes beginning in Q1 FY2026**, primarily through Singapore. The One Big Beautiful Bill Act accelerates deductions and has already impaired use of the corporate alternative minimum tax credit deferred tax asset (a $407 million valuation allowance in fiscal 2025). Conditional reduced tax rates in Singapore begin expiring in fiscal 2030 and may not be renewed. **Balance sheet and capital return.** $6.5 billion of senior unsecured notes outstanding; a change of control plus a downgrade below investment grade can trigger a 101% repurchase offer. Dividends and buybacks are discretionary and could be reduced. **Other named risks.** Intellectual property protection and enforcement (particularly the unauthorized manufacture of parts using its technology); cybersecurity, including AI-enabled attacks and quantum threats to encryption; acquisition and divestiture integration and regulatory-approval risk; government incentive agreements with clawback and debarment exposure; volatility in the display industry; expansion into adjacent markets; risks from the company's own use of AI; talent retention; goodwill and long-lived asset impairment; legal proceedings; global regulatory environment; sustainability commitments; and environmental, health and safety regulation. --- ## Management's discussion — fiscal 2025 *From the FY2025 Form 10-K, accession 0001628280-25-056742. Fiscal 2025 and 2024 each contained 52 weeks.* **Results.** Net revenue $28,368M, up $1,192M (4%) from $27,176M. Gross margin 48.7%, up 1.2 points, on higher revenue, favorable customer and product mix, higher average selling prices and lower material and manufacturing costs. Operating income $8,289M (29.2% margin) vs. $7,867M (28.9%). Net income $6,998M vs. $7,177M — down despite higher operating income, because of tax. Diluted EPS $8.66 vs. $8.61. **Segment drivers.** Semiconductor Systems revenue rose 4% as customers invested in new capacity and technology transitions; foundry/logic spending rose on leading-edge investment, and memory rose on NAND upgrade investment. Mix within Semiconductor Systems: foundry, logic and other 67% (68% in FY2024), DRAM 26% (28%), NAND 7% (4%). AGS revenue rose 3% on long-term service agreements and spares, partly offset by lower 200mm equipment spending; AGS operating margin fell 1.0 point to 28.1% on the 200mm decline, added headcount and higher excess-and-obsolete inventory charges. **Geography.** China $8,529M (30% of revenue), down 16% year over year; Taiwan $6,857M (24%), up 71%; Korea $5,608M (20%), up 25%; Japan $2,273M (8%); Southeast Asia $1,076M (4%); United States $3,063M (11%), down 20%; Europe $962M (3%), down 33%. Asia-Pacific totaled 86% of revenue. **Operating expenses.** RD&E $3,570M (up $337M) on headcount and depreciation; marketing and selling $858M; G&A $910M (down $51M on lower professional services, partly offset by a $41M goodwill impairment in Q4). A **Fiscal 2025 Restructuring Plan** approved in Q4 FY2025 targets roughly 4% of the global workforce and carried $181M of charges, mostly cash severance, with completion expected in fiscal 2026. **Below the line.** Interest expense $269M; interest and other income, net $1,251M (up $719M, driven mainly by gains on equity investments — a volatile, non-operating contributor to reported earnings). **Tax.** Provision $2,273M, effective rate 24.5% vs. 12.0% in FY2024. The increase came from a $659M remeasurement of deferred tax assets on new Singapore tax incentive agreements plus the $407M CAMT valuation allowance following the OBBBA. **Cash and capital allocation.** Operating cash flow $8.0B (down year over year on higher income tax and inventory payments). Investing used $2.8B, including $2.3B of capital expenditures (up from $1.2B) for real property, demonstration and test equipment, and manufacturing and network equipment. Financing used $6.0B: $4.9B of buybacks, $1.4B of dividends, $700M of notes repaid, $248M of equity-award tax withholding, offset by $991M of net note issuance and $261M of employee stock purchases. In September 2025 the company issued $550M of 4.000% notes due 2031 and $450M of 4.600% notes due 2036, using part of the proceeds to retire the $700M 3.900% notes due October 1, 2025. $6.5B of senior unsecured notes outstanding at year end; $4.1B of undrawn revolvers; commercial paper capacity raised to $4.0B with $100M outstanding. A March 2025 board authorization added $10.0B to the buyback program, leaving ~$14.0B available at year end. Working capital $12.9B; DSO 69 days. Purchase obligations $10.6B, of which $7.3B due within 12 months. $233M of CHIPS Act investment tax credit reduced current taxes payable with a further $548M to reduce future taxes payable; the OBBBA raises that credit from 25% to 35% for qualifying property. --- ## Current quarter — Q2 fiscal 2026 (quarter ended April 26, 2026) *From the Form 10-Q, accession 0001628280-26-037227, and the results release furnished on Form 8-K, accession 0001628280-26-035071.* **Headline.** Record revenue $7,910M, up 11% from $7,100M. Gross margin 49.9% (up 0.8 points). Operating income $2,523M, 31.9% margin (up 1.4 points). Net income $2,806M, up 31%. Diluted EPS $3.51 vs. $2.63. On a non-GAAP basis gross margin was 50.0%, operating margin 32.1% and diluted EPS $2.86 (up 20%) — the wide GAAP/non-GAAP gap runs the unusual direction this quarter because GAAP earnings include large unrealized equity-investment gains that non-GAAP excludes. **Six months.** Revenue $14,922M (up 5%); gross margin 49.5%; operating income $4,354M, essentially flat at $10M higher, with operating margin down 1.3 points to 29.2% because of the $253M legal settlement charge; net income $4,832M (up $1,510M) and diluted EPS $6.05 vs. $4.08, flattered by the lower tax rate and investment gains. **Segments (recast for the 200mm move and full corporate cost allocation).** - Semiconductor Systems: revenue $5,965M (up 10%), gross margin 54.7% (from 53.5%), operating income $2,092M, 35.1% margin (up 2.3 points). Six-month operating margin fell 1.4 points to 31.7% because the settlement charge was booked to the segment. - AGS: revenue $1,665M (up 17%), gross margin 34.7%, operating income $487M, 29.2% margin (up 2.6 points), on service agreements, spares and mix. - Other: revenue $280M, operating loss $(56)M vs. $21M income a year earlier. **Semiconductor Systems mix.** Foundry, logic and other 67% (66% a year ago); DRAM 29% (27%); NAND 4% (7%). Management attributes the quarter's foundry/logic increase to leading-edge demand, and the memory increase to DRAM technology transitions; for the six months, foundry/logic spending was *down* on weaker trailing-edge logic, so the year-to-date growth is a memory and services story. **Geography (quarter).** Taiwan $2,155M (27%, up 8%); China $2,087M (27%, up 18%); Korea $1,572M (20%, up 1%); Japan $623M (8%); Southeast Asia $185M (2%); United States $941M (12%, up 16%); Europe $347M (4%, up 38%). Asia-Pacific 84% of revenue. **Costs.** RD&E $1,027M for the quarter (up $134M) and $1,955M for six months (up $203M) on headcount and depreciation. Marketing and selling $233M; G&A $164M (down $43M on lower corporate support costs). Six-month items: the $253M export-controls legal settlement and $12M of restructuring charges under the Fiscal 2025 plan (restructuring reserve down from $165M at year end to $23M at April 26, 2026). **Below the line and tax.** Interest expense $69M in the quarter, $138M for six months. Interest and other income, net was $771M in the quarter and $1,337M for six months, versus $221M and $229M a year earlier, driven by higher net *unrealized* gains on equity investments — this is the single largest reason GAAP net income grew far faster than operating income, and it is not repeatable earnings. Effective tax rate 13.0% in the quarter (vs. 8.0%) and 13.0% for six months (vs. 25.2%), the six-month decline reflecting the Singapore deferred-tax remeasurement in the prior-year comparative. **Balance sheet and cash.** Cash, equivalents and investments $13,383M at April 26, 2026 (cash and equivalents $6,301M; short-term investments $1,940M; long-term $5,142M) vs. $12,900M at October 26, 2025. Inventories $6,343M (up from $5,915M), consistent with management's stated increase in build plans and inventory positions. Contract liabilities $2,570M; contract assets $221M; remaining unsatisfied performance obligations on contracts of a year or more approximately $1.2 billion, ~77% expected within 12 months. Stockholders' equity $23,909M. Working capital $13.6B; DSO improved to 73 days from 79. Total senior unsecured notes $6.5B principal, of which the $1,200M 3.300% notes due 2027 moved to current; no commercial paper and no revolver borrowings outstanding. **Cash flow (six months).** Operating $2,531M (vs. $2,496M). Investing used $1,739M, including $1.3B of capital expenditures, $289M of net investment purchases and **$175M of cash paid for acquisitions, net of cash acquired** — the 10-Q does not name the target or provide a business-combination note. Financing used $1,745M: $737M of buybacks, $730M of dividends, $309M of equity-award tax withholding, $100M net commercial paper repayment, offset by $131M of employee stock purchases. In the quarter alone the company returned $765M ($400M buybacks, $365M dividends) and generated $845M of operating cash; non-GAAP free cash flow was $210M vs. $1,061M a year earlier, reflecting the elevated capital spending. Quarterly capital expenditures of $635M included $501M in the Other category, i.e. infrastructure rather than segment capacity. Approximately $13.2B remained available under the buyback authorization. **Dividend.** The board declared $0.53 per share in March 2026 (payable June 2026) and $0.46 in December 2025 — a 15% increase and the ninth consecutive year of increases. **Management's framing.** With the Q2 release management said it now expects the semiconductor equipment business to grow more than 30% in calendar 2026, citing the AI infrastructure build-out and positions in leading-edge logic, DRAM and advanced packaging, and said it has increased build plans, inventory positions and logistics capacity to support customer growth. Against that, the disclosed BIS Affiliates Rule headwind of roughly $600 million to fiscal 2026 revenue and the higher foreign tax burden from the global minimum tax regime remain in force. **Legal.** Beyond the completed BIS settlement, the company states it does not currently believe any pending matter will have a material effect on financial condition or results. --- ## Subsequent events The Form 10-Q for the quarter ended April 26, 2026 (accession 0001628280-26-037227) contains **no subsequent-events note** — its notes run from Note 1 through Note 14 (segment operations) with no post-balance-sheet events disclosed. The post-quarter items that do appear in the company's filings are: - **Q3 fiscal 2026 outlook**, given May 14, 2026: total revenue of **$8,950 million ± $500 million** and non-GAAP diluted EPS of **$3.36 ± $0.20**. The EPS outlook excludes $0.01 per share of known acquisition-related charges, includes a $0.01 normalized share-based compensation tax benefit and includes a $0.04 net income tax benefit related to intra-entity intangible asset transfers (Form 8-K, accession 0001628280-26-035071). - **Agreement to acquire the NEXX business of ASMPT Limited**, a supplier of large-area advanced packaging deposition equipment, disclosed with the second-quarter results on May 14, 2026. The purchase price and closing date were not disclosed in the filings (Form 8-K, accession 0001628280-26-035071). - **Dividend payment.** The $0.53 per share quarterly dividend declared in March 2026 was payable in June 2026, after the quarter end. Separately, the $175 million of cash paid for acquisitions during the first six months of fiscal 2026 is disclosed only as a cash-flow line; no target, price or business-combination accounting is given in the quarterly report.