Materion Corporation Stock

Greetings. Welcome to the Materion Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, Kyle Kelleher, Director, Investor Relations and Corporate FP&A. You may begin.

Good morning, and thank you for joining us on our second quarter 2026 earnings conference call. This is Kyle Kelleher, Director, Investor Relations and Corporate FP&A.

Before we begin our remarks this morning, I would like to point out that we have posted materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access the materials through the download feature on the earnings call webcast link. With me today is Jugal Vijayvargiya, President and Chief Executive Officer; and Shelly Chadwick, Vice President and Chief Financial Officer.

Our format for today's conference call is as follows: Jugal will provide opening comments on the quarter. Following Jugal, Shelly will review the detailed financial results in addition to discussing expectations for 2026. We will then open up the call for questions.

Let me remind investors that any forward-looking statements made in the presentation, including those in the outlook section and during the question-and-answer portion, are based on current expectations. The company's actual performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. Those factors are listed in the earnings press release we issued this morning.

Additionally, comments regarding earnings before interest, taxes, depreciation, depletion and amortization, net income and earnings per share reflect the adjusted GAAP numbers shown in Attachments 4 through 9 in this morning's press release. The adjustments are made in the prior year period for comparative purposes and remove special items, noncash charges and certain discrete income tax adjustments.

And now I'll turn over the call to Jugal for his comments.

Thanks, Kyle, and good morning, everyone. I'm pleased to be with you today to discuss our second quarter performance and to highlight the momentum we're seeing across our markets as we continue to accelerate into the back half of the year.

Q2 was truly a milestone quarter for Materion. Our diverse portfolio of critical materials continues to enable the technologies shaping the future, and our results clearly reflect the role that we play. Strong end market trends, combined with meaningful new business wins are driving double-digit growth across the company. Amid unprecedented levels of demand, our teams delivered exceptional performance, supplying the advanced materials our customers depend on and doing so with unwavering commitment in precision.

We delivered the highest quarterly sales and earnings in our company's history. All 3 businesses achieved double-digit sales and EBITDA growth. Performance Materials grew value-added sales by 13%. Electronic Materials increased by 15% and Precision Optics delivered an impressive 26% sales growth. Profitability was even stronger, reflecting outstanding operational leverage and disciplined execution. For the first time, we exceeded 23% adjusted EBITDA margin, a milestone achievement for the company.

Electronic Materials delivered 32% adjusted EBITDA margin, marking its fifth consecutive quarter of expansion and the highest margin on record. Precision Optics surpassed 20% margins, delivering its best profit in more than 5 years and continuing its strong trajectory of transformational performance. Across all our businesses, higher volumes, strong price/mix and outstanding operational execution came together to produce record earnings of $1.90 per share, up nearly 40% from a year ago. We generated solid free cash flow in the quarter, driven by strong earnings performance, improvements in working capital and disciplined capital investments.

Let me provide some color on our sales growth from an end market perspective. Sales to the semiconductor market were up 23% year-over-year as AI continues to drive growth across leading edge logic and memory, and we continue to see outsized growth across power and communication markets. We delivered our highest quarterly sales to the aerospace and defense market, fueled by continued strong demand and new business in space and defense applications, along with market recovery in commercial aerospace.

Industrial markets posted strong results across all 3 segments, led by Performance Materials as data center build-outs are positively impacting nonresidential construction and increasing demand for our beryllium-nickel spring material. Energy shipments were up more than 20%, driven by our new business wins in next-generation energy applications. Finally, telecom & data center grew almost 50%, propelled by the AI infrastructure build-out and significant wireless network expansion outside the U.S.

As we look to the back half of the year, we're excited about the broad-based strength we're seeing. The demand signals across our key markets remain robust, and our order patterns give us confidence that this momentum will continue to build. What's even more encouraging is that the strength is not isolated. It's accelerating. We exited the quarter with record backlog, up roughly 30% from last year and 20% since the start of the year. Incoming orders in the first half reached a new high, growing nearly 30% year-over-year. Defense continues to stand out. We secured $90 million of incoming orders in the first half alone and now have more than $500 million in open RFQs across major programs.

Space orders have doubled year-over-year. Commercial aerospace backlog continues to build and semiconductor orders are up 20% with a meaningful uptick in demand for high-performance memory applications. These are important data points, and they tell a clear story. Demand for our material solutions continues to strengthen and the trends driving our markets remain firmly positive. Given the results we've achieved and what we are seeing across our order book, we are increasing our full year growth outlook for the second consecutive quarter. We now expect mid-teens year-over-year sales growth, reflecting the strengthening demand across our end markets and the applications we serve. And as a result, we are raising our full year adjusted EPS guidance to a range of $6.80 to $7.20, a roughly 30% increase versus last year at the midpoint and 12% from the midpoint of our prior guidance.

Before I turn the call over to Shelly, I'd like to take a deeper dive into one of the most exciting and rapidly expanding markets we serve, the space market. Space has become a major growth engine for Materion, and our materials support an exceptionally wide range of mission-critical applications. What distinguishes Materion is not just the range of applications we serve, but the vital role our materials play in ensuring mission success in the most demanding environments, whether it's satellites, telescopes, launch systems, planetary exploration vehicles or emerging in-space power systems.

Across satellite platforms, our technologies are integral to systems that collect, transmit and process mission-critical data. We supply filter arrays for earth observation satellites, optical filters and mirrors for laser communication systems, thermal management materials that support precision optics assemblies and semiconductor materials that enable high-performance computing and next-generation communications at orbit. In orbital and deep space systems, including telescopes and probes, our beryllium mirrors, optical filters and beamsplitters provide the stability and clarity required for advanced scientific missions.

We also support propulsion and imaging systems with engineered alloys and semiconductor sensor materials designed for efficiency and durability in extreme environments. Our capabilities extend from orbit back to the ground. For ground to space systems, we provide beryllium components, advanced optical coatings and high-performance filters used in observatories, laser communication ground stations and next-generation infrastructure that supports the movement of critical data around the world.

We also play an essential role in launch systems, supplying materials for engine components, structural assemblies and advanced heat shielding systems. Our precious metal and chemical materials enhance engine efficiency and support thermal barrier coatings that are critical to mission reliability. And once spacecraft reach their destination, our materials remain central. In rovers and exploration vehicles, our lightweight structural materials and advanced optical coatings help ensure reliable performance in harsh and unpredictable environments.

Looking ahead, our beryllium and alloyed materials are increasingly being designed into advanced microreactor concepts that will power future in-space propulsion and surface power systems. Across all these applications, the message is clear. Materion is embedded across the full space value chain from launch to orbit, from exploration to communication, from ground systems to emerging in-space power. Our materials are enabling the technologies that are expanding human capability and accelerating scientific discovery.

And this quarter, we strengthened our position even further. We secured a new $15 million program to deliver advanced materials critical to engine performance for a major commercial space customer. This is a meaningful win and a clear signal of the trust customers place in Materion to support their most demanding missions. Q2 was an exceptional quarter. I'm incredibly proud of what our people have accomplished. Their commitment and hard work were evident across the board and were instrumental in delivering our outstanding results. I'm excited about the trajectory that we're on and look forward to what's next.

With that, I'll turn the call over to Shelly to walk through the financial details.

Thanks, Jugal, and good morning, everyone. During my comments, I will reference the slides posted on our website this morning, starting on Slide 11.

In the second quarter, value-added sales, which exclude the impact of pass-through precious metal costs, were a record $308.2 million, up 15% from the prior year and up 18% sequentially. This year-over-year increase was driven by our highest quarterly aerospace and defense sales and significant growth seen across semiconductor, industrial, energy and telecom & data center. Additionally, as Jugal mentioned, all 3 of our businesses delivered double-digit year-over-year sales growth, highlighting the strong performance seen across the company. Adjusted earnings per share were a record $1.90, up 39% from the prior year and up 50% sequentially.

Turning to Slide 12. Adjusted EBITDA was a record $71.8 million or 23.3% of value-added sales, an increase of 29% year-over-year with 250 basis points of margin expansion. This increase was driven by higher volume and favorable price/mix and strong operational performance, along with the benefit of some onetime items.

Moving to Slide 13. Let me review second quarter results by business segment. Starting with Performance Materials, value-added sales were $190 million in the quarter, up 13% year-over-year and up 36% sequentially. This year-over-year increase was driven by significant growth across the aerospace and defense, telecom & data center, energy and semiconductor end markets. In addition to market strength, the strong sequential increase was driven by new business initiatives and the return to a normalized level of clad strip sales.

Adjusted EBITDA was $48.3 million or 25.4% of value-added sales, up 16% compared to the prior year period with 80 basis points of margin expansion. This increase was driven by higher volume and strong price/mix. Sequentially, adjusted EBITDA was up 70% with 500 basis points of margin expansion. Looking out at the second half of 2026, we expect continued top line momentum supported by accelerating order book activity across most of our end markets, led by space, defense and semiconductor.

Turning to Slide 14. Electronic Materials delivered another exceptional quarter. Value-added sales were $87.4 million, up 15% year-over-year, driven by continued strength in semiconductor as AI adoption fuels high demand for semiconductor chips and data storage devices, complemented by the benefit of new business wins. We delivered a record adjusted EBITDA of $28 million or 32% of value-added sales, up 57% year-over-year with nearly 900 basis points of margin expansion. This marks the fifth consecutive quarter of expanded margins in EM. These outstanding results reflect the higher volume, favorable price/mix and strong operational performance, along with the impact of new business and benefits from the cost optimization work done over the last few years. For the remainder of 2026, we expect to see additional top line improvement driven by increasing demand from the semiconductor market and continued contributions from new business.

On Slide 15, Precision Optics value-added sales were $30.8 million, up 26% year-over-year, driven by new business wins and growth across all end markets. This marks the segment's strongest quarter since 2021 and its fifth consecutive quarter of top line growth. Adjusted EBITDA was $6.6 million or 21.4% of VA sales, up 206% year-over-year with significant margin expansion. This represents the first quarter delivering north of 20% adjusted EBITDA margin since 2021 and the sixth consecutive quarter of bottom line improvement. The continued improvement reflects the benefit of the ongoing transformation of our Precision Optics business with the new program wins and operational improvements leading the way. Looking out at the second half, we expect continued top line growth supported by new program wins, along with favorable end market dynamics.

Moving now to cash debt and liquidity on Slide 16. We ended the quarter with a net debt position of approximately $421 million and $233 million of available capacity on our existing credit facility with leverage at 1.8x, below the midpoint of our targeted range. We saw strong cash performance in the quarter, generating $59 million in free cash flow from higher earnings and working capital improvements with approximately 150% cash conversion. We expect to continue strong free cash flow performance in the back half of the year, targeting roughly 75% conversion for the full year.

Lastly, turning to Slide 17. Our robust first half results paired with record backlog and continued order rate momentum give us increased confidence in delivering stronger-than-anticipated full year results. We now anticipate mid-teens top line growth for 2026 and are raising our adjusted EPS outlook to $6.80 to $7.20 compared to our prior guidance of $6 to $6.50. This represents approximately a 30% year-over-year increase at the midpoint and underscores the momentum we are seeing across the company and the strength of our operating performance.

This concludes our prepared remarks. We will now open the line for questions.

[Operator Instructions] The first question comes from Dan Moore with CJS Securities.

This is Will on for Dan. In defense, orders are up 50% year-to-date. There seems to be prolonged conflicts developing on multiple fronts. How would you describe your outlook for growth, not necessarily for this year, but for 2027 and beyond relative to where you saw things entering this year?

Yes. Well, defense has certainly been an important driver of growth in our business. We've been talking the last few quarters about the level of new bookings that we're doing on defense, and they continue to increase every quarter. And then we're also talking about open RFQs that we have, and they've been increasing every quarter. So in fact, the latest data that we shared here is $90 million of incoming orders that we've had year-to-date, and we've got $500 million plus of open RFQs. Last quarter, that number, by the way, was around $300 million of open RFQs.

So with everything going on, I think, in the world and just the general spending that the U.S. is projecting as well as, I would say, the allied countries are projecting, we expect this trend to continue and have defense be a strong driver of growth for our business, not only for this year, but I would expect that, I think, going on as well in the out years. So important market for us and one that I think we are very well suited with our material set to continue to see the growth.

That is very helpful. And then just one more. Can you take a minute or 2 and take a deeper dive into Precision Optics? Obviously, you've done a lot of work on the cost and margin front, but what are the biggest drivers of the top line growth year-to-date? And where do you see the most opportunity going forward?

Yes. Well, needless to say, Precision Optics has had a wonderful run over the last 5 quarters. We made leadership change and just general business changes in that area, and it's paid really, really great dividends for us. The top line has improved. The bottom line has improved even more, and we expect the top and bottom line to continue to do well on an ongoing and going-forward basis. We've had significant support from new business activity. The team has been involved in a number of different fronts.

In particular, I would say, a growing semiconductor market. Also in the defense area, the space area have been important drivers. Life sciences is an important market for them. Industrial is an important market for them. So the market growth and market tailwinds certainly have helped. But I think what's really been great is the new business initiatives that the teams have been focused on. Some of those have materialized and are showing up in the growth rate. Others will continue to materialize as we go forward and hopefully will contribute to further growth in that business.

On the operational side, the team has made significant progress, I think, on the manufacturing, the productivity, the yields, of course, rightsizing the business to the appropriate sales levels and ensuring that we're delivering to our customers in a timely manner and therefore, delivering the right level of margin growth as you've seen. So to deliver 20% plus margins is -- hasn't been seen in the last 5 years. And so it's really a milestone quarter for that business. And our expectation is that this business will continue to improve and contribute to the midterm target that we have of the overall company of 23% margin. So we're excited about what the business has achieved. And more importantly, I think we're excited about -- more excited about what the business can achieve over the next 3 to 5 years.

Next question comes from Mike Harrison with Seaport Research Partners.

Congrats on a strong quarter here. You noted that the space order book is up 100% year-on-year. I assume that's off a relatively small base. Hopefully, at some point, you break out space from the rest of aerospace and defense. Definitely appreciate the details here on Slide 8 that you provided on where you guys participate in the market. I was hoping that maybe you could dig a little bit deeper for us as we look at these applications, where are you seeing the fastest growth today? Or if we want to think about maybe where some of the largest addressable markets or largest longer-term opportunities could lie, again, referring to the illustration there on Slide 8.

Yes. Well, first of all, this is a very, very exciting market for us. We've talked about it over the last few years that this used to be a very niche market for us. But of course, it has emerged into one that is extremely exciting, growth-oriented, accelerated growth. I mean just to give you a perspective, I think we said up to last quarter that our business in the last few years, basically in the, I'll call it, the 3- to 4-year window had increased 5x. I'm here to say that now we're up to 6x growth in the last 3 to 4 years.

So the continued growth in the space market is exciting for us. You mentioned that it's off of a small base. I would say not that small. It's a relatively good-sized business for us. So when you look at aerospace and defense for the quarter, I mean, you could approximate perhaps around 25 or so percent 1/4 of the business be in the -- directionally in the space side of things. So fairly sizable business for us, what it has evolved into.

When you look at our biggest markets on that page you're referring to -- the slide that you're referring to, certainly launch and satellites are our 2 largest areas. We have significant content on the launch side. We have significant content on the satellite side. And then looking at the growth, I mean, the in-space propulsion and the surface power. So when you think about powering and providing remote power or quick power to this overall market, we are actively engaged on a number of fronts in that area. There are certainly some boxes that are more, again, niche, more science-oriented or one-off type of activities. But I think when you look at launch, you look at satellites, strong markets, you look at the power side, really, really high growth opportunity for us. And then when you look at the ground to space, that's, I would say, a little more of an emerging market as well. So exciting area for us.

All right. And then I wanted to revisit this question on Electronic Materials margin and how sustainable it could be. We've discussed in the past that you might be seeing some unusually strong mix as well as the benefits from cost actions that you've taken. But this is a business that historically was more like mid- to high teens EBITDA margin. Q2 results, you're basically double that. So I guess given the strength that you're seeing in the order book and the improvement in the cost structure and what appears to be an upgraded mix, where do the margins go from the 32% that you reported this quarter?

Mike, I'll start on that one. So certainly, we're really excited about the performance of that business this quarter, right? I mean, 32%, as you said, is something that is really a big step forward from where the business has been. And there's a number of factors going on. You talked about the mix. Mix is certainly in play here. We had a very nice mix in Q2, just given on what we could -- what orders came in, in the quarter and what we shipped out. As we look at the order book for the full year, that's probably a richer mix than we'll see all year. But the -- it's undeniable that there's been a big step forward in that business. And it's partly a little bit of volume, but it's a lot of the improvements that have been made in the business and making sure we get the value for our products. So I expect that structurally that margins are going to be well ahead of last year. This is not a new floor, as I always say.

Yes. Mike, I think it's important to note that when we had those, you mentioned the mid- sort of teens, high teens types of margins, we made it very clear at that time that this is not where we want this business to be, right? This is an Electronic Materials business, and it deserves and it needs to have electronic material level margins. So we're never satisfied with the mid-teens and the high teens type of margins that you mentioned. But frankly, we're not satisfied with where we are, right? We want to continue to drive better sales, better profitability going forward. But of course, we have to manage and balance the growth with the profitability, as Shelly indicated, we're a very balanced company when it comes to, I think, supplying in the semiconductor market.

We talked about this before, whether it's power semi, communications, data storage, logic, memory, high-bandwidth memory, some of the accelerated growth activities that are going on in logic and memory right now. Of course, data storage with all the data center activity is growing. I mean so we really do provide a breadth of product that kind of goes across the entire semiconductor value chain. And our goal and objective is to make sure that we never, of course, go back to those types of margins, and we continue to build and drive a very balanced portfolio with good margin that should be coming with an Electronic Materials type of business.

All right. And then just kind of a question on raw materials and energy costs and pricing specific to the Performance Materials segment, can you talk about any impact that you saw from -- I guess, it's probably more higher energy and freight costs that could impact you there. But just curious how much pricing is in that 13% growth number that you posted for value-added sales? And are there some materials within Performance Materials where you can push pricing harder given that this is a very strong demand environment and you may have relatively limited competition?

Yes. Look, we learned a lot during the COVID time frame, right, on how to manage supply, how to manage constraints and how to make sure that we can manage our operations accordingly. We also learned a lot during the inflationary times and I'd also call it the growth times about how to manage the appropriate pricing mechanisms and making sure that if we are seeing some cost impact that we are appropriately discussing those with our customers and making sure that those prices are adjusted too with our customers. We want to make sure that we're not the sponge with regard to that. Our teams continue to do that. They continue to manage it very well.

And I think we've got processes in place to be able to do that. So wherever we see inflationary type impacts, so you mentioned energy as an example, if there are scenarios like that, we make sure that we have those appropriate discussions with our customers. So certainly, price is an important enabler to our growth, not only in PM, by the way, I mean it's really across the board because we want to make sure that we are getting the value -- we're delivering the value and then we're getting the appropriate return for that value that we're delivering. So it's an important element, and it's an important element in terms of being able to capture, particularly for the cost increases that we may see from our customers.

Our next question comes from David Silver with Freedom Capital Markets.

So I'll preface my questions by saying these are exceptionally strong results. So the questions I'm having, at least a couple of them might sound a little nitpicky. But anyway, first thing I'd like to ask is maybe about R&D spend and just resourcing to continue to support what looks like pretty strong growth. But year-to-date, I mean, your R&D expense is flattish and your revenues are up well above double -- your value-added revenues are up well above double digits. Is this -- would I be correct in thinking, Jugal, that over time, your business is going to become a little more R&D intensive, more collaborations for leading-edge facilitating technology products? And what are your plans maybe on that -- in that regard, just for staffing and resourcing to support what looks to be some well above trend line growth for your company?

Yes. Good observation, David. And I can assure you and I can tell you that R&D is an extremely important enabler because innovation for us is at the core of what we do and making sure that we're providing the solutions to our customers that they need and that they may need going forward. So we are very much focused on that. At the same time, we're very much focused on making sure that many of the R&D activities are actually being funded by our customers and by various government entities. So we -- when we work with our customers, we make sure that in many cases, just like we do that on CapEx, by the way. I mean, so it's a very similar model to the CapEx model that we work with our customers on what type of support we are able to have with them so that they're jointly funded R&D activities and not just only funded by Materion.

So when you look at some of our numbers, we kind of have to make sure that we're keeping all of that understood regarding R&D spending. The other element I would think of R&D spending is we are leveraging our portfolio and in a platform development way and going to our customers in a platform development way. The third is leveraging our portfolio in a way that we can grow with our existing technologies and existing solutions that we have. So I think R&D is a very, very important enabler and one that we're focused on. And I think -- I like to think of ourselves as a very sort of research and development heavy company, providing the solutions to our customers, but making sure that we're doing it in a very cost-effective way, leveraging, I think, support from our customers as needed.

Okay. Great. The next question kind of regards trends in sales along with trends in your order book or your backlog. So 15%-ish value-added revenue growth, 30% growth in your backlog. I'm thinking back a few years during another kind of bullish or very strong growth period for your company and several others that I followed towards the earlier part of the pandemic. And at that time, due to supply chain concerns and some other things, there was definitely a big dose of overordering or prebuying that worked itself out over the next couple of years. So nice on the way up, but there was a shakeout period to follow.

As you look at your order book overall, I mean, what gives you confidence that the orders that you're filling now are really for or the orders that you're taking are really for kind of current demand and maybe not just buffer stocks or safety stocks for your customers?

Yes. Again, a good question. What I would tell you is that our order book that we have and the orders that we're getting is broad-based. It really runs across our important end markets that we have and not focused on, first of all, 1 or 2 things. Second, I would comment on is that when you look at the type of orders that we're getting and the areas that we're getting the orders in, we believe it is for consumption now and maybe in the next, let's say, 6 to 9 months and not some inventory buildup.

So let's start with defense. We all know what's going on in the world, and we know what's happening with the overall defense spending globally. And so we believe that's actually for builds that are happening and not inventory buildup. When we look at space, space is another area where the same applies. When you look at commercial aerospace, I mean you look at the build rates that are going on and the increasing build rates that Boeing and Airbus are having and then now COMAC is coming on board, we believe it is for the orders that they have in place and the build rates that are going on.

If you look at new energy applications, new energy applications, it is for the things that are going on and the development that CFS is doing or Kairos is doing and other new energy companies are doing and not for a build. Look at the supplies that we're making in the semiconductor side with memory applications, with high-bandwidth memory, high-performance logic, data storage, we know what's going on in the builds, whether it's data centers, whether it's for AI applications, it is for builds that are happening today.

So in general, what I would tell you is our order book is broad-based. It runs across the various markets that we have. And we believe it is for applications that are happening now and not necessarily for inventory buildup that may be happening in various markets for the next 3 to 5 years. So we feel pretty good about, I think, what we're seeing across the board.

And I'll just repeat, my comment or observation was not about your company in particular, but just about a range of companies I was tracking several years ago. So thank you for that. Last question is really just kind of housekeeping. But going through one of the earlier slides, I believe, when you were talking about revenues, in your commentary, I think you used the term onetime items or special items or something that may have boosted either revenue or EBITDA this quarter that it counted. It wasn't nonrecurring, but maybe it was an unusual item. Did I hear that correctly? And if so, what did that refer to?

Yes, I'll take that. You did hear that correctly. We had -- every quarter, we've got some onetime things that usually go both ways. I would say this quarter, we had a few that all went the positive way. So it was a little bit more impactful, call it, a few million, $2 million to $3 million in total. Nothing major stands out there. Some -- a refund, a settlement, a little bit of royalty income. So just a number of good guys that helps along the results a little bit, but nothing overly material.

[Operator Instructions] The next question is from Dave Storms with Stonegate.

Just want to maybe start with the new contract win, the $50 million new contract win. Is there anything more you can tell us about this, maybe term or start date or anything like that? And if not, maybe you could just talk generally about how you're seeing the contracts like that in the market, are they all roughly the same size? Is there a lot more out there? Just anything like that would be helpful.

Yes. I mean in terms of actually the specific details of the application and the business, we're able to provide what we shared with you already. But this is a program that I'm going to say is probably going to run about maybe about a year, 1.5 years. We're basically in the process now. So we would expect probably this level of sales to be finished out by the end of next year.

We get contracts that are anywhere from $1 million to -- you may recall, in space, about a year, 1.5 years ago, we announced 2, 3 sort of combined contracts of the same applications worth about $200 million, right? I mean -- and it was a multiyear contract and it's, in fact, just part of the overall space growth that we are seeing today. So the contracts vary in size, small, large, but I think this is a fantastic business win for critical materials that are going to be used in engine performance, and we're quite excited about it over the next 4 to 6 quarters.

That's great commentary. I appreciate that. And then maybe one more. Going back to defense and some of the drivers that you mentioned earlier that are driving that market. Second order impact of that, as we've seen is impact on the energy markets. Just curious as to how you're seeing the energy markets develop? Are operators being slower to move? Or could that be a bit of a lagger to the defense market or really anything else you're seeing there?

Yes. I mean energy, of course, has been an important market for us historically. I mean we've been a major player in the oil and gas. We continue to be. The oil rig count has not necessarily increased, but we continue to have good applications, I think, on the energy side. But what I think is really more exciting for us on the energy side is the new energy applications that we've been working on. And if those materialize over a period of time, those could mean significant boost to our energy market. So overall, I would say the energy market has been steady, but in general, but I think it's been boosted for us because of the new energy applications.

We have a follow-up question coming from Mike Harrison with Seaport Research Partners.

Just a few more for me. First of all, it doesn't look like you've increased your CapEx outlook. And I'm just curious, as you look at kind of the record backlog and the strength in the order book, can you just talk about where you stand on capacity and how you're thinking about maybe the need for additional growth CapEx in the coming years?

Yes. Well, I mean, we, as you know, pay a lot of attention to CapEx, and we paid a lot of attention to how we can get CapEx funding through our customers, through government entities, through any other type of partnerships and things like that. So we want to make sure that we're very prudent about the level of CapEx spending that we do. At the same time, we're making sure that we're driving more efficiency in our plants, more productivity in our plants, improving our yields, et cetera, so that we can get more output from the existing CapEx and existing equipment that we have.

We certainly have been investing at the rate that is needed to make sure that as the growth is coming through, we're able to deliver to that growth. We don't want to outspend the growth. We want to be very prudent and cautious about that. But like I said, I think from a capacity standpoint, we are well positioned to be able to support the growth that's there. And I think we're well positioned to support the growth that's coming in the next year. So it's just, I think, great capital management from our team.

Maybe just a quick housekeeping comment on CapEx. As you know, we were awarded a $65 million investment to expand beryllium capacity from one of the primes. Some of that money will be spent and refunded or sent to us this year. That number will come through CapEx, but is not shown in the CapEx forecast in our materials, just for clarity.

All right. So in actuality, the CapEx number is higher than that $75 million you show in the forecast?

It will be, right? But we'll just -- we'll have funds come in that offset.

Yes. Mike, this gets back to the strategy that, as you know, we've been leveraging for a number of years now, right? I mean, wherever we can, we want to make sure that we're developing joint activities with our customers, right, and taking on responsibility in a meaningful way with our customers.

Okay. And then I guess last question is really -- I know it's very early to be looking at 2027, but you guys are looking at 30% EPS growth this year, record backlog, record margins, strong order patterns. As investors are starting to think longer term, are there any modeling assumptions that you're willing to share at this point in terms of how we might think about sales growth or margin performance into next year?

Yes. As you know, for '27, we'll start to put our heads together and start to talk with our teams later this year and start to put our kind of forecast together and then we share it with you guys in the January-ish early next year time frame. What I can tell you, and we've been talking about it, of course, is the general direction of where the markets are headed, right? We talk about defense and kind of what's happening and the backlog we have and the growth rate that we've seen. I mean, we all see, again, what's happening on the geopolitical and the spending side, we're seeing what's happening on space. We're seeing what's happening on the AI side, the data center side, the high-performance logic and memory, the need for energy that the world has, especially as data centers become more and more enabled and energy is needed and so on.

So we talk about, of course, the market trends and what's happening in the market trends and the role that we play and how important of a player we are, I think, in those various markets. But of course, we'll have to put all that together and what that means for '27 and beyond and be able to share that with you guys at another time.

We have reached the end of the question-and-answer session. And I will now turn the call over to Kyle Kelleher for closing remarks.

Thank you. This concludes our second quarter 2026 earnings call. A recorded playback of this call will be available on the company's website, materion.com. I'd like to thank you for participating on this call and your interest in Materion. I will be available for any follow-up questions. My number is (216) 383-4931. Thank you again.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Greetings. Welcome to the Materion First Quarter 2026 Earnings Conference Call. [Operator Instructions]. Please note this conference is being recorded. I will now turn the conference over to your host, Kyle Kelleher, Director, Investor Relations and Corporate FP&A, you may begin.

Good morning, and thank you for joining us on our first quarter 2026 earnings conference call. This is Kyle Kelleher, Director, Investor Relations and Corporate FP&A.

Before we begin our remarks this morning, I would like to point out that we have posted materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access the materials to the download feature on the earnings call webcast link.

With me today is Jugal Vijayvargiya, President and Chief Executive Officer; and Shelly Chadwick, Vice President and Chief Financial Officer. Our format for today's conference call is as follows: Ju will provide opening comments on the quarter. Following Jugal, Shelly will review the detailed financial results in addition to discussing expectations for the remainder of 2026. We will then open up the call for questions.

Let me remind investors that any forward-looking statements made in the presentation, including those in the outlook section and during the question-and-answer portion, are based on current expectations. The company's actual performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. Those factors are listed in the earnings press release we issued this morning. Additionally, comments regarding earnings before interest, taxes, depreciation, depletion and amortization, net income and earnings per share reflect the adjusted GAAP numbers shown in Attachments 4 through 8 in this morning's press release. The adjustments were made in the prior year period for comparative purposes and removed special items, noncash charges and certain discrete income tax adjustments.

And now I'll turn over the call to Jugal for his comments.

Thanks, Kyle, and good morning, everyone. I'm pleased to be with you today to discuss our first quarter performance and share what we're seeing for the remainder of the year.

VA sales were up 10% year-over-year, excluding precision clad strip, reflecting strong demand across most of our end markets. Electronic Materials sales increased 18% versus last year, driven by AI-led demand for high-performance memory and data storage applications, along with strengthening demand in power applications and communication devices. Precision Optics delivered 43% year-over-year top line increase with new business coming online across multiple end markets and applications. While Performance Materials sales were roughly flat, excluding precision clad, this was primarily due to shipment timing. The order book continues to build driven by strong demand in aerospace and defense, energy and telecom and data center.

We expect a meaningful step up in sales in Q2 and throughout the rest of the year. As for precision clad strip, the production ramp-up is progressing well and remains on schedule. We are now producing at the same rate as before the quality issue. We also delivered strong earnings in Q1 with EBITDA margins exceeding 20%, a record for our first quarter, given our typical seasonality. Electronic Materials continues to be an outstanding performer, achieving record profitability on very strong sales. Precision Optics continued to exceed expectations delivering its fifth consecutive quarter of profitability improvement through strong execution on its expanding top line.

Turning to our end markets. It's encouraging to see most markets in the high single-digit to low double-digit growth rate. Even more importantly, our order book continues to strengthen. We exited the first quarter with the highest backlog in our company's history. Order backlog is up more than 20% year-over-year and 15% since the start of the year. Defense orders remain strong with $60 million received in the first quarter, and we have more than $300 million in open RFQs.

Over the last 12 months, aerospace and defense order rates are up 50%, energy is up 20% and semiconductor is up 10%. We are seeing clear acceleration across many of our end markets, and our teams are preparing to meet the higher levels of demand.

Going a layer deeper. I want to step back and frame a broader trend that is having a significant impact on Materion, the rapid proliferation of AI. When people think about our role in AI, they often focus on our semiconductor deposition materials and with good reason. We are a leading supplier of advanced electronic materials that enable advanced node chips and data storage devices. We're in the midst of an AI-driven semiconductor growth cycle and that strength is evident in our Electronic Materials performance.

But our impact on AI extends far beyond the chip itself. Materion has become a critical enabler of the AI ecosystem not at the edges, but at the core. AI acceleration depends on advances in semiconductor performance, high-speed connectivity, next-generation optics and high-reliability energy and space systems. Each of our 3 businesses provides foundational materials for these applications. Our Performance Materials business plays a strategic role across the infrastructure powering AI F.rom advanced data centers to global connectivity networks and next-generation energy systems, our engineered alloys and beryllium-based materials enable performance, reliability and safety at scale.

We supply growing nickel materials for fire protection systems and data center build-outs and specialty alloys for connector technologies and high-speed semiconductor fab equipment. Our materials support the wireless backbone that carries AI-driven data, including towers, undersea cables and base stations. In energy, our beryllium alloys enable breakthrough nuclear reactor technologies needed to deliver the continuous power AI will require and are widely used in oil and gas drilling and processing equipment.

In space, our materials are integral to propulsion systems, spacecraft structures and launch components supporting global connectivity and observation networks. Our Precision Optics business provides advanced optical coatings and engineered components essential for data center expansion, immersive AR/VR technologies and advanced semiconductor manufacturing. Our solutions support connectivity and semiconductor equipment applications, and we supply optical filters and systems for satellite technologies that enhance communication and earth observation capabilities.

As semiconductor devices become smaller and more complex, advanced optics have become increasingly important for lithography, inspection and metrology, improving accuracy, boosting yield and enabling scaling for next-generation chips. Our Electronic Materials business sits at the center of semiconductor innovation, supplying the advanced deposition materials and engineered targets required to manufacture chips at the most sophisticated nodes.

These materials power both high-performance computing and data storage devices used in data centers as well as the semiconductor components that enable global connectivity. Beyond deposition, we provide a range of high-value niche materials supporting AI, including alloys for next-generation nuclear reactor technologies, specialty metals for base station applications and chemicals used in satellite heat shield tiles. While smaller in scale, these applications highlight the depth of our capabilities and our ability to solve complex materials challenges in high reliability environments. As AI workloads scale, demand for the engineered materials we produce is rising rapidly, and we are already seeing that momentum reflected in customer demand, order rates and new business wins.

Looking ahead to the remainder of 2026, we are energized by the growth our businesses are experiencing and the opportunities emerging across our markets. We're seeing momentum build across the company in our end markets, our incoming order rates and the new business opportunities our teams are securing. Our results reflect their hard work and commitment. We now see a path to delivering low double-digit top line growth for the year while continuing to seize opportunities for the future. This gives us even greater confidence in delivering results toward the high end of our earnings guidance provided in February.

I want to express my gratitude to our global teams for their dedication and unwavering commitment to excellence. Their work, driving innovation, ensuring quality and supporting our customers is the foundation of Materion's success. And finally, I'd like to thank our customers and shareholders for their continued trust and partnership. With that, I'll turn the call over to Shelly to review the financial details.

Thanks, Jugal, and good morning, everyone. During my comments, I will reference the slides posted on our website this morning, starting on Slide 11.

In the first quarter, value-added sales, which exclude the impact of pass-through precious metal costs, were $261.8 million, up 10% from the prior year when excluding Precision Clad Strip. All in, value-added sales were up 1%, reflecting broad-based demand across our portfolio. Growth was led by semiconductor and aerospace and defense, consistent with the momentum Jugal outlined.

Electronic Materials delivered another very strong quarter with 18% growth, supported by continued strength in semiconductor applications and new business wins. Precision Optics grew 43%, driven by new programs across multiple end markets and marking its highest quarterly sales since 2021. Adjusted earnings per share were $1.27, up 12% from the prior year.

Turning to Slide 12. Adjusted EBITDA was $52.9 million or 20.2% of value-added sales, a record first quarter margin for Materion and an increase of 9% year-over-year. We delivered 140 basis points of margin expansion, driven by higher volume, favorable price/mix and strong operational performance, particularly within Electronic Materials and Precision Optics.

Moving to Slide 13. Let me review first quarter performance by business segment. Starting with Performance Materials, value-added sales were $139.5 million in the quarter, down 13% year-over-year, but up 5% sequentially. This year-over-year decline was driven by lower precision clad strip sales as production levels ramped through the quarter. Outside of clad, we saw strength in aerospace and defense and telecom and data center, partially offset by timing in energy orders.

Adjusted EBITDA was $28 million or 20.1% of value-added sales, down 32% compared to the prior year period. This decrease was driven by the lower clad strip volume and the impact of operational challenges in the back half of 2025 that amortized into this year. Looking ahead, we expect meaningful sequential improvement in the top and bottom line, driven by stronger aerospace and defense sales and higher PMI shipments with momentum building into the second half. As Jugal highlighted, the order backlog continues to expand, and we are well positioned to support higher demand levels throughout 2026.

Turning to Slide 14. Electronic Materials delivered another exceptional quarter. Value-added sales were $91.6 million, up 18% year-over-year, driven by semiconductor strength as our materials continue to enable advanced node technologies and AI-related applications. Adjusted EBITDA reached a record $25.9 million, up 95% year-over-year with more than 1,000 basis points of margin expansion and a record adjusted EBITDA margin of 28.3%. The meaningful improvement reflects higher volume, favorable price/mix and strong execution across the segment. For the remainder of 2026, we expect to see continued growth, supported by semiconductor market outgrowth and contributions from new business wins.

On Slide 15, Precision Optics value-added sales were $30.7 million, up 43% year-over-year, driven by new business wins and growth across every end market. This marks the segment's strongest quarter since 2021 and its fourth consecutive quarter of top line growth. Adjusted EBITDA was $5.5 million or 17.9% of VA sales with significant year-over-year margin expansion. This reflects higher volume, favorable mix and continued execution on the business transformation. The segment has now delivered 5 consecutive quarters of bottom line improvement. We expect both top and bottom line growth to continue in 2026 as new business ramps in key high-growth markets and the transformation progresses.

Now moving to cash, debt and liquidity on Slide 16. We ended the quarter with a net debt position of approximately $474 million and $192 million of available capacity on our existing credit facility with leverage slightly below the midpoint of our targeted range at 2.1x. We strategically built inventory in Q1 to support expected sales growth in Q2 and into the second half, which temporarily constrained free cash flow generation. We continue to expect strong free cash flow for the full year as volume increases and working capital normalizes.

Finally, turning to Slide 17. Our record backlog and strong order rate momentum exiting Q1 give us increased confidence in our full year outlook. We now expect low double-digit top line growth for 2026 and are affirming our adjusted EPS guidance of $6 to $6.50 with growing confidence in delivering toward the upper end of that range. With the strong start to the year, we also remain committed to making progress toward our midterm EBITDA margin target of 23% while generating strong cash flow over the balance of 2026.

This concludes our prepared remarks. We will now open the line for questions.

[Operator Instructions]. Your first question is coming from Daniel Moore from CJS Securities.

obviously, you gave a lot of color, Jugal, but always good to talk. Start with semi. Maybe just talk about the sort of the cadence of order rates exiting Q1 and into Q2. And obviously, you talked about many of the different applications. Just a sense of how your customers see the outlook for kind of '27 and beyond maybe relative to what those expectations would have looked like 6 or 9 months ago?

Yes. As you know, Dan, I mean, semis was a really good quarter for us here in Q1, up 16% on a year-over-year basis. In fact, up, I would say, about 40%, if you exclude some of the China business, which we know have been going through some changes, and we've talked about that over the last 12 to 18 months. So a very, very strong Q1 for us.

We expect semi to continue to be a very strong Q2 and then the rest of the year. Our order rate for semis have been improving sequentially. I would say that our exit out of Q1 was stronger than the exit out of Q4, and we expect that sort of trend to continue. I mean, the great thing with semi for us is we really do play in all the areas of semi, so whether it's power semiconductor or communications, data storage, logic devices, memory devices.

And so I think we're seeing that -- we're seeing the growth rate across really all of those areas. So it's not concentrated with 1 or 2 areas. And so we expect it to really be more of a broad-based growth in the remaining quarters as well. When we look at, for example, our high-performance memory in our data storage, which is really much more aligned towards the AI applications, our sales were up 47% on a year-over-year basis in Q1, and we expect that to continue as well.

So we -- and then, of course, from the profitability side, and I know you didn't ask that question, but I'll add it to it, the business has performed with EM, which semi really mainly resides in, has performed very well, and our profitability in this business is improving substantially on a year-over-year basis as well. So we expect this to continue. We'll see what '27-'28, of course, has to bring to your point about maybe what are our customer is saying. But I think for the rest of the year, we expect strong order intake and a very good growth curve on a year-over-year basis.

Really helpful. Switching to aerospace and defense, orders up 50% year-over-year. Obviously, you announced the CapEx funded projects for the large prime last quarter. Just how does the war in Iran change your outlook and growth expectations? And just maybe a little bit of kind of under-the-hood dialogues with customers, not necessarily for the rest of this year, but looking out into '27 and beyond as well?

Yes. Well, defense, in general, was getting a lot of attention, even prior to the conflict that started, right? And there was a discussion about higher budget for this year or next year. And I think the war has just strengthened that talk in Washington. And so what I would say we're seeing and we've been talking about over the last 2 or 3 quarters is the open RFQs, right? We started out saying a couple of quarters ago that when we had $100 million in open RFQs, we kind of increase that, say, $150 million, $100 million in open RFQs.

And at this stage, we sit at $300 million-plus open RFQs. These are inquiries that have come in from various primes from different countries on the defense side of our business. The $60 million that we booked in Q1 is a record for us. We haven't booked -- we haven't had a $60 million Q1 ever. And so the momentum, I would say, has certainly shifted even more. It was there before the conflict, but certainly, that has aided the order rate as well as the open RFQs that are on the defense side.

So we expect this trend to continue during the rest of the year and probably the next 3- to 5-year window as well, and that certainly plays into our overall aerospace and defense market. As you know, some of our space activities are certainly related to defense area as well, and we see the same type of trends that I'm highlighting here in that area as well. So in general, defense is a strong market, and I think will continue to be a very strong market and probably even become a stronger market as we get into the next 1 to 2 years.

I'll sneak one more in and jump back in queue. But -- and I know you don't guide quarterly, but just looking at the low double-digit growth -- top line growth for the full year, obviously, a meaningful inflection from what we saw in Q1. So just how do we think about the cadence of that growth? Do you thinking about kind of double-digit growth starting in Q2 or do you see it maybe a little bit more back-end loaded?

Well, I think considering the fact that overall, our business was about 1% in Q1, certainly up 10% year-over-year, excluding the precision clad. So we're already seeing the 10% or the, let's call it the double-digit growth even in Q1 when you exclude the precision clad, we expect double-digit growth really for each of our quarters. And certainly, it will be more of a growth in the back half of the year, no question, but we expect strong growth throughout the year.

And maybe just to pipe in, Jugal, on that, we think how that translates through to bottom line. I think we'll see probably a 15% to 20% step-up from an EPS perspective next quarter, but even much more meaningful step-ups in the back half as that flows through. So looking at a really great outlook for the rest of the year.

Your next question is coming from Mike Harrison from Seaport Research Partners.

I was hoping you could address a couple of questions on the Performance Materials segment. I guess just in terms of the precision clad strip quality issue, it sounds like there was kind of some amortization of that impact dragging on Q4, and it also impacted Q1. I'm just curious, how should we think about Performance Materials earnings in the second quarter compared to what is obviously some unusual weakness in Q1? And then can you also give some additional color on, is this quality issue fully resolved? What changes had to be made? And I know you said you ramped back to where you were before the issue came up. But I guess how much additional capacity or capability do you have beyond what you had before this issue came up? Sorry for like 6 questions in one there.

No problem. Yes, let me start with the quality issue and kind of where things stand and then Shelly will jump in, I think, on the financials and what we expect in Q2. I would say that our team has made significant progress and really very, very good progress in working with the customer and resolving the quality issue. We had indicated in the last time that we spoke that we were back up and running. It was really just a matter of ramping here in Q1, which I think the team did and has done a really nice job of ramping.

And like I indicated, we are back to running at the rate that we were running prior to the quality issue. So we're producing now at those rates and starting to ship at those rates to the customer. So the team is very excited about the rest of the year in Q2, Q3, Q4. We expect good growth, I would say, in each of the quarters as we go forward. So there are certainly changes that we made to our manufacturing processes and changes that not only did we make to that manufacturing process, but there are great learnings that you take across the entire company, and we're doing that. We're in the midst of actually doing that across our entire company so that we can be -- we can continue to improve and be a better company overall.

We, as I said, have back to the earlier production schedules, and we still have capacity. So if the customer wanted higher volumes, the capacity is there, and we certainly can do that. And we're working with the customer on what type of volumes they like for the rest of the year. But we expect the rest of the year, like I said, to be at or better than the production levels that we had prior to the quality issue.

And maybe just to hit the profitability side, right? So it's great to see the production levels back to kind of normal rates. That obviously ramped during the quarter, right? So a big impact on the quarter from an underutilization of the plant perspective. And as you know, we're going a little bit slower, taking a few more steps that are impacting the profitability right now, but we'll see a really strong step-up on the top line in Q2 and then very normalized, I would say, both top and bottom line in the back half for the clad specifically.

When I look at PM overall, which I think was also in your question, we're going to see a meaningful top line step-up next quarter, more than a couple of hundred basis point step-up from a profitability perspective. And again, working past some of the operational issues, working past the clad item in the back half, we'll see even better profitability.

All right. Very helpful there. Then I had a broader question on Performance Materials. I just was wondering if you can help us understand how we might think about pricing going forward because you've got a portion of the business that's more beryllium-based -- and arguably, there aren't substitutes for some of those products and there aren't many alternative sources either. So maybe help us understand what portion of your sales are more towards the beryllium and harder to substitute side of the spectrum versus products that are alloys and maybe could be subject to competition from other metals or could be substituted for other alloys. Does that question make sense?

Yes. No, it absolutely does. And let me address that because that's probably 6 questions. And one also like you indicated on the earlier one, but let me address, I think, some of the points that you've brought up here. I'd say roughly about half of our sales are somehow beryllium or beryllium-based type of materials that we supply and the other are non-Beryllium type. Certainly, beryllium type of business is a very good rich mix business for us.

We tend to look at the business in terms of much more of a longer cycle and more harder to change, sticky type businesses, I think, tend to be better from a profitability standpoint, from a -- obviously, from a sales security standpoint. And I think beryllium provides that, right? I mean, so whether it's the defense side or whether it's some of the aerospace side or even some of the energy side, I mean, that's what beryllium gives us is it gives us a longer runway in terms of sales as well as I think it gives us some better mix, and better profitability, like you indicated on that.

We do have to keep in mind, of course, that there's always a substitution risk, but it does take a longer period of time. And beryllium's performance, the material performance far exceeds, of course, other materials. So I think pricing is certainly an important enabler for us in this business. It has been, as you know, Mike, I mean, if you look at the last 5 to and kind of where the profitability was and where the profitability of the business is today, pricing was an important enabler to that.

We continue to focus on that. We continue to look at what opportunities we have in pricing. And yes, but in general, I would say we like, I think, the direction that the business is headed. We like the mix -- the general mix of the business in terms of some of the markets that we're -- that beryllium is being used in. That certainly broadened, I think, the use overall. So I think overall, in PM, as Shelly indicated, we see a little bit of a downturn here in Q1, and we kind of explained kind of what those are, but we expect it to be right back to the type of levels that you are used to on PM in a very short order.

All right. Then in terms of the defense RFQs and this $300 million number, are you the incumbent in most of those applications? Or are a lot of them new technologies? And I guess these quotes, is this business that could come to you in the next 12 to 24 months or could it be spread out over a much longer period?

Yes. So I would say, in many cases, of course, we are the incumbent because in many cases, the primes and the government is looking to produce more of things that we already do. But I would say there are a number of things that we're involved in that are new, both in our optics business and in our Performance Materials business. There are new activities that we are involved in both on the state side as well as in some cases, outside the U.S. But -- so it's a mix. Of course, when we win a business, typically, as you know, it's a 12- to 24-month type of a window. In some cases, it's maybe even a longer window.

So if we get a multiyear order, 3- to 5-year type of order, that certainly could be the play as well. But in most cases, it is in the next 12- to 24-month window is how we look at these businesses. We're -- we've been increasing this number. Like I indicated, I think when Dan asked the question, just within the last 2, 3 quarters, this number has grown to $300 million. It was starting out around $100 million. And we've been increasing the dollar amounts that we've been actually booking. This feeds right into our record backlog that we talked about, the highest backlog that our company has ever had as we exited Q1. So that's how we see the business kind of playing out over the next 12 to 24 months.

All right. This is my last one, I promise. Just on Electronic Materials and the gross margin strength that you're seeing there. Q1 was almost 1,000 basis points higher than the gross margin rate you had in '22 or '23. I'm curious how much of that strength would you attribute to mix that maybe is going to fluctuate or normalize over time? And how much of that improvement is more sustainable in nature? Just trying to understand if something north of 40% gross margin is what we should be modeling going forward?

Yes, Shelly, I think, can comment on the numbers, but let me just tell you a little bit about, I think, the last couple of years and what we've done to the business, Mike, we've talked about it. As you know, the semiconductor market and the electronic materials market in general, had a little bit of a downturn over the last couple of years. We took the opportunity to make significant operational improvements and cost improvements in that business, and that's benefited us.

So as the volumes are now coming in and the volume for Electronic Materials was $90 million plus, right, for Q1. I mean the flow-through has been really, really fantastic because of the significant improvements the business has driven over the last couple of years. So I think that's been a key contributor to our margin expansion.

Yes. And maybe just to add to that, Jugal, I think if you go back a few years, we felt the margins in Electronic Materials were not what they should be, right? And so there was certainly a lot of upward potential when we think about where EM margins could go. And so the work that has been done was really impactful. And now that we see the volume coming in on top of that, we're seeing margins that are much closer to typical what I would call Electronic Materials margins.

Now was this quarter particularly strong? Yes. And we've talked about the fact that this does bounce around a little bit with mix. The mix absolutely is positive right now, and it will move around a little bit. But I think we expect this trend to continue in terms of delivering stronger margins in EM.

Your next question is coming from Samuel McKinney from KeyBanc Capital Markets.

The business transformation and cost initiatives have obviously been the focus in Precision Optics recently, but the first quarter value-added sales was the best quarterly figure for that segment in years. Can you just talk about what's driving that top line improvement and the associated operating leverage within that business?

Yes. Sam, as we've highlighted, I think, in our remarks, and we've talked about it in the last couple of quarters, the team has made really, really great progress in transforming that business in a very short order. When you look at kind of how things finished out in Q1, 43% year-over-year growth on the top line, highest since 2021, almost 18% of EBITDA margin. You may recall that even when you go back several years and you kind of look at the peak of that business, it was about a 20% EBITDA margin, right?

And so the team has done a nice job of driving the turnaround of that business, and we feel very good with where we're positioned for Q2 and the rest of the year. top line has been an important enabler of that turnaround. And that's a combination of general market improvement, I would say, but also significant new business activities that our folks have been involved in, in markets such as semiconductor and automotive, defense, some of the key markets that, that business participates in.

There's a lot of new business initiatives that they've been involved in. And the most importantly is we've been able to close on those new business initiatives and get sales, in fact, in Q1 and then for the rest of the year. So the top line has been recovering as a result of both market and that. And certainly, the transformational activities on the operational side, cost side have been important enablers.

Okay. And then with the Chinese portion lagging the overall semiconductor business, can you give us an update on the progress made and when you expect to start deriving benefits from the Konasol acquisition?

Yes. That's an important activity for us, as you can imagine, for the rest of this year and then because it's an item that we're looking for key contributions in the '27-'28 time frame for sales. We expect that we should have some level of small-scale activity perhaps at the end of this year. But really, I would say, '27-'28 is when we start to have a meaningful impact into the semiconductor business, into the EM business for that.

The Chinese component, as we have spoken, certainly is a year-over-year headwind. But the rest of our markets are performing very, very well in that area. Like I highlighted earlier, the business was up 16% in Q1, 40%, 41% actually for -- excluding the Chinese activity and strong order intake, very, very strong order intake that's happening in that business across all of our areas of semi. And so we expect very solid growth in the rest of this year, which is, I think, one of the reasons why we feel that our business can be low double digits type of growth rate for this year.

Your next question is coming from David Silver from Freedom Capital Markets.

I had a couple of questions, I think, mostly on Electronic Materials. But I think you sort of touched on some of these before. And let me preface my remarks. I did have to step away for like 2 minutes. I apologize in advance if I'm making you repeat yourself. But the growth on the electronic materials side, top line and at the EBITDA level, very, very strong. I was wondering if you could maybe characterize it a little bit. So one thing would be whether the bulk of the improvement was tilted maybe towards Milwaukee versus Newton? Or was it very broad-based?

And then maybe just a comment. would I be correct in assuming the top line growth is mostly due to volume and not so much to price? So I'll just stop there, but price versus volume component. And then is tantalum participating as much as the sputtering targets and the deposition products?

Yes. Well, first of all, very impressive growth, like you indicated, our top line has done very well in that business. When we look at our semiconductor business, we really look at it more from an angle of the type of semiconductor that we end up serving, right? So we end up serving power semiconductor, which is a very strong part of our business, memory, so both, I'll call it, legacy memory, but then also high-performance memory is an important part of our business. And then it cuts across communication devices, data storage, logic devices.

So it kind of goes across really all of those. And our factories, you mentioned Milwaukee, we have Newton with the Tantalum business, but we also have facilities in Brewster in Buffalo and [indiscernible] in Singapore, Taiwan, et cetera, that support these businesses globally. We are seeing growth rate across all of these businesses. And we're seeing order intake be really good across all of these businesses. So it's not a single area that we are seeing the growth rate in.

The market, I think, is coming through on all of these areas. I want to talk about new business. So one of the areas -- one of the reasons that we're seeing the growth is new business initiatives that our teams have driven over the last couple of years that now that the market is recovering, we're starting to see the benefit of that, right? So as you know, in Electronic Materials or in semiconductor type market, it takes about 24 months -- 18 to 24 months to qualify new products at customers. But we did that. In many cases, we did that over the last 18 to 24 months when the markets were a little bit challenged.

Now that the markets are recovering, we are seeing the benefits of those new business initiatives come through in our sales. So it's market recovery is certainly an important part of it. New business wins and new business initiatives that we've been able to get is certainly an important part of it. And certainly, price is an important part, but it is not the main part, right? So there's a little bit of price in here, I would say, but not really a significant part of the growth story that we have for electronic materials or, let's say, the semiconductor business.

Okay. Great. And then if I was to just ask a question on the Performance Materials side. And again, apologies if I'm making you repeat yourself. But in your current guidance, the upper end of a range of $6 to $6.50, you have discussed the resumption of normal operations on the precision clad strip line. I believe there was also a timing or the belief that there might be another line of Precision Clad strip starting up at some point this year. Again, apologies if I missed it, but what is the assumption for that or do we have any clarity on when that large customer might be back and utilizing that most recent clad strip line?

Yes. So in our facility, we have a level of capacity that we are using for that customer, and we do have more capacity if that customer comes back with, let's say, higher levels of demand. We are -- as I indicated earlier, David, is that we are back to pre-quality issue type of production levels. And so we are producing that, we are supplying that to the customer. And if there is a demand during this year to go higher, we are prepared and we can go higher.

I mean it really depends on what the customer -- what type of orders the customer gives us. As you know, and we've talked about it, they're also looking at their U.S. application and kind of the approval on the U.S. side. If that happens, that may trigger higher levels of demand. If it does, we'll utilize that capacity to do that. But I want to -- I think -- in general, I want to stress, though, I think on the PM side that in Q1, I know our margins and our sales level were a little bit depressed from our historical levels. We expect a step-up in Q2 and then further step-ups in the back half of the year.

And these are not based on -- solely based on a precision clad type of recovery. These are broad-based type of recoveries that are happening across defense, across aerospace, across industrial, across energy. All of those areas are contributing, in fact, to that business, our order rate that we've been getting indicates exactly that. So we're -- I believe we're really well positioned to have a meaningful step-up in that business in Q2 as well as the rest of the year.

Okay. I meant to start off with this comment, but I really did appreciate that extra slide you put in, I believe it was Slide 8, where you highlighted kind of some of the key end uses for your products. It's great that it's all kind of laid out in one place like that. I appreciate it. Kyle probably did some work on this, and he's going to buy himself some more work as I go through it with them. But anyway. One other question on budgeting or your guidance page.

And in particular, I wanted to hone in on the CapEx budget, $75 million, and then there's another $25 million, I guess, for mine development. But in that $75 million, certainly, there's a sustaining sustaining component of it. But if you could kind of hone in on the growth-oriented or discretionary part of that $75 million in CapEx that you expect to spend this year. Just where are those incremental resources targeted for?

So yes, as you know, we've had pretty strong capital spending over the last several years because of the organic opportunities that we've had laid out, and you see that coming through in our results, which we're happy about. I would say we've got projects in each of our businesses that are focused on expanding capacity and capabilities as well as sort of recapitalizing and making sure that our plants are up to snuff and ready to produce at the levels we need them to produce that. So I wouldn't say it is -- it's all Performance Materials or it's all EM. We've got big meaningful projects in each business, even some in optics as that business is performing really well. So I wouldn't call it discretionary so much as continuing the support of organic growth and what we expect going forward.

Okay. So not one major project to call out, more broad-based...

Sorry, I was just going to mention, we talked about the $65 million investment that we're getting from a customer to expand capacity in the beryllium side of the business, and that will be somewhat additive, not all spent in 1 year, but you'll see that come through as sort of customer funding and additional CapEx, and that's obviously all on the TM side.

Thank you. Your next question is coming from Dave Stones from [indiscernible].

Just want to maybe circle back to some of the EM new business wins. I know it was mentioned in the prepared remarks, and it sounds like a lot of that 12 to 24 months is kind of starting to come to fruition. Maybe if you could just go a little deeper into what's working and what that sales cycle looks like now and maybe how the top of the funnel has changed. I got actually you're probably seeing more inbounds than you were at this time a year, 18 months ago?

Yes. So are we getting more requests and opportunities from a new business perspective particularly the EM, right, Dave?

Yes.

Okay. I got it. So yes, as I indicated, I think in the earlier comments, we've been working with the customers over the last couple of years on a number of different initiatives, and those initiatives have been coming through, and then that's been contributing to some of the sales increases that we're seeing right now. But that's not slowing down, right? That's not slowing down. That's not stopping. We are working with our customers on other new business initiatives across the whole semiconductor space, across the entire EM space, and we'll continue to do that.

Typical validation or, let's say, verification, qualification cycle lasts maybe somewhere in the 12 to 24 months is probably more reasonable and some where you have just a small modification or something like that could be 12 months, but longer when you have a new product, it's maybe more of a 24-month type of a cycle. And we continue to have that. Our funnel is strong, and I think it will continue to contribute towards the growth that we are expecting over the next year.

Understood. Appreciate that. And just maybe a follow-up on that. With those new customers, I mean, are you seeing them be more trial customers where they're maybe only tasking you with a smaller portion of their projects and there's room to expand or do you see them being full scale out the gate?

Both. I mean we're seeing -- in some cases, we're seeing a scenario where maybe we're entering in as perhaps like, let's say, a second supplier or a third supplier with a smaller share. In other cases, they're brand-new projects. They're brand-new projects, in which case that we are working with them on the majority of the volume or perhaps even all of the volume. So it cuts across, I think, with a number of different opportunities that we have.

We reached the end of the question-and-answer session. I'll now turn the call over to Kyle Kelleher for closing remarks.

Thank you. This concludes our first quarter 2026 earnings call. A recorded playback of this call will be available on the company's website, materion.com. I'd like to thank you for participating on this call and your interest in Materion. I will be available for any follow-up questions. My number is (216) 383-4931. Thank you again.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Greetings. Welcome to the Materion Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Kyle Kelleher, Director of Investor Relations and Corporate FP&A. You may begin.

Good morning, and thank you for joining us on our Fourth Quarter 2025 Earnings Conference Call. This is Kyle Kelleher, Director of Investor Relations and Corporate FP&A. Before we begin our remarks this morning, I would like to point out that we have posted materials on the company's website that we will reference as part of today's review of the quarterly and full year results.

You can also access the materials through the download feature on the earnings call webcast link. With me today is Jugal Vijayvargiya, President and Chief Executive Officer; and Shelly Chadwick, Vice President and Chief Financial Officer.

Our format for today's conference call is as follows: Jugal will provide opening comments on the quarter and full year. And following Jugal, Shelly will review the detailed financial results in addition to discussing expectations for 2026. We will then open up the call for questions.

Let me remind investors that any forward-looking statements made in the presentation, including those in the outlook section and during the question-and-answer portion, are based on current expectations. The company's actual performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors.

Those factors are listed in the earnings press release we issued this morning. Additionally, comments regarding earnings before interest, taxes, depreciation, depletion and amortization, net income and earnings per share reflect the adjusted GAAP numbers shown in Attachments 4 through 8 in this morning's press release. The adjustments are made in the prior year period for comparative purposes and remove special items, noncash charges and certain discrete income tax adjustments.

And now I'll turn over the call to Jugal for his comments.

Thanks, Kyle, and good morning, everyone. It's great to be with you today to discuss our fourth quarter and full year 2025 results and to provide an overview of our growth expectations for 2026. Our fourth quarter sales were impacted by a quality event with our largest customer.

Excluding this event, we delivered very strong financial results, led by outperformance on both top and bottom line in our Electronic Materials and Precision Optics businesses. This performance, combined with new business growth and the momentum we are seeing across our markets and in our order rates, we are entering 2026 with confidence.

Let me first address the quality event. In Q4, our large precision clad strip customer alerted us to a performance issue with our material during their production process. Our team responded swiftly and decisively, collaborating closely with the customer to identify the root cause.

To thoroughly assess and address the situation, we temporarily idled our 2 precision clad strip facilities, allowing us time to implement corrective actions. We conducted a comprehensive evaluation of the issue scope, made targeted modifications to our processes and procedures and introduced enhanced quality control measures designed to minimize the risk of any future occurrences.

Both facilities came back online toward the end of the quarter and are ramping production, supported by additional resources and oversight.

We are determined to deliver quality product to our customer and not impact 2026 planned volumes. The foundation of our company is built upon the strong partnerships we have cultivated with our customers by consistently providing high-quality critical materials to help solve their most complex technical challenges.

We take our role as a trusted partner and supplier very seriously. Moving beyond this issue, I'm excited to share that we delivered 7% year-on-year organic growth in the fourth quarter, excluding precision clad strip. Our outgrowth initiatives, coupled with strong end market dynamics are contributing to this level of growth and building our order backlog to continue the trajectory into 2026.

Electronic Materials experienced its strongest sales quarter in nearly 3 years with a 20% increase in VA, driven by accelerating growth in the semiconductor market. This growth is fueled by the rapid expansion of AI technologies and the rising need for high-performance computing and data storage solutions.

EBITDA was up an impressive 50% with 470 basis points of margin expansion as the power of the work our team has done to streamline and strengthen that business is magnified by increasing volumes and a strong mix. Precision Optics continued its transformation journey, delivering a 26% increase in sales, marking the third consecutive quarter of top line improvement.

The business is tracking ahead of plan, led by new business wins in semiconductor, space, defense and automotive. This level of growth, combined with an improved cost structure and operational efficiencies allowed the business to reach nearly 16% EBITDA margin.

Performance Materials sales were impacted by the clad strip quality event. The business delivered strong margins on a lower sales base while focusing their energies on getting clad back online and building a strong pipeline of new business for 2026.

Reflecting on 2025, I'm extremely proud of the significant progress we made while navigating some turbulent times, particularly in the first half with the uncertainty around tariffs and the related impact to our China business. Let me highlight some significant accomplishments, which will directly contribute to 2026 performance.

Our Electronic Materials business delivered record results with nearly 23% EBITDA margins, up 300 basis points year-on-year. The transformation of Precision Optics achieved 7% year-on-year sales growth, reaching nearly 10% EBITDA margins, up almost 800 basis points.

And our Performance Materials business reached 25% plus EBITDA margins for the third consecutive year. Our specialized comprehensive materials portfolio resulted in new business wins, which, combined with improved market dynamics have led to a 7% year-on-year increase in backlog. More importantly, backlog in the second half of the year improved 12% versus first half.

We have seen a significant uptick in order rates, led by our semiconductor business, up 6% year-on-year, 14%, excluding China. And we completed acquisition of Konasol's semiconductor manufacturing footprint in Korea, which will position us to deliver local to the leading semiconductor manufacturers.

Our focus on growing in the new energy market in support of accelerating energy needs resulted in more than doubling sales year-on-year. For this market, we signed a multiyear supply agreement with Commonwealth Fusion Systems, a leading developer of Fusion energy solutions.

We surpassed $100 million in defense sales for the second consecutive year and have delivered 10% yearly growth since 2020. New business bookings reached nearly $140 million, highest ever, with another $35 million booked so far this year.

And we have approximately a $200 million pipeline of new business RFQs. These demand levels are aligned with the record levels of global defense spending while the U.S. and allied nations are prioritizing replenishment and modernization.

In support of our accelerating growth in the defense market, we secured a $65 million investment from a major U.S. defense prime to expand our beryllium capacity. This investment will not only enhance our capacity, it strengthens our strategic partnership with this customer, setting the stage for long-term growth in defense.

While we will support meaningful near-term growth with our existing capacity, the new investment will enable us to support continued double-digit growth in the out years. Looking ahead to 2026, we expect to deliver approximately 15% earnings growth on a strong top line sales growth.

New business wins and continued market recovery will further expand our order book, particularly in markets like defense, semiconductor, energy and space. We anticipate continued progress toward our midterm EBITDA margin target of 23%, supported by top line growth, ongoing operational improvements, disciplined cost management and the benefits of our portfolio transformation.

Free cash flow generation is expected to strengthen as we optimize working capital, make thoughtful investments and realize higher levels of profitability. The transformation of Precision Optics will advance further, unlocking additional growth and margin expansion opportunities.

Electronic Materials will continue to benefit from the proliferation of AI and data center demand, driving sustained outgrowth. In Performance Materials, we expect marked operational improvements and top line growth led by the defense, energy and space end markets.

We remain focused on delivering value for our customers and shareholders through innovation, operational excellence and strategic investments. I want to thank our global team for their dedication, hard work and unwavering focus on execution.

Their commitment to innovation, quality and customer service is the foundation of our company. I also want to thank our customers and shareholders for their continued trust and support. With that, I'll turn the call over to Shelly to review the financial details.

Thanks, Jugal, and good morning, everyone. During my comments, I will reference the slides posted on our website this morning, starting on Slide 13. In the fourth quarter, value-added sales, which exclude the impact of pass-through precious metal costs, were $253.9 million, up 7% organically from the prior year, excluding precision clad strip.

All in, value-added sales were down 14%. This decrease is largely attributed to the quality event we experienced during the quarter that limited sales to our largest customer. Electronic Materials experienced 20% growth, led by strength in semiconductor and Precision Optics was up 26%, driven by overall market improvement and new business wins. When looking at earnings per share, we delivered quarterly adjusted earnings of $1.53, up 9% sequentially.

Moving to Slide 14. Adjusted EBITDA was $57 million or 22.5% of value-added sales in the quarter, down 7% year-over-year, but up 170 basis points from a margin perspective. The decrease was attributable to the clad strip volume decline, partially offset by higher volume, strong price/mix and improved performance in Electronic Materials and Precision Optics.

Moving to Slide 15. Let me review fourth quarter performance by business segment. Starting with Performance Materials, value-added sales were $132.4 million in the quarter, down 32% year-over-year.

This decrease was driven primarily by lower precision clad strip sales, partially offset by strength in energy and telecom and data center. Adjusted EBITDA was $35.8 million or 27% of value-added sales, down 33% compared to the prior year.

This decrease was driven by the lower clad strip volume, partially offset by strong price/mix. Looking out to 2026, we expect to see strong top line growth led by space, defense and energy initiatives.

We also expect improved operational performance as we continue to execute on a number of initiatives aimed at increasing uptime and yields across our facilities.

Next, turning to Electronic Materials on Slide 16. Value-added sales were $94.1 million, up 20% from the prior year and up 18% sequentially. EM delivered 8% organic growth for the year with sales increasing sequentially each quarter, driven by the strengthening semiconductor market.

The top line growth, strong mix and an improved cost structure delivered $22 million in adjusted EBITDA or 23.4% with nearly 500 basis points improvement year-over-year.

Looking ahead to 2026, we anticipate another year of strong top line growth, fueled by the semiconductor market strength and contributions from new business initiatives alongside continued strong margin performance.

Turning to the Precision Optics segment on Slide 17. Value-added sales were $27.4 million, up 26% compared to the prior year. This year-over-year increase was driven largely by new business wins and growth across several end markets, marking the strongest quarter since Q4 of '22 and the third consecutive quarter of top line growth.

EBITDA, excluding special items, was $4.3 million or 15.7% of value-added sales in the quarter with significant year-over-year margin expansion. The increase was driven by higher volume, favorable price/mix, improved performance and the impact of structural cost adjustments.

This marks the fourth consecutive quarter of improved bottom line results and the second straight quarter of double-digit margin performance. Looking out to 2026, we expect both the top and bottom line to continue to grow as new business initiatives advance and the transformation continues to unfold.

Now let me recap the full year results on Slide 18. Value-added sales were approximately $1.05 billion, up 4% organically, excluding precision clad strip, driven by strength in semiconductor, energy and telecom and data center. All in, value-added sales saw a 4% decrease organically from prior year as a result of the lower precision clad strip volume.

While this was a meaningful year-on-year headwind, many parts of the business saw strong growth with Electronic Materials up 8% organically and Precision Optics up 7% for the year. Despite the slight decline in VA sales, we delivered our fifth consecutive year of higher adjusted EBITDA margins at 20.7% of value-added sales, which was up 50 basis points from 2025.

We are very pleased to have delivered our second straight year of 20-plus percent adjusted margins for the full year, and we are making good progress towards our new 23% midterm objective. Adjusted EBITDA was $217 million, down 2% from the prior year, driven by the lower precision clad strip volume, partially offset by higher volume across the rest of the company, favorable price/mix and strong operational performance in Electronic Materials and Precision Optics.

Adjusted earnings per share was $5.44 for the year, up 2% as compared to the prior year. Lower interest expense and the benefit of tax initiatives contributed to the uptick. Moving now to cash, debt and liquidity on Slide 19. We ended the quarter with a net debt position of approximately $445 million and $224 million of available capacity on the company's existing credit facility with leverage slightly below the midpoint of our target range at 2.1x.

The clad strip quality event impacted our cash flow performance in the quarter as inventory and cash receipts related to this business came to a temporary halt. Lastly, let me transition to Slide 20 and address the full year outlook for the company. As we move into 2026, we expect to continue the momentum we built in 2025 to deliver strong organic top line growth and higher earnings while continuing to make progress towards our midterm EBITDA margin target of 23%.

We also expect a marked improvement in free cash flow performance with higher cash earnings, improved working capital and thoughtful capital investments. The first quarter will be a slower start to the year with normal seasonality and the ramping of clad strip production that comes along with some additional costs we are incurring to ensure a smooth and efficient restart.

For the year, we expect to deliver earnings in the range of $6 to $6.50 adjusted earnings per share, an increase of 15% from prior year at the midpoint. This concludes our prepared remarks. We will now open the line for questions.

[Operator Instructions] And the first question today is coming from Mike Harrison from Seaport Research.

Congrats on a nice finish to the year and it sounds like some nice momentum into next year. I wanted to start with a couple of questions just on the precision clad strip situation. I guess, first, any additional detail you can provide on the quality issues that occurred and I guess, some of the actions that were required to address that and what that means for the business going forward?

And then second, can you talk about that key customer, PMI and maybe what you've heard from them about their expectations for FDA or other approvals for their device and what that could mean for growth expectations in PCS for next year?

Yes. Mike, in our -- let me start with the first one, which is the quality event. Just give a little bit more color on it. In our production process in one of the steps, we had a control failure. We were not able to detect the control failure through our quality system that we have.

So the nonconformity that was produced as a result of that reached the customer. The customer actually discovered it in their manufacturing process. And in working, of course, closely with the customer, that's where we halted production. We went through and we thoroughly looked at the situation, investigated, determined the root cause we implemented fixes for the root cause.

But more importantly, we implemented a very much robust revised quality system across the entire plant that I think makes us a much stronger company and a much stronger supplier to our customer. And that's important. We want to make sure that we are producing good product for them and supplying good product for them.

So we feel good with where we're at now. We certainly did not have the necessary means in the system to be able to catch the nonconformity that happened earlier. So we are actively working with them, ramping production here in the first quarter. The customer has actually visited our facility. They've looked through the changes that we've made.

We've got the right, I would say, quality leadership and quality resources at the facility and in general, additional resources to make sure that the changes that we've made are being worked and doing the right things for producing good quality product for our customer. So that's the issue that occurred. We feel good about, I think, the changes that we made, and I would say where the product is going.

We are fully prepared to support them as they go through their '26 volumes. We expect our '26 volumes to be better than '25. Of course, we're going to go through a ramp here in Q1, but then higher production in Q2 and beyond to ensure that we can support them in the right way.

As for the other items that you mentioned, like, for example, the FDA approval, I mean, they are working through it. We don't have any other new information that we can communicate with you. I'm sure whenever it is that they reach that, they'll share that with us, and then we'll see what the impact may be to our delivery that they want.

So I think this is certainly a situation that occurred in Q4 that we dealt with, but I feel good with where we are coming out, and I feel good with the quality systems that we've placed and making us a stronger supplier to this customer.

All right. Very helpful. And then my second question is on the Electronic Materials business. Obviously, very nice to see some recovery happening in value-added sales. I was a little bit surprised to see that sequentially, value-added sales were up about $15 million, but it doesn't really seem like sequentially that contributed to much EBITDA growth.

So I'm just curious, why didn't we see better leverage on the strong sequential top line growth in Electronic Materials? And maybe if you could take it a step further and talk a little bit about how we should think about margin performance in Electronic Materials in a growth environment in 2026?

Yes. So first of all, let me just talk about the top line growth. I mean we are very excited with where things are at. We've talked about our product portfolio. So let me just talk a little bit about that, right? We have a very good diverse portfolio that cuts across pretty much all parts of semiconductor, whether it's logic, memory, power, communications, data storage. And I think we're seeing the power of that.

We're seeing the fact that our sales growth that you mentioned sequentially, highest in nearly 3 years, it's really cutting across all those areas. So as the proliferation of AI is happening, high-performance computing is coming in place, data storage is increasing, high-performance memory is increasing.

I think it's giving us a good backdrop to be able to say that not only do we have the good Q4 increase, the sequential increase that you're mentioning, which is nearly the best quarter in the last 3 years, but it also speaks to the incoming order rate that we have, which is up sizable on a year-over-year basis and kind of I would say, how we feel about '26. We expect that '26 will continue to improve, and we're looking forward to be able to capitalize on that improvement.

So I think from a top line perspective, we're feeling very good. I think from a margin perspective, we have to keep in mind that this business, along with our other businesses, there are significant mix factors that go into play from a quarter-to-quarter standpoint, right?

So we look at our margin profile from a more of -- on a larger sort of sample size, you could say, or sort of longer time frame, so more like a 2, 3, 4 quarters on a full year basis, up 300 basis points on a year-over-year basis. We had some onetime items in Q3. We have some mix issues in Q4.

So when you put that together, we don't have the same level of, let's say, percent performance in Q4, but we feel really good about the overall improvement that this business has made through the cost actions, the operational efficiency actions, and we expect those to carry through into '26 as well. So I think with where I see EM in total, I feel good about how we finished the year, and I feel good about, I think, where this business is going to go in terms of the top line, in terms of the bottom line, continued progress, I think, from where we were in '25.

All right. My last question is just on kind of where we stand on beryllium capacity. I know you called out the $65 million investment from a defense prime. It sounds like that additional capacity is going to be coming on end of '27. But there is a lot of talk out there about building up strategic mineral reserves in the United States.

I'm curious, do you expect beryllium to be among the minerals that the government would want to add to that reserve? And what does that mean for potential further investments that might be needed in capacity? What does that mean for supply and demand of beryllium and maybe some of the products that you have within the Performance Materials segment?

Yes. So let me -- a number of different topics, right, on beryllium there. Let me just first start with the strategic reserve part of it and just say that I'm not able to talk about that in any level of detail. We work very actively with the government in a number of different areas. And we have been doing that for obviously a number of years.

And there's a long-standing relationship that we have in ways that the government wants, and we work that with them appropriately. So with that said, let's talk about the beryllium capacity. We have good level of beryllium capacity.

We are able to support our customers' needs today. What we are really excited about, I think, is the additional investment that we have received from this defense prime. It will be over this year and next year, $65 million. It's fully funded.

So 100% of the funding is going to be from this investment that we're going to get from the customer. This will give us additional capacity starting in the '28 time frame. In the meantime, we have the capacity that is needed to be able to support the volumes for '26 and '27.

It will give us more, I would say, sustained long-term capacity increase, and we're very excited about that. This is something that we've been working with the customer on for the last 6 months or so, and we were able to finish the discussions and now the project is in execution mode.

The next question will be from Phil Gibbs from KeyBanc.

Jugal, just confirming that you said the $65 million of customer funding will be received over the course of 2026 and 2027. And then also curious within that, is some of the increased mining CapEx that you have for this year with the intentions in mind of supporting what you're going to be seeing in the next few years?

Yes. So you're absolutely right, Phil. The investment is going to be over '26 and '27 time frame. We'll receive the proceeds over that time as we are working the project. It impacts 2 of our facilities that are involved in the overall beryllium value stream.

So like I mentioned, we're quite excited about that, and we're in execution mode on that project. In terms of the mining CapEx, I would say it's just a normal part of what we're seeing, right? We indicated that we've had 10%+ CAGR of the business over the last 5, 6 years.

We've crossed in the defense side, over $100 million. for the second consecutive year.

We've got new defense orders, $140 million. We've got a long pipeline. Now of course, beryllium is not only used in defense, but it's a good part of our business. And so as we move forward, we would expect that we are using more beryllium to be able to support some of the growth, not only in defense, but we've talked about energy, right?

Energy is a big part, and we're looking at beryllium applications in energy. We're looking at applications in other parts of our markets as well. So that is definitely a, I would say, general business growth is a contributing factor to our mining CapEx.

And just wanted also just some clarification, if you could, on the first quarter in terms of what you're anticipating from an earnings perspective maybe relative to last year? And then just the second part in terms of the modeling for the year. I wanted to confirm you said you expected the sort of the China semi sales to be relatively stable.

Yes, I'll take that one, Phil. So the first quarter, as I mentioned in my remarks, will start off a little slow. That typically happens for us. Part of that is some normal seasonality. Defense and semi tend to be softer in Q1. We're also going to have the additional costs around the ramp.

So as Jugal talked about, all of the resources and changes that we've put in place, we are being extra careful during this ramp period and are going to bear some additional costs to make sure that this is a flawless execution.

So you're going to see a little bit of a lower Q1, still a step-up from last year, probably roughly 10% higher than last year is what we're thinking right now. And then we'll have sequential step-ups in earnings all year.

Yes. And let me talk about China and semiconductor. I think we've highlighted this over the last year or so, in particular that we saw a decrease in our sales in China just based on all the geopolitical issues, tariff issues, et cetera.

We don't anticipate and we're not assuming a further decrease from '25 to '26 in our China business. At the same time, we've highlighted that we are very much focused on making sure we're growing our business globally. China is one component, and we don't want to let that be a determining factor for where our growth rates are.

And so I'm very excited about where the semiconductor business is, the growth rates that we're seeing. I indicated, I think, in our remarks that excluding China, our order rates for semiconductor are up 14% on a year-over-year basis, so 24% to 25%. And we continue to see good order rates, and we anticipate good order rates as we go forward.

With our new business activities, we've talked about, for example, Atomic Layer Deposition or ALD products and at the same time, with existing business that is seeing really good growth in areas like data storage and high-performance computing, high-performance memory, all being driven by -- through many of the things that are going on through AI.

So certainly, China is an important market for us, and we're very much focused on it, but we are not letting that market sort of drive what we think our growth rates are going to be. We are really, really focused on making sure we're driving global growth across all of our businesses.

The next question will be from Dan Moore from CJS Securities.

This is Will on for Dan. Industrial, are you seeing any green shoots or signs of recovery entering 2026? Or is it more of the same?

Yes. So in industrial, we have a couple of things that we typically talk about. One is we have a beryllium nickel spring business, which is something that has seen a recovery. It was at a low point in the '24 time frame, saw a good recovery in '25, and we expect to see continued recovery going into '26.

So that part of the business, we expect it to be good. I would say the rest of industrial is at this stage, our expectation is about GDP type of growth. Nothing too exciting. But I think our overall industrial business, I expect it to move forward based on -- particularly based on our beryllium nickel spring business.

That's helpful. And you've given a lot of great color on the momentum in defense. Can you talk about energy and space and the momentum in each of those end markets as we head into 2026?

Yes. I mean energy has been an exciting market for us, especially over the last year or so. We've been a strong player in what I'll call more of the traditional energy, oil and gas area, but we've really focused a lot over the last 2, 3 years on developing partnerships outside of that area into more of the new energy space.

You're all aware of the partnership that we announced with Kairos on new energy solutions. Last year, we announced a partnership with Commonwealth Fusion Systems, again, on new energy solutions. I think this area is quite exciting for us. We all know from a market standpoint that the demand for energy is increasing almost sort of at an exponential rate.

And we want to make sure that we're working with all the leading players and providing materials for them and enabling them so that they can participate in that. Our new energy business was -- the order rate was up 50% or over 50%. Our new energy business, I should say, doubled -- more than doubled on a year-over-year basis. So we're very excited about where I think overall energy market can go for us in the next 3 to 5 years.

On space, we've had very good success on a number of different programs on the space side. We have one large customer, but we have been working very diligently on gaining other customers. Certainly, those customers are smaller customers. We've also been working very diligently on making sure that more of our products are being sold at the large customer, but also at the more emerging customers.

So we want to -- we are expecting to see continued improvement in our space market over the next 3 to 5 years as well.

[Operator Instructions] The next question will be from David Silver from Freedom Capital.

So I admit that I have a bit of a scatter of questions. But the first question would generally be just checking on potential bottlenecks that might prevent you from achieving your targeted growth in 2026. So for instance, in Electronic Materials, you have made recent investments in both Newton and Milwaukee.

And if growth was to continue at the recent trend rate, 20% or so, I mean, are you comfortable with the idea that you won't be running into bottlenecks during 2026 from -- is the capacity you have in place, the spare capacity sufficient to handle expected demand? And then just along with those lines, you did purchase the facility in Korea about middle of last year.

So -- has that unit been completed? And is that currently contributing? Or will that be a contributing asset in 2026? I'll kind of stop there for now. But just kind of how do you feel about your spare capacity or your ability to meet based on your order book, what looks to be a meaningful surge in new orders or demand?

Yes. David, I would say, in general, I think we're well positioned to be able to support our customers' needs in all of our facilities for electronic materials. We are seeing good order rates across a number of different areas. And the investments that we have made, the operational improvements that we've made over the last few years, I think, position us well to be able to support their needs.

We are continuing to, of course, look at other ways that we can increase our capacity. One of the ones that you just mentioned is an acquisition that we made in the middle of last year, where we acquired a facility in Korea. We are in the process of getting that qualified.

We expect the qualification of that to be back half of this year. And I would say really any meaningful sales would be into next year and maybe some sample and qualification sales can be at the end of this year. But I expect that we're going to be able to support our customers at the levels that they're looking for.

Okay. Great. And I apologize if I missed this, but just a clarification. I think one of Mike's questions earlier regarded the status of the next stage of precision clad strip capacity for your key customer there. Did you discuss a time line or your latest thoughts about when that customer might be requiring production from that new precision clad strip capacity?

Yes. We didn't specifically discuss a time line along that. But what I can tell you is that we're very much focused on making sure that we are ramping up production in our facilities this quarter, getting the facilities back up in a way that is producing good quality product and delivering to our customers.

And we are positioned to support them on a year-over-year volume improvement, which we will do. And certainly, if they have more need due to U.S. approval or other needs, we are prepared to support them in that way as well.

Okay. And unusual topic for me, but I did want to ask about your working capital needs. So if I have this right, I mean, 2025 was the fifth consecutive year where if you look at the cash flow statement, where the change in assets and liabilities was a net use of capital and fairly significant one in most years.

I was just wondering, I mean, certainly, you're in a growth mode, so some of that is self-explanatory. But is there anything unusual along those lines that we should think about? In other words, is working capital growing in line with kind of the growth in your business? Or is it is there a buildup due to -- you have some certain parts of your business are especially working capital intensive or maybe in the back half of 2025, have you purposely been building working capital to meet what you anticipate to be kind of stronger demand in 2026?

Yes. So let me start on that one. So you are correct. With the growth trajectory that we've been in and the new pieces of business that we put on, there have been step-ups, especially in inventory. When we bring on an acquisition like the HCS Electronic Materials, when we ramped the business for clad strip, those took pretty big step-ups with the inventory.

Certainly, we look to manage that efficiently and get the turns in line, but it does create an increase that's sort of a onetime step-up. When I think about other new business pieces that we brought on, the beryllium business, as you know, is vertically integrated.

So when beryllium grows, that inventory cycle is pretty long. So that does require a bit more inventory. But we do identify this as an area of opportunity. Number one, there was an issue -- the quality issue did impact working capital at the end of the year. As I mentioned in my comments, the inventory didn't move, the receipts didn't come in. So that was really a temporary pause that caused us to be high at the end of the year.

And even from that, we've got a number of working capital initiatives to manage inventory specifically, but also AR and AP to keep looking to bring that number down as a percent of sales in both and in days to keep it more efficient and generate cash.

Okay. And yes, I should have accounted for the fourth quarter issues in precision glad strip. Just one more question. And this has to do with metals or your procurement needs or maybe some contract terms. But whether it's precious metals or other critical materials, I mean, the pricing and in certain cases, availability issues have been topics cross the industries that you serve. I'm just wondering, this is purely speculative, I don't know. But are any of your contracts contingent on metals prices not topping a certain amount? In other words, is any of your business at risk because of where copper or gold or silver or other critical materials that you require are currently priced.

I mean availability, I guess, is a separate issue. But is there any kind of risk or uncertainty to your order book based on the procurement prices of the critical materials that your customers' products utilize?

Yes. I would say, in general, the answer is no. We don't have those types of contracts with our customer. I think we have a very good transparency with our customers on what our materials prices are and how we handle that with them. Certainly, if there's materials that a customer is using and those materials are now much more costly than perhaps other materials that may be available out there, the customer can consider substitution.

But that substitution requires a requalification, developing a solution that actually works for them and then requalification, which in most cases, is unlikely because these things can be temporary in nature. So I would say, in general, that's really not a topic for us that we look at.

And the next question is coming from Dave Storms from Stonegate.

I just wanted to ask a quick one on the energy end market. I was hoping to clarify, the new contribution from the CFS shipment, it was mentioned in the slides that that's an initial shipment. Just trying to think about can we -- is that a nonrecurring shipment? Or is this kind of the new normal for energy given the start-up of that contract?

Yes. We announced last year that we had signed an agreement with them. And then as part of that agreement, we had received an initial contract that goes over a couple of years. And as part of that, we made the first shipment into Q4, and we'll continue to do that this year. And what happens, I would say, really beyond that, we'll continue to work with them on what their needs are and support appropriately.

Understood. Very helpful. And then also just thinking about your order book and backlog, with the new $65 million defense contract having about a 2-year burn rate, this is maybe just a little bit longer than your traditional burn rate that you mentioned in your 10-Q of about 18 months.

Are you seeing that be maybe the new normal for your backlog burn rate? Or is this maybe more of a onetime thing?

Yes. Let me just talk first about the $65 million investment. That is actually an investment into increasing our capacity for being able to produce beryllium and beryllium-related products. So that's a capital project, and that will be done over this year and next year.

So approximately about a 24-month time frame is when we will get that implemented and put that in place. What we have indicated is that, that will give us more capacity to produce product. And certainly, whatever then we're able to supply to our customers in the out years with that, that will happen.

The orders and the new orders that we're talking about, which is the $140 million of orders that we've talked about that we booked, the $35 million that we booked already this year, those can be within the quarter delivery. They can be within the year delivery.

In some cases, they actually go a little bit into the following year, maybe over a 6-quarter time frame or something. So that is a -- I'm sure the 18 months or something that you may be referring to is that, those that come in. If we get new orders because of the increased capacity in beryllium, those will be negotiated over, let's say, the rest of this year. And because those will go into effect then in the '28 and sort of year '28 and beyond time frame.

There were no other questions at this time. I would now like to hand the call back to Kyle Kelleher for closing remarks.

Thank you. This concludes our fourth quarter 2025 earnings call. A recorded playback of this call will be available on the company's website, materion.com. I'd like to thank you for participating on this call and your interest in Materion. I will be available for any follow-up questions. The number is (216) 383-4931. Thank you again.

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

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" KeyBanc Capital Markets Inc., Research Division

" Seaport Research Partners

" CJS Securities, Inc.

" Freedom Capital Markets

" Stonegate Capital Partners, Inc., Research Division

Greetings, and welcome to the Materion Third Quarter 2025 Earnings Conference Call. [Operator Instructions] And please note, this conference is being recorded.

I will now turn the conference over to your host, Mr. Kyle Kelleher, Director, Investor Relations and Corporate FP&A. Sir, the floor is yours.

Good morning, and thank you for joining us on our third quarter 2025 earnings conference call. This is Kyle Kelleher, Director, Investor Relations and Corporate FP&A. Before we begin our remarks this morning, I would like to point out that we have posted materials on the company's website that we will reference as part of today's review of the quarterly results. You can also access the materials through the download feature under earnings call webcast link.

With me today are Jugal Vijayvargiya, President and Chief Executive Officer, and Shelly Chadwick, Vice President and Chief Financial Officer. Our format for today's conference call is as follows: Jugal will provide opening comments on the quarter. Following Jugal, Shelly will review the detailed financial results for the quarter in addition to discussing expectations for the remainder of 2025. We will then open up the call for questions.

Let me remind investors that any forward-looking statements made in the presentation, including those in the outlook section and during the question-and-answer portion, are based on current expectations. The company's actual performance may materially differ from that contemplated by the forward-looking statements as a result of a variety of factors. Those factors are listed in the earnings press release we issued this morning.

Additionally, comments regarding earnings before interest, taxes, depreciation, depletion, and amortization, net income, and earnings per share reflect the adjusted GAAP numbers shown in Attachments 4 through 8 in this morning's press release. The adjustments are made in the prior year period for comparative purposes and remove special items, noncash charges, and certain discrete income tax adjustments.

And now I'll turn over the call to Jugal for his comments.

Thanks, Kyle, and good morning, everyone. I'm pleased to be with you today to discuss our third quarter results and to provide an update on what we are seeing across our businesses and end markets.

We achieved a couple of very important milestones in the quarter, including all-time high EBITDA margins of 27% in Electronic Materials. This reflects the power of our improved cost structure, strong operational performance, and new business initiatives as the semiconductor market continues to recover.

In addition, the transformation of Precision Optics is tracking ahead of our expectations, and we saw a return to double-digit EBITDA margins with a significantly better cost structure and a nice step-up in sales.

At the company level, our sales were up roughly 1%, with a strong Electronic Materials and Precision Optics results partially muted by some equipment downtime challenges that limited shipments in Performance Materials. These challenges are being addressed, and we anticipate more normalized production levels as we finish out the year.

Despite the shortfall in Performance Materials, we delivered 21% EBITDA margins for only the second time in our company's history. Our team is making great progress towards our new midterm target margins of 23%.

In addition to our strong financial performance in the quarter, we are also pleased with the step-up we're seeing in incoming order rates across the company. Overall, our order rates are up more than 10% sequentially, and with the key markets of semiconductor, defense, space, and energy up 20% year-to-date. These markets are seeing strong secular demand growth, and we are developing products and partnerships to supply the materials that are critical to their performance.

Semiconductor has long been a leading market for us, where we have made strategic organic and inorganic investments to develop the right footprint and material set. We are starting to see a cyclical recovery taking shape, led by the proliferation of AI. Excluding China, our semi business is up 7% year-to-date, with sales into high-performance memory applications increasing more than 30%. In our ALD portfolio, we have developed molybdenum-based products that are in high demand given their performance in smaller node chips. We are seeing significant interest in this product set and are working with new and existing customers as our production ramps.

Energy demands are increasing at a rapid pace, and this trend is closely related to the proliferation of AI. The number of data centers is expected to double in the next five years, with each center's energy usage also doubling. Combined with other drivers of energy usage, it is fair to say that energy is going to continue to be a great market for Materion. We continue to have a strong position in traditional energy, and we have exciting opportunities to grow with new energy that will bring about the higher volumes of energy required to supply tomorrow's demand.

In the past year, there has been a step-up in the market's interest in nuclear solutions. Small modular reactors enable regional energy independence and efficient nuclear space propulsion as well as remote battlefield autonomy for defense applications. We work with a number of customers on these types of applications and expect to see continued growth.

We are also partnering with companies that are aggressively developing breakthrough technologies to expand the total energy supply. Our partnership with Kairos Power to supply materials to produce FLiBe, a molten salt coolant critical to the performance of safe vision reactors, is progressing well.

Additionally, we announced an exciting new supply agreement with Commonwealth Fusion Systems, the leading and largest commercial fusion energy company, to provide beryllium fluoride for their breakthrough fusion energy technology to be used in their ARC power plants. We will begin shipping product this year.

Defense is another important area for our company, and our materials play a critical role in national security for the U.S. and its allies. The current U.S. administration has put a pronounced focus on defense spending and has outlined its priorities, including the Golden Dome, space, maritime, and nuclear microreactors for portable energy use.

In addition, as geopolitical tensions persist, the U.S. is looking to replenish and expand its stockpiles and as a result, has increased budgetary spending to almost $1 trillion for next year. Outside the U.S., many allied countries are also increasing their defense budgets and have committed to certain spending in the U.S. as part of trade agreements. As a result, we are seeing record defense bookings this year, up roughly 40%, and we're currently working a total of about $150 million of RFQs that should result in meaningful new orders.

The commercial space sector represents exciting opportunities for Materion as this market is influenced by a number of the macro trends impacting our other markets, including AI, connectivity and defense technologies.

The number of satellite launches has increased exponentially with more than 260 launches last year. We have secured meaningful wins with space proposal applications and are winning new applications as well. We have a number of products being introduced at our large space customer, and we have relationships with the smaller players looking to grow in this market. Our sales in the space market have increased fivefold in just 3 years, and we see strong opportunities as we move forward.

As we look to the balance of 2025, we expect to finish the year on a positive note, driven by our strong order book and improved operational performance. I would like to thank our global team for their relentless focus on satisfying our customers' needs and driving our company forward.

Now let me turn the call over to Shelly to provide more details on the financials.

Thanks, Jugal, and good morning, everyone. During my comments, I will reference the slides posted on our website this morning, starting on Slide 10.

In the third quarter, value-added sales, which exclude the impact of pass-through precious metal costs, were $263.9 million, up 1% organically from prior year. Electronic Materials experienced 7% organic growth, led by strength in semiconductor and Precision Optics was up 21% with new business wins. This growth was partially offset by lower volume in Performance Materials, where we experienced some temporary equipment downtime at our largest facility, limiting sales by roughly $10 million in the quarter. When looking at earnings per share, we delivered quarterly adjusted earnings of $1.41, flat with prior year and up 3% sequentially.

Moving to Slide 11. Adjusted EBITDA was $55.5 million, down 2% year-over-year. This decrease was driven primarily by lower volume related to the equipment downtime within Performance Materials, partially offset by higher volume and favorable price/mix in Electronic Materials, along with the improved performance in Precision Optics.

Despite the muted shipments in PM, we achieved 21% EBITDA margins for the second time in the company's history, demonstrating good progress towards our new midterm target of 23%.

Moving to Slide 12. Let me review third quarter performance by business segment. Starting with Performance Materials, value-added sales were $157.1 million in the quarter, down 4% year-over-year. This decrease was driven primarily by equipment downtime and shipment timing in Defense and Energy, partially offset by higher hydroxide shipments and growth in space.

Adjusted EBITDA was $38 million or 24.2% of value-added sales, down 18% compared to the prior year. This decrease was driven primarily by lower volume and operational performance, partially offset by cost management.

Looking out to the fourth quarter, we expect to see significant top line improvement with more normalized production volumes. We also expect strong sales into Defense and Energy as a result of both market seasonality and new business initiatives. With the higher volume and improved operational performance, we expect to see significant bottom line improvement from the third quarter results.

Next, turning to Electronic Materials on Slide 13. Value-added sales were $79.7 million, up 2% from the prior year and up 7% organically. This increase was driven mainly by non-China semiconductor sales as power and data storage device demand continues to improve.

EBITDA, excluding special items, was $21.6 million or a record 27.1% of value-added sales in the quarter, up 38% from the prior year with 700 basis points of margin expansion. This record margin and year-over-year increase was driven by higher volume, strong price/mix, improved operational performance and some favorable onetime operating-related items.

As we look out to the fourth quarter, we expect top line improvement driven by the continued upturn in the semiconductor market as this market continues to recover and benefit from favorable macro trends led by AI and global connectivity.

Turning to the Precision Optics segment on Slide 14. Value-added sales were $27.1 million, up 21% compared to the prior year and up 11% sequentially. This year-over-year increase was driven largely by new business wins, primarily in aerospace and defense.

EBITDA, excluding special items, was $3.2 million or 11.8% of value-added sales in the quarter with almost 1,000 basis points of year-over-year margin expansion. The increase was driven by higher volume, favorable price/mix and the impact of the structural cost changes. This quarter marks the third consecutive quarter of improved bottom line results and a return to double-digit EBITDA margins. We expect this trend will continue as new business initiatives advance, and the transformation continues to unfold.

Moving now to cash debt and liquidity on Slide 15. We ended the quarter with a net debt position of approximately $441 million and approximately $214 million of available capacity on the company's existing credit facility, with leverage slightly below the midpoint of our target range at 2x.

While no share buyback activity occurred during the quarter, I'm pleased to share that the Board of Directors authorized a new $50 million stock repurchase program during the quarter. While organic initiatives remain our top capital allocation priority, it is important we have this tool available to us.

As we look out to the remainder of the year, we remain on track to deliver free cash flow of roughly 70% of adjusted net income with strong cash generation year-to-date and fourth quarter cash initiatives on track.

Lastly, let me transition to Slide 16 and address the full year 2025. With our strong performance year-to-date, increasing order rates and new business initiatives on track, we remain confident in our ability to deliver $5.30 to $5.70 per share and are affirming our prior full year guide.

This concludes our prepared remarks. We will now open the line for questions.

[Operator Instructions] Our first question is coming from Phil Gibbs with KeyBanc.

So with regard to the full year outlook, you've maintained the range. But just curious in terms of now having better visibility with a couple of months left and you've got 10 months effectively behind you. Maybe give us some flavor why you didn't narrow the range? It's pretty wide for the implied fourth quarter results. So just trying to hone in on that a little bit better.

Yes, I'll start, Phil. Thanks for the question. So we're looking forward to a strong Q4. As you know, we always have kind of a nice end to the year with the strong defense orders, and we believe we're on track for that. When we think about why we didn't narrow the range, there's still some uncertainty for us around China. Hopefully, we will see that settle down in the coming days and weeks. But right now, that's not certain. And with the government shutdown, that could impact the timing of some of the orders that we're waiting on. And so when we thought about that, we said, why don't we leave the range where it is, but we are on track for the midpoint.

And then in terms of the new arrangement with Commonwealth, any thoughts you could provide us in terms of what that could mean you all financially and when some of these shipments step up more materially?

Yes. Phil, I mean, we're very, very excited to have this agreement. As you know, a number of years ago, I think it was in 2020, we had signed an agreement with Kairos Power as they were working on new energy initiatives. Now we are excited to announce this agreement with Commonwealth Fusion. We've been working with them actually for a number of years, but we were able to get that into -- an agreement here in the last couple of months. We are going to be supplying material to them starting this quarter in Q4 and then into next year. We expect it to be a few million this year, and then I would say more of an annualized run rate next year. So this is very exciting for us because now we've got Kairos Power on the vision side, CFS on the Fusion side. So we've got sort of both sides covered. And I think they're clearly the two leading companies in the world on this new energy initiatives.

Yes, I think you also hit on what can we expect to see from that Phil. And as Jugal mentioned, we will start shipping on that this year, expect to say maybe a few million to contribute in Q4. And then as we look to next year, you can think about that sort of annualizing. So good sized impact on the next couple of years. As you can read in their release, they're still in development phases. So that could be a very large step-up as you get into kind of 2030 time frame. But right now, it's a nice win for us, and we look forward to working with them.

And then just one more follow-up, if I could. The onetime items that helped margins in EM in the quarter in terms of the timing, maybe just highlight the size of that impact so we can have a better bridge to what maybe more normalized margins there are.

Sure. Sure, Phil. So we were really pleased with the EM performance in the quarter, and it was a strong mix. The volume was good. The cost structure is really contributing in terms of being where we wanted it to be. But yes, we did get a little bit of a bump up from some onetime items that are all operating related. So in our precious metals process, we refined some of the leftover material. And some of that we send out, some of it we do in-house. When we got that material back, it had a higher concentration of precious metals than we were estimating. And so there was a pickup, call it, $1 million or so around that number that we got to record in Q3 that helped, but really should be in our year-to-date results anyway.

Yes. But I think, Phil, just to add, I think, to what Shelly was talking about, I mean, this business has improved significantly throughout the year with all the improvements that it's driven in the cost structure over the last 18, 24 months. As you know, then [suddenly] market was down. So now for the last 2 quarters, it's been 20-plus percent EBITDA margins, so I mean, almost 24% in Q2 and now 27% in Q3 from the historical 20% or less margins that it used to deliver. So a really, really nice step-up for this business. And clearly, we have high expectations of this business as we go forward.

Our next question is coming from Mike Harrison with Seaport Research Partners.

I was hoping we could address a handful of questions I had around the equipment downtime that you mentioned in the Performance Materials segment. Can you give us a little bit of additional detail on the nature of the outage or what kind of product line it was affecting? And is the outage or downtime resolved now? Or if not, when do you expect to resolve it?

Yes. Mike, we had a couple of pieces of equipment in our largest plant where we process both beryllium and non-beryllium materials. The equipment downtime issues that we had are mainly resolved. We're back up and running. And so we expect to be able to catch up a majority of the sales into Q4 and perhaps a little bit into Q1. But for the most part, we're going to be able to do that here in the Q4 time frame.

As you know, we've got a fully vertically integrated value chain all the way from the mine into the finished material. So any type of a hiccup that we have on 1 or 2 pieces of equipment ends up resulting in a fairly impactful delivery issue. And it was around $10 million in Q3. I mean, at a company level, it's about 4 points of growth. I mean, you can look at it that way, that I think that impacted. We are -- to your point, we are back up and running on both as we got that addressed. And like I said, we expect to be able to make up the sales mostly in Q4 and perhaps some in Q1. But it's something that the teams have been able to resolve.

All right. And just to follow up on that. It seems like maybe this disruption was not as impactful as what you guys had happened in the first quarter of 2024. But this is the second time in a couple of years that you've had a disruption or an unplanned outage in your Performance Materials segment. So I'm curious, is this just part of doing business in kind of a mining and conversion type of market that you guys serve? Or are there actions that you think you can take that might help you improve operational reliability?

Yes. So, to your point, it is a lesser of an impact than the first quarter of '24. Like I mentioned, when we're vertically integrated, smaller equipment issues that we have end up impacting kind of our overall production schedule. So it is something that, because we're fully vertically integrated, I think it tends to impact this business maybe a little bit more than some of the other businesses that we have. At the same time, I can tell you that we are very, very focused on making sure that we're making the type of improvements that we can on the equipment. Some of the equipment is legacy equipment, so that we can minimize these or even eliminate them as we go forward.

So it is a focus area for us, both on finding the right type of capital improvements that we can drive into the business, along with just general maintenance and upkeep of the equipment. But it does tend to be a little bit more in this business than clearly our EM business or our optics business.

All right. Very helpful. And then I was hoping to also ask kind of a broader question about 2026 outlook. I know it's a little bit early, but when you talk about the order books that you have and some of the backlog in your key growth markets, presumably, we see some improvement in semiconductor, presumably, we see some improvement from the Precision Clad strip customer. And obviously, you've taken a lot of cost actions. It seems like there is really good earnings momentum into next year. And I was hoping you could just give us maybe some initial thoughts on how we should think about the top-line and bottom-line growth in 2026.

Mike, maybe I'll start a little bit, and then Shelly can jump in and talk more as well. We are very excited about some of the key markets, the high-growth markets that we're engaged in, and the portfolio that we have. We've included a slide this time that talks about our activities in semiconductor and energy and defense, and space, and how order rates for those key growth markets are up approximately 20% on a year-to-date basis. We've got the right type of portfolio across those four areas -- of portfolio that goes across all 3 of our businesses.

We talked about the Commonwealth Fusion announcement, for example, that goes across energy. We've got over $150 million of open RFQs that we're engaged in on the defense side. You'll recall in the last earnings call, we mentioned it was $100 million. So that's actually increased from $100 million. And by the way, some of that we closed, new RFQs got added in. And now on top of that, we have another $50 million of RFQs that we've added. So we have more than $150 million of open RFQs in defense and so on and so on. So we're very excited about those high-growth markets, I think, as we enter into '26 and into '27, and we look at the sort of the midterm outlook in those areas.

We certainly have challenges that we need to be addressing. China, as a market for us, is a challenge. We've highlighted that, I think, in the last couple of calls that we have. Our sales into China are down on a year-over-year basis, just based on all the geopolitical issues that are going on. We expect to continue to see pressure on our China business. But what our goal is, is to offset those pressures with these high-growth markets that we're focused on in the U.S. and the rest of the world.

So I think in total, our business is moving forward. We've demonstrated that, I think, throughout this year. Our expectation is to move it forward again in Q4 and then continue to do that over the next 2, 3 years with the portfolio set that we put in place. So in general, I mean, I'm not going to address '26, of course, in particular, just because there will be a time when we do address '26. But I think when we look at the overall midterm time frame, we're very excited about where the business is.

You mentioned Philip Morris. We're actively engaged with them on understanding what's going to happen next year. And as we get a better understanding of that this quarter, we'll be able to model that into our '26 and go forward. We are, of course, monitoring with them what the FDA approval is. So far, they have not announced the FDA approval. So we don't know if they have received it or have not received it yet, and we'll obviously have to wait and see what they say about that. But certainly, the later that goes, of course, it would impact the sales into '26 and perhaps push those out into '27. Of course, the sooner they're able to get that, then that could have a potential sales uptick in '26.

So we'll have to see kind of where that -- the Philip Morris business settles out at. But I think in total, when you put everything together, we've got a lot of upside opportunities that can help address some of the challenges that we have, whether it's China or some other areas that are going on.

So, I think we've got good momentum in the business this year that we've demonstrated, and I expect that momentum to continue into '26, '27 and into our midterm outlook of 23% EBITDA margins.

Our next question is coming from Daniel Moore with CJS Securities.

Start with similar to Phil's question, but on Precision Optics. You're back to double-digit adjusted EBITDA margins, a big jump year-on-year. Can you just give a little more granularity on cost and operating improvements that have been made? And are double-digit margins sustainable as we look to '26 and beyond?

Yes. We are very pleased, I think, with the progress that, that team has made in a very short time. I would say our results are tracking sort of ahead of the expectations and sort of the time line that we had established for ourselves. So very pleased with that. We're seeing a good uptick in a number of different markets, the more traditional markets that this business operates in, such as aerospace and defense and industrial, life sciences, et cetera.

But also, we've entered and are making a bigger progress, I think, in some markets that perhaps we weren't focused on in the past, such as semiconductor. We've made inroads into that market. And so, I think from a top line standpoint, we're making good progress. We've made really good progress from the cost structure side with a number of different actions that we've taken over the last 12 months. And I would say, still are looking at actions that we can be taking here in Q4 and into next year.

We've made sequential progress this year, all 3 quarters. Our goal is to continue to make sequential progress in this business. So having double-digit EBITDA margin is a good start. And I think it's tracking ahead of expectations, but that is not where we just need this business to be. We need this business to contribute to our 23% midterm EBITDA margin target. And so, we're going to continue to focus on that, Dan, and continue to push forward.

Very helpful. Following up on Mike's question, obviously, great detail on the areas, semi, defense, others where you're seeing nice pickup in orders, nice strength, little uncertainty in China. Are there any pockets where you could see maybe detractors in terms of year-on-year growth being negative in terms of difficult comps or pieces of the business? Just trying to kind of conceptualize a lot of the arrows pointing toward anything that could be a drag on that growth as opposed to more neutral as we think about next year?

Yes. Well, I think the auto market, we've talked about this, I think, in the last call as well, right, continues to be a very challenging market for us. In general, I think it's a challenging market. I mean the EV rollout has slowed down quite a bit. I think the growth in China OEMs has been substantial. The Western OEMs have had a very challenging environment in the last 1 or 2 years. So, we continue to look at the auto market as perhaps a bit more challenging market for us as we move forward and a bit more opportunistic, I would say, as we put a lot more focus on these key high-growth markets.

So, our portfolio adjustments are real time and our customer adjustments are real time. And so, we're going to do everything we can to make sure that we're capturing these high-growth markets. And in some cases, if we have to go and be a bit more opportunistic in other markets, then we'll do that accordingly.

Helpful. Appreciate the color on the Commonwealth acquisition. Just going back to Konasol, just talk a little bit about what you're seeing since it's been a few months since you closed that acquisition. And just remind us kind of the timeline in terms of what the incremental contribution could like either '26 or over the next 2 to 3 years?

Yes. No, that's been a very good pickup for us. Our teams have fully gotten involved, integrated the business into our Materion family. We are working with our customers and being able to talk to them about the capability that we bring forward. We have a number of different qualifications that we are involved in with the customers. Our expectation is to go through those qualifications here the rest of this year and into '26 with the objective of being able to start to see some sales in '26 and then into '27 and beyond. So we are, I would say, on track and in some cases, perhaps even a little bit ahead of track on that acquisition.

And then lastly would be just in terms of capital allocation, nice to see the authorization. Just how do we think about where buybacks potentially could fall in terms of rank ordering priorities? Growth has always been a key priority. Balance sheet is down to 2x and generating strong cash. So, you've got flexibility. But just help us think about how you're kind of rank ordering that as we look out to '26 and beyond?

Yes. Thanks. I'll take that one. So, I think our priorities remain the same. We've been very focused on growth and organic growth. We continue to be very focused on organic growth. The areas that Jugal highlighted will continue to need some investment and provide, as you know, very, very good returns. When we think about the share buyback, it is a very opportunistic tool for us. We had not done share buyback in a number of years. But when we kind of looked at where the stock was in Q2, it was the right time to go ahead and buy a little bit back, and that proved to be a worthy use of our capital at that time. And we had run the current authorization down to a very small amount. So, it was just the right time to re-up with our Board of Directors. So, we have that tool in our tool belt, but it is not one that we are actively pursuing.

Our next question is coming from David Silver with Freedom Capital Markets.

So I have a scatter of questions. I'll just warn you. But first, I'd like to hone in a little bit on your comment about sequential order growth of double digits or better, I believe, in all 3 of your segments. And I was just wondering from your perspective or would you characterize this sequential -- kind of across-the-board sequential growth. Would this be reflective of maybe some, I don't know, some deferred activity on the part of your customers, maybe over the last quarter or two in response to the tariff issues and some other things. Or would you characterize the bulk of the new orders as reflective of kind of pure organic growth? I mean, how do you think about the kind of broad-based trend of significant sequential pickup in your order book?

Yes. I think I would look at this as primarily, I think, good organic growth that our teams are driving, new business activities that our teams are driving as well as, I think, the overall market growth and market trends that are there. Certainly, there could be some, David, as you mentioned, of some orders that perhaps have been held back and that got released. But in general, we see continued uptick and improvement in our order rates in most of our markets, and in particularly in the high-growth markets that we've indicated.

Next question would be kind of your take on tariff impacts on your financial results. So if I recall correctly, I mean, you highlighted maybe a $0.10 to $0.15 per share negative impact in the second quarter and then up to $0.50 or more for the back half of the year. And I know that, that initial forecast has been tempered a bit, but we're kind of 6 months into it now. How do you assess the overall effect on your financial results or operations, however you look at it of the of the tariff issues to date? I mean, how much of that has flown through what might be remaining, what that might not be offset by price or other actions? And what should we think about, maybe heading into 2026 on a year-over-year basis?

Yes, David, as you know, what we've been talking about the most has really been the impact to our China business. And so we think about that more commercially, and what is that doing both with customers reserving orders, but also maybe looking for suppliers that are outside the U.S., right? There's a bit of sort of a tone that, hey, we would rather have suppliers that are outside the U.S., given the volatility and the tone of how things are going in negotiations there.

So right now, when we look at our China business, it's down about 20% year-on-year, year-to-date, and that's meaningful to us. The other side of that, of course, would be raw materials that we are incurring on material being brought in. That's a smaller number, call it, $3 million, $2 million, $3 million in that range. Some of that we're able to bill out through price. Others takes a little bit of time to settle in with customers and work through contracts. But the part that gets most of our attention is China and how that will shake out if some agreements are reached.

I would like to ask a question about the margin progression, in particular in Electronic Materials. So 27% is -- the high—not only is it, well, whatever -- it's the highest I have in my model going back as many years as it does. And I know that in general, Electronic Materials can often be a very high incremental margin business on incremental sales. But I don't know, I'm not thinking that, that's the case at least just yet. So, whether it's product mix or cost savings or whatever, but what went into this record margin performance this particular quarter? And should I assume that it can continue to go higher, maybe as sales growth continues to progress?

Yes. Maybe I can start on this, and then Shelly can jump in as needed. This business, as you know, has gone through a downturn for the whole semiconductor market over the last couple of years. The recovery has now started, particularly in the data center business, the high-performance computing memory business, high-performance logic business, et cetera, those have been recovering at a very good rate, and some of the other areas are starting to now catch up.

We took the time over the last year, 1.5 years, 2 years to really make the adjustments to our cost structure and to the business so that as the recovery happens, we can make sure that the margins are improving. We've talked about making those adjustments. I think when the volumes were at a peak level, it was hard to get some of those adjustments done. But now, having done those adjustments, I think, has allowed us to deliver the type of margins that we're delivering.

In addition to that, of course, our mix is much stronger than the mix that we've had in the past. Certainly, the power segment and the data storage segment gives us a lot more of what we call precious metals mix business, which is a great business for us. The fact that the China business is a little bit lower, I mean, certainly, those margins were not as good as some of the other businesses that we have. So, the mix is certainly a helpful item. But in total, I think we've really made the right type of changes for this business so that it can be a much stronger business going forward.

If you take the 27% that we have here in the quarter that we delivered, I mean, even if you adjust for the sort of that $1 million or so that Shelly talked about earlier, I mean, you're looking at about a 25% type of EBITDA margin compared to the 24% EBITDA margins that this business delivered in Q2.

So we think that it's the right type of margin profile. Our goal is going to continue to be able to deliver those types of margins as we move forward and to contribute positively to our midterm target of 23%. I believe we're well-positioned to deliver these good margins.

And then maybe just the last one, but you did mention your efforts in molybdenum very much kind of a leading-edge material for thin films and whatnot. I was just thinking, and I don't recall exactly your wording, so I apologize. But is this the type of product where maybe you've developed it in close collaboration with a single customer, and therefore, maybe that customer might have an exclusive access to your technology? Or is it more something that Materion has developed on their own or proprietary basis, and therefore, it could be ultimately available to a large number of your semiconductor-based customers. Just – if qualitatively, if you could just discuss the nature of that development, and I guess, by extension, the marketing potential down the road?

Yes. So in some cases, you're right. I mean, we develop our products with collaboration with the customer and perhaps have some sort of a arrangement with the customer. I think in this particular case, ALD in general is a product set that we started working on 7, 8 years ago. We started to do organic development of that. We have a number of different materials that we have developed in this area. Molybdenum is one of those materials. We've done that with our investments and, of course, in working with a number of different customers.

So we are selling this product to our customers. We will be marketing it more so as we continue to go forward. We think this is an exciting, exciting product set as we move forward, as it replaces some of the tungsten use that's in the semiconductor market. So we're well-positioned, I think, to take advantage of this across a number of different customers and as we continue to get the pull and as we continue to, of course, push.

Our next question is coming from Steve Storms with Stonegate.

Just want to start by maybe getting a little more commentary around the timing impacts on defense. With the quarter closing on 9/30, were any of these timing issues related to the government shutdown? And one way or another, how much more impact could we see here from the government shutdown?

Yes. So in our case, for the third quarter, we didn't have any, I would say, government shutdown related impacts for defense in the third quarter, but we certainly could have impacts of that here in the fourth quarter. We do have a number of contracts that we're working on with the government. We have a process where we actually work on projects well in advance of actually receiving the contracts. That's a normal process that we have in our defense market. And then, as we receive the contract, we make the shipment or we do some sort of recognition.

In this case, we are waiting on a few of those agreements. And we will have to see how those things play out over the next couple of months. But no impact in Q3, could have impact in Q4. Again, from our operational side, we're fully ready. It's just a matter of being able to get those contracts and closing them out.

That's very helpful. Turning, maybe, to the impact of China. I know this may be hard to estimate, especially without a deal being reached. It was mentioned earlier that China may be impacted by 20% or so. Is there any sense of how much of that would be recoverable, given some resolution here that removes some of the uncertainty?

Yes. And like you said, I mean, it's hard to know, right, what the customers are thinking for the out years, '26, '27, midterm time frame. But I think in general, I mean, what we are hearing and seeing from our customers is that they want to make sure that they're able to purchase from locations where they have more reliability or more stability. And so if there are some temporary measures that are reached, I mean, we don't know if it's going to be permanent, temporary, some sort of pause. It's hard to know, right? And hard to know what the customers are going to do as a result of that.

But I think in general, I would say our business in China has seen pressure this year. And we are planning as if the pressures will continue as customers look for ways to purchase outside of the U.S. Now we are actively involved in a number of ways that we can actually be that supplier, though outside the U.S. We announced this Konasol acquisition last quarter. And so we're looking at any and all ways that we can continue to supply these materials, just do it from outside the U.S. if that's what's necessary.

Understood. That's great commentary. One more for me, if I could. I would just love to hear your thoughts on maybe the volume of opportunities in the energy sector, similar to the Commonwealth agreement. Is this an opportunistic one-off that we'll continue to see once every couple of years? Or do you expect to see more opportunities like this come into the market?

Well, like we've indicated, we've got the agreement with Kairos Power. We've had that for a while. And now we have announced the agreement with CFS. We are working with a number of different partners in all types of new energy areas. So certainly, if there is additional announcements or additional agreements that we reach, we will certainly talk about that. But we're very excited about having agreements on both vision and fusion for new energy applications.

Our next question is coming from Phil Gibbs with KeyBanc Capital.

You had mentioned in your prepared remarks about the government potentially looking to stockpile certain resources. Do you think beryllium will be one of those materials? I'm just trying to think of whether or not you expect any pickup in that dynamic. I know that's something that tends to happen to the company from my experience, maybe once a decade, but I know it does happen from certain cycle to certain cycle. So curious to hear your thoughts on that.

Well, I think when we look at the overall defense market with the U.S. defense spending approaching $1 trillion for next year, the NATO countries increasing their spending to 5% of their GDP by the end of the decade, and then Japan and Korea increasing on an annual basis. I think that drives, I would say, an increased usage of beryllium. I mean many of the defense applications are beryllium-based applications. And so we are actively involved in a number of discussions with various groups on making sure that we have the right level of beryllium and we can produce that and be able to provide that to them.

Now, whether that's done in some sort of a stockpile form or whether that's done in actual materials that are used in various applications, like we indicated the different things that I think the defense department is involved in, we're prepared and ready to do that. So we do have a lot of active discussions, I would say, underway with different entities about how to support in the right way, all the defense needs, which, of course, a big part of that is beryllium-based materials.

As we have no further questions on the lines at this time, I'd like to turn the call back over to Mr. Kelleher for any closing remarks.

Thank you. This concludes our third quarter 2025 earnings call. Recorded playback of this call will be available on the company's website, materion.com. I'd like to thank you for participating in this call and for your interest in Materion. I will be available for any follow-up questions. My number is (216) 383-4931. Thank you again.

Thank you, ladies and gentlemen. This does conclude today's call. You may disconnect your lines at this time, and we thank you for your participation.