Materion - Earnings Call - Q3 2025

Executive Summary

• Q3 2025 was solid: net sales grew 1.9% YoY to $444.8M and adjusted EBITDA landed at 21.0% of value-added sales despite a ~$10M shipment impact from temporary equipment downtime in Performance Materials.
• Electronic Materials posted record margins (27.1% of value-added sales) on improved cost structure, favorable mix, and a small ~$1M one-time precious metal refine pickup; Precision Optics returned to double‑digit margins, while Performance Materials is set to normalize in Q4.
• Guidance reaffirmed: full-year adjusted EPS $5.30–$5.70; free cash flow conversion ~70% of adjusted net income; new $50M buyback authorized, Q4 dividend declared at $0.14/share.
• Consensus comparison: revenue modest beat (+0.5%), EPS in line/slight miss, adjusted EBITDA below consensus as downtime muted shipments; sequential order rates up double-digit with strength in semiconductor, defense, space, and energy – key catalysts into Q4.

What Went Well and What Went Wrong

What Went Well

• Record Electronic Materials margins: “all-time high EBITDA margins of 27% in electronic materials,” driven by structural cost improvements and strong price/mix as semi recovers, with AI-led demand underpinning the upturn.
• Precision Optics transformation: returned to double‑digit EBITDA margins (11.8%) with ~1000 bps YoY expansion on higher volume, favorable mix, and structural cost changes; third straight quarter of sequential improvement.
• Order momentum and secular markets: “order rates are up more than 10% sequentially,” with strong YTD activity in semiconductor, defense, space, and energy; record defense bookings and ~$150M RFQs; new CFS fusion supply agreement with shipments beginning this year.

What Went Wrong

• Equipment downtime: Performance Materials faced temporary equipment issues at the largest facility, limiting Q3 sales by roughly $10M; management expects catch-up in Q4 (and some in Q1) as production normalizes.
• China softness: commercial tone and tariffs pressured China sales; YTD China sales down ~20%, with uncertainty constraining visibility and impacting mix.
• EBITDA versus consensus: adjusted EBITDA below Street as downtime muted Performance Materials and mix effects persisted; management also cited ~$1M operating one-time item in EM, but underlying margin gains remain durable.

Transcript

Operator (participant)

Greetings and welcome to the Materion third quarter 2025 earnings conference call. At this time, all participants are on a listen-only mode, and a question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press Star zero on your telephone keypad. 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.

Kyle Kelleher (Director of Investor Relations and Corporate FP&A)

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 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 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, non-cash charges and certain discrete income tax adjustments. Now I'll turn over the call to Jugal for his comments.

Jugal Vijayvargiya (President and CEO)

Thanks, Kyle, and good morning, everyone. I am 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 the 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 who are aggressively developing breakthrough technologies to expand total energy supply.

Our partnership with Kairos Power to supply materials to produce FLiBe, a molten salt coolant critical to the performance of safe fission 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'll 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 budgeted 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 three 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 the 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.

Shelly Chadwick (VP and CFO)

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 Performance Materials, 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 one-time 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 1000 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 margin. 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-$5.70 per share and are affirming our prior full year guideline. This concludes our prepared remarks. We will now open the line for questions.

Operator (participant)

Thank you. At this time we will be conducting our question and answer session. If you would like to ask a question, please press Star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue and you may press Star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. Thank you. Our first question is coming from Philip Gibbs with KeyBanc. Your line is live.

Philip Gibbs (Director and Metals Equity Research Analyst)

Hey, good morning.

Jugal Vijayvargiya (President and CEO)

Morning Phil.

Shelly Chadwick (VP and CFO)

Morning, Phil.

Philip Gibbs (Director and Metals Equity Research Analyst)

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 months left and you've got 10 months effectively behind you, maybe give us some flavor why you didn't narrow the range, pretty wide for the implied fourth quarter results. Just trying to hone in on.

That a little bit better.

Shelly Chadwick (VP and CFO)

Yeah, I'll start. Phil, thanks for the question. 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. With the government shutdown, that could impact the timing of some of the orders that we're waiting on. 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.

Philip Gibbs (Director and Metals Equity Research Analyst)

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

Jugal Vijayvargiya (President and CEO)

Yeah, Bill, 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. This is very exciting for us because now we've got Kairos Power on the fission side, Commonwealth Fusion Systems on the fusion side.

We've got sort of both sides covered and I think they're clearly the two leading companies in the world on these new energy initiatives.

Shelly Chadwick (VP and CFO)

Yeah, I think you also hit on what can we expect to see from that, Phil? As Jugal mentioned, we will start shipping on that this year. Expect, say, maybe a few million to contribute in Q4. As we look to next year, you can think about that sort of annualizing. Good size 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 timeframe. Right now it's a nice win for us. We look forward to working with them.

Philip Gibbs (Director and Metals Equity Research Analyst)

Thank you. Just one more follow-up if I could. The one-time items that help margins and 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.

Thank you.

Shelly Chadwick (VP and CFO)

Sure. Sure, Phil. 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. Yes, we did get a little bit of a bump up from some one-time items that are all operating related. In our precious metals process, we refine 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 there was a pickup, call it $1 million or so around that number, that we got to record in Q3. That helped, but it really should be in our year-to-date results anyway.

Jugal Vijayvargiya (President and CEO)

Yeah, but I think, Phil, just to add, I think to what Shelly is talking about, I mean, this business has improved significantly throughout the year with all the improvements that have driven in the cost structure over the last 18, 24 months. As you know, the incentive market was down. Now for the last two quarters it's been 20+% EBITDA margins, I mean, almost 24% in Q2 and now 27% in Q3 from the historical 20% or less margins that it used to deliver. Really, really nice step up for this business. Clearly we have high expectations of this business as we go forward. Thank you.

Operator (participant)

Thank you.

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

Mike Harrison (Managing Director and Senior Chemicals Analyst)

Hi, good morning.

Shelly Chadwick (VP and CFO)

Good morning.

Mike Harrison (Managing Director and Senior Chemicals Analyst)

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? Is the outage or downtime resolved now, or if not, when do you expect to resolve it?

Jugal Vijayvargiya (President and CEO)

Yeah, Mike, we had a couple of pieces of equipment in our largest plant where we processed both beryllium and non-beryllium materials. The equipment downtime issues that we had are mainly resolved. We're back up and running, and we expect to be able to catch up majority of the sales into Q4 and perhaps a little bit into Q1. 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. Any type of a hiccup that we have on one or two pieces of equipment ends up resulting in a fairly impactful delivery issue. It was around $10 million in Q3. At a company level, it's about 4 points of growth.

You can look at it that way, and I think that impacted where we are. To your point, we are back up and running on both as we got that addressed. 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.

Mike Harrison (Managing Director and Senior Chemicals Analyst)

All right, just to follow up on that, it seems like maybe this disruption was not as impactful as what you guys had happen 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. 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?

Jugal Vijayvargiya (President and CEO)

Yeah, no. To your point, it is less of an impact than first quarter of 2024. Like I mentioned, when we're vertically integrated, smaller equipment issues that we have end up impacting kind of our overall production schedule. 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. 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.

It does tend to be a little bit more in this business than clearly our PM business or our Optics business.

Mike Harrison (Managing Director and Senior Chemicals Analyst)

All right, very helpful. 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 book 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. Obviously you've taken a lot of cost actions. It seems like there is really good earnings momentum into next year. 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.

Jugal Vijayvargiya (President and CEO)

Yeah, 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, a portfolio that goes across all three of our businesses. We talked about the Commonwealth Fusion Systems 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 recall in the last earnings call we mentioned it was $100 million. That's actually increased from $100 million.

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. We have more than $150 million of open RFQs in defense and so on and so on. We're very excited about those high growth markets. I think as we enter into 2026 and into 2027 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 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.

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. I think in total, our business is moving forward. We've demonstrated that. I think throughout this year our expectation is to move forward again in Q4 and then continue to do that over the next two, three years with the portfolio set that we've put in place. In general, I'm not going to address 2026, of course, in particular, just because there will be a time when we do address 2026. 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.

As we get a better understanding of that this quarter, we'll be able to model that into our 2026 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. We'll obviously have to wait and see what they say about that. Certainly, the later that goes, it would impact the sales into 2026 and perhaps push those out into 2027. Of course, the sooner they're able to get that, then that could have a potential sales uptick in 2026. We'll have to see where the Philip Morris business settles out at.

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. I think we've got good momentum in the business this year that we've demonstrated, and I expect that momentum to continue into 2026, 2027 and into our midterm outlook of 23% EBITDA margins.

Mike Harrison (Managing Director and Senior Chemicals Analyst)

Very helpful. Thank you very much.

Operator (participant)

Thank you. Our next question is coming from Daniel Moore with CJS Securities. Your line is live.

Daniel Moore (Partner and Director of Research)

Thank you.

Good morning, Jugal.

Morning, Shelly. Thanks for taking questions.

Shelly Chadwick (VP and CFO)

Hi, Dan.

Jugal Vijayvargiya (President and CEO)

Morning, Dan.

Daniel Moore (Partner and Director of Research)

Start with similar to Phil's question, but on Precision Optics. You're back to double-digit adjusted EBITDA margins. You know, big jump year-over-year. Can you just give a little more granularity on cost and operating improvements that have been made, and you know, are double-digit margins sustainable as we look to 2026 and beyond?

Jugal Vijayvargiya (President and CEO)

Yeah, 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 timeline that we'd established for ourselves. 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. We've entered and are making 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. 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 three quarters. Our goal is to continue to make sequential progress in this business. Having double-digit EBITDA margin is a good start, and I think it's tracking ahead of expectations. That is not where we just need this business to be. We need this business to contribute to our 23% midterm EBITDA margin target. We're going to continue to focus on that, Dan, and continue to push forward.

Daniel Moore (Partner and Director of Research)

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-over-year growth being negative in terms of difficult comps of pieces of the business? Just trying to conceptualize a lot of the arrows pointing north. Anything that could be a drag on that growth as opposed to more neutral as we think about next year?

Jugal Vijayvargiya (President and CEO)

I think the auto market, we've talked about this in the last call as well, continues to be a very challenging market for us in general. I think it's a challenging market. 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 one or two years. 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. Our portfolio adjustments are real time and our customer adjustments are real time. We're going to do everything we can to make sure that we're capturing these high growth markets.

In some cases, if we have to go and be a bit more opportunistic in other markets, then we'll do that accordingly.

Daniel Moore (Partner and Director of Research)

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 closed that acquisition, and just remind us kind of timeline in terms of what the incremental contribution could, like either 2026 or over the next two to three years. Thanks again for the color.

Jugal Vijayvargiya (President and CEO)

Yeah, 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 2026, with the objective of being able to start to see some sales in 2026 and then into 2027 and beyond. We are, I would say, on track and in some cases, perhaps even a little bit ahead of track on that acquisition.

Daniel Moore (Partner and Director of Research)

Lastly, in terms of capital allocation, nice to see the authorization. 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 two times and generating strong cash, so you've got flexibility. Help us think about how you're kind of rank ordering that as we look out to 2026 and beyond.

Shelly Chadwick (VP and CFO)

Yeah, thanks. I'll take that one. 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 repurchase program, it is a very opportunistic tool for us. We had not done a share repurchase program 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. That proved to be a worthy use of our capital at that time. We had run the current authorization down to a very small amount. It was just the right time to re-up with our Board of Directors.

We have that tool in our tool belt, but it is not one that we are actively pursuing.

Daniel Moore (Partner and Director of Research)

Understood. Thank you again.

Operator (participant)

Thank you. Our next question is coming from David Silver with Freedom Capital Markets. Your line is live.

David Silver (Managing Director and Senior Equity Research Analyst)

Okay. Hi, thank you very much.

Jugal Vijayvargiya (President and CEO)

Hi, David.

David Silver (Managing Director and Senior Equity Research Analyst)

Good morning. 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 three of your segments. I was just kind of wondering from your perspective, would you characterize this sequential, kind of across the board sequential growth, as reflective of maybe some deferred activity on the part of your customers over the last quarter or two in response to the tariff issues and some other things, or would you characterize the bulk of it, the bulk of the new orders, as reflective of pure organic growth? How do you think about the kind of broad-based trend of significant sequential pickup in your order book? Thank you.

Jugal Vijayvargiya (President and CEO)

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 had been held back and that got released. In general, we see continued uptake and improvement in our order rates in most of our markets and particularly in the high growth markets that we've indicated.

David Silver (Managing Director and Senior Equity Research Analyst)

Okay, thank you for that. Next question would be kind of your take on tariff impacts on your financial results. If I recall correctly, you highlighted maybe a $0.10-$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. I know that initial forecast has been tempered a bit. We're kind of six months into it now. How do you assess the overall effect on your financial results or operations, however you look at it, of the tariff issues to date? How much of that has flown through, what might be remaining, what might not be offset by price or other actions? What should we think about heading into 2026 on a year-over-year basis?

Shelly Chadwick (VP and CFO)

Yeah, David, as you know, what we've been talking about the most has really been the impact to our China business. 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. Right now when we look at our China business, it's down about 20% year over 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, material being brought in. That's a smaller number, call it $3 million-$3 million in that range. Some of that we're able to bill out through price.

Others take a little bit of time to settle in customers and work through contracts. The part that gets most of our attention is China and how that will shake out as some agreements are reached.

David Silver (Managing Director and Senior Equity Research Analyst)

Okay, thank you for that. I would like to ask a question about the margin progression in particular in electronic materials. 27% is, you know.

Not only.

Is it, whatever, it's the highest I have in my model going back, you know, as many years as it does. I know that in general, electronic materials can often be a very high incremental margin business on incremental sales. I don't know. I'm not thinking that that's the case, at least just yet. Whether it's product mix or cost savings or whatever, 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?

Jugal Vijayvargiya (President and CEO)

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 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, year and a half, two 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.

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 give 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, certainly those margins were not as good as some of the other businesses that we have. Mix is certainly a helpful item. In total, I think we've really made the right type of changes to 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, even if you adjust for the sort of that $1 million or so that Shelly talked about earlier, you're looking at about a 25% type of EBITDA margin compared to the 24% EBITDA margins that this business delivered in Q2. 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.

David Silver (Managing Director and Senior Equity Research Analyst)

Okay, thanks. Maybe just the last one, you did mention your efforts in molybdenum. Very much kind of a leading edge material for thin films and whatnot. I was just kind of thinking, and I don't recall exactly your wording, so I apologize. 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 exclusive access to your technology? Is it more something that Materion has developed on their own or a proprietary basis, and therefore it could be ultimately available to a large number of your semiconductor basis 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.

Jugal Vijayvargiya (President and CEO)

In some cases you're right. We develop our products with collaboration with the customer and perhaps have some sort of arrangement with a customer. I think in this particular case, ALD in general is a product set that we started working on seven, eight 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, of course, in working with a number of different customers. We are selling this product to our customers. We will be marketing it more. 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.

We are well positioned, I think, to take advantage of this across a number of different customers as we continue to get the pull and as we continue to, of course, push.

David Silver (Managing Director and Senior Equity Research Analyst)

Okay, great. Thank you very much. I appreciate all the color.

Jugal Vijayvargiya (President and CEO)

Thank you.

Operator (participant)

Our next question is coming from Dave Storms with Stonegate. Your line is live.

Dave Storms (Equity Research Analyst)

Good morning and thank you.

you for taking my question.

Shelly Chadwick (VP and CFO)

Good day.

Dave Storms (Equity Research Analyst)

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? One way or another, how much more maybe impact could we see here from the government shutdown?

Jugal Vijayvargiya (President and CEO)

Yeah, 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. 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. 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.

Dave Storms (Equity Research Analyst)

That's very helpful, thank you. 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 is maybe 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?

Jugal Vijayvargiya (President and CEO)

Yeah, like you said, I mean it's hard to know what the customers are thinking for the out years, 2026, 2027 midterm timeframe. I think in general, 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. If there are some temporary measures that are reached, we don't know if it's going to be permanent, temporary, some sort of pause. It's hard to know, and hard to know what the customers are going to do as a result of that. 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 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.

Dave Storms (Equity Research Analyst)

Understood. That's great commentary. One more for me if I could. I would just love to hear your thoughts around 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 years, or do you expect to see more opportunities like this come into the market?

Jugal Vijayvargiya (President and CEO)

Like we'd indicated, we've got the agreement with Kairos Power. We've had that for a while, and now we announced the agreement with CFS. We are working with a number of different partners in all types of new energy areas. If there's additional announcements or additional agreements that we reach, we will certainly talk about that. We're very excited about having agreements on both fission and fusion for new energy applications.

Dave Storms (Equity Research Analyst)

That's perfect. Thank you very much and good luck in Q4.

Shelly Chadwick (VP and CFO)

Thanks.

Operator (participant)

Thank you. Our next question is coming from Philip Gibbs with KeyBanc. Your line is live.

Philip Gibbs (Director and Metals Equity Research Analyst)

Hey, thanks.

You'd mentioned.

Yeah.

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. Curious to hear your thoughts on that.

Jugal Vijayvargiya (President and CEO)

I think when we look at the overall defense market, with U.S. defense spending approaching $1 trillion for next year, the NATO countries increasing their spend 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. Many of the defense applications are beryllium-based applications. 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.

We do have a lot of active discussions 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.

Philip Gibbs (Director and Metals Equity Research Analyst)

Thank you.

Operator (participant)

Thank you. 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.

Kyle Kelleher (Director of Investor Relations and Corporate FP&A)

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 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.

Operator (participant)

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.