Materion's Q3 2025: Contradictions Emerge on Defense Orders, Automotive Market, Precision Optics, Tariff Impacts, and Sales Recovery Potential

Date of Call: October 29, 2025

Financials Results

• Revenue: Value-added sales $263.9M, up ~1% organically vs prior year (company-level)
• EPS: $1.41 adjusted EPS, flat YOY, up 3% sequentially
• Operating Margin: 21% adjusted EBITDA margin at company level (second time in company history); Electronic Materials EBITDA margin 27.1% (record), Performance Materials 24.2%, Precision Optics 11.8%

Guidance:

• Affirmed full-year EPS range of $5.30 to $5.70.
• Expect Q4 top-line improvement as Performance Materials production normalizes and Defense & Energy seasonality/new wins ramp.
• Begin shipments to Commonwealth Fusion in Q4 ("a few million" in 2025) with larger annualized contribution in 2026.
• Target free cash flow of ~70% of adjusted net income for the year; Board authorized $50M repurchase program.
• Continue pursuing midterm adjusted EBITDA margin target of 23%.

Business Commentary:

• Record Financial Performance in Electronic Materials:
• Materion's Electronic Materials division achieved a record EBITDA margin of 27% in Q3, up 38% year-over-year, with a 7% organic sales growth.

• This improvement was driven by higher volume, strong price/mix, improved operational performance, and favorable operating-related items.

• Precision Optics Turnaround:

• Precision Optics segment saw a 21% increase in value-added sales and a return to double-digit EBITDA margins with 11.8% margin expansion.

• The turnaround was attributed to new business wins, particularly in aerospace and defense, and structural cost changes.

• Strong Order Rates and Market Growth:

• Order rates across the company increased more than 10% sequentially, with key markets like semiconductor, defense, and energy up 20% year-to-date.

• Growth was driven by secular demand in AI, defense spending, and energy sector investments.

• Defense Market Expansion:

• Materion has experienced record defense bookings, up roughly 40%, with over $150 million in open RFQs.
• This growth is due to increased defense spending by the U.S. and allied countries amidst geopolitical tensions.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted record 27% EBITDA margins in Electronic Materials, company-level EBITDA margin of 21%, order rates up >10% sequentially and key growth markets up ~20% YTD, and affirmed full-year EPS $5.30–$5.70 while announcing energy and defense wins (Commonwealth Fusion, Kairos Power), signaling constructive outlook and operational confidence.

Q&A:

• Question from Philip Gibbs (KeyBanc Capital Markets Inc., Research Division): Why didn't you narrow the full-year EPS range given better visibility with two months left?
  Response: Left range due to continued uncertainty around China and potential government shutdown timing; company believes it is on track for the midpoint.

• Question from Philip Gibbs (KeyBanc Capital Markets Inc., Research Division): Financial impact and timing of the Commonwealth Fusion Systems arrangement—when do shipments step up materially?
  Response: Shipments start in Q4 with a few million in 2025 and a larger annualized run rate in 2026; potential for much bigger volume longer-term.

• Question from Philip Gibbs (KeyBanc Capital Markets Inc., Research Division): Size of the onetime items that helped Electronic Materials margins in Q3?
  Response: Approximately a $1M operating-related one-time pickup from higher-than-expected precious-metal recoveries; core margin improvement driven by structural cost and mix changes.

• Question from Michael Harrison (Seaport Research Partners): Details on the Performance Materials equipment outage—what was affected and is it resolved?
  Response: Two pieces of equipment at the largest plant were impacted; issues are mainly resolved, ~ $10M of sales limited in Q3 and majority expected to be caught up in Q4 (some into Q1).

• Question from Michael Harrison (Seaport Research Partners): This is the second outage in recent years—can reliability be improved?
  Response: Yes; because of vertical integration legacy equipment can cause outsized impacts, and the company is prioritizing capital improvements and maintenance to minimize future outages.

• Question from Michael Harrison (Seaport Research Partners): Early thoughts on 2026 top-line and bottom-line given order book and cost actions?
  Response: Management is optimistic—order rates and >$150M of defense RFQs provide upside—but declined to provide formal '26 guidance, noting China remains a headwind to model explicitly.

• Question from Dan Moore (CJS Securities, Inc.): What drove Precision Optics' margin improvement and are double-digit margins sustainable into '26?
  Response: Sequential volume gains, favorable price/mix and structural cost actions delivered margin expansion; double-digit EBITDA is sustainable and management will continue initiatives to further improve margins toward the company target.

• Question from Dan Moore (CJS Securities, Inc.): Any pockets that could be detractors to year-over-year growth next year?
  Response: Auto market remains weak (EV rollout slowed and China OEM dynamics), and could be a drag while company focuses on higher-growth markets.

• Question from Dan Moore (CJS Securities, Inc.): Update on Konasol acquisition and expected contribution timing?
  Response: Integration is complete and qualifications are underway; expect initial sales in 2026 with larger contributions in 2027 and beyond.

• Question from Dan Moore (CJS Securities, Inc.): How are buybacks prioritized against growth and balance sheet objectives?
  Response: Organic growth and reinvestment remain top priorities; buybacks are an opportunistic tool and not actively being pursued despite the new $50M authorization.

• Question from David Silver (Freedom Capital Markets): Is the sequential order growth across segments deferred customer activity or organic demand?
  Response: Primarily organic growth driven by new business and market recovery, with potentially some released deferred orders contributing.

• Question from David Silver (Freedom Capital Markets): Assessment of tariff impacts to date and what remains into 2026?
  Response: Biggest impact is commercial—China sales down ~20% YTD; raw-material tariff cost exposure is modest (~$2–3M) and partially recoverable through pricing; uncertainty remains for 2026.

• Question from David Silver (Freedom Capital Markets): What drove the record 27% Electronic Materials EBITDA and can it continue?
  Response: Margin expansion driven by cost-structure improvements and favorable mix (power/data storage), plus ~ $1M one-time recovery; management expects elevated margins to persist as volumes recover.

• Question from David Silver (Freedom Capital Markets): Is the molybdenum ALD product exclusive to a single customer or broadly marketable?
  Response: Molybdenum ALD was developed over years and is being marketed to multiple customers—it's not positioned as a single-customer exclusive.

• Question from David Storms (Stonegate Capital Partners, Inc., Research Division): Were defense timing issues in Q3 related to the government shutdown and how much more impact could occur?
  Response: No Q3 shutdown impact; there is potential timing risk in Q4 if shutdown affects contract award timing, but operations are ready to execute once contracts are received.

• Question from David Storms (Stonegate Capital Partners, Inc., Research Division): If China tensions resolve, how much of the ~20% China decline is recoverable?
  Response: Uncertain—customers appear to prefer stable/alternative sourcing; company is preparing to supply from outside China (e.g., via Konasol) but recovery is not guaranteed.

• Question from David Storms (Stonegate Capital Partners, Inc., Research Division): Is the Commonwealth Fusion win a one-off or indicative of more energy opportunities?
  Response: It complements existing Kairos Power work; management is engaged with multiple partners and expects additional new-energy opportunities rather than one-offs.

• Question from Philip Gibbs (KeyBanc Capital Markets Inc., Research Division): Could the government stockpile beryllium and drive demand?
  Response: With rising defense budgets and increased defense activity, beryllium demand is expected to increase and the company is engaged in discussions to support stockpiles or increased procurement.

Contradiction Point 1

Defense Orders and Government Shutdown Impact

It involves the impact of government shutdowns on defense orders, which could affect Materion's financial performance and market expectations.

Were defense orders affected by the government shutdown? - David Storms (Stonegate Capital Partners, Inc., Research Division)

2025Q3: No impact in Q3, but there could be Q4 impacts due to the shutdown affecting contract recognition. Our operations are ready for any contract closures. - Jugal Vijayvargiya(CEO)

What is the outlook for the automotive market for the rest of the year, and how is Materion's defense backlog progressing regarding timeline, burn rate, and margins? - David Joseph Storms (Stonegate Capital Partners)

2025Q2: Defense, on the other hand, has significant potential, with a substantial increase in bookings and global inquiries, contributing positively to margins. - Jugal K. Vijayvargiya(CEO)

Contradiction Point 2

Automotive Market Outlook

It involves the outlook for the automotive market, which impacts Materion's sales and growth expectations in a key sector.

Are there any areas with potential YoY growth drag? - Dan Moore (CJS Securities, Inc.)

2025Q3: The auto market remains challenging due to EV rollout slowdown and Western OEM issues. We're shifting focus to high-growth markets with a more opportunistic approach in auto. - Jugal Vijayvargiya(CEO)

What is the outlook for the automotive market for the rest of the year, and what is the status of Materion's defense backlog regarding timeline, burn rate, and margins? - David Joseph Storms (Stonegate Capital Partners)

2025Q2: Automotive remains a small market for Materion, with expectations of flat to slightly increased growth in the back half of the year. - Jugal K. Vijayvargiya(CEO)

Contradiction Point 3

Precision Optics Margins and Expectations

It involves differing expectations and progress reported for the Precision Optics division, which could impact investor assessments of the company's financial performance and strategic direction.

Can you provide more details on equipment downtime in Performance Materials? - Philip Gibbs (KeyBanc Capital Markets Inc., Research Division)

2025Q3: Precision Optics was up 3% year-over-year, driven by 19% sales growth in aerospace, defense, and 7% growth in semiconductor, partially offset by a 41% decline in consumer electronics. - Jugal Vijayvargiya(CEO)

What is the expected decline in the Precision clad strip business and its impact in Q1 and Q2? Will other consumer electronics segments offset this decline? - Mike Harrison (Seaport Research Partners)

2024Q4: Precision Optics' sales were $134 million, down 17% year-over-year, which was in line with our expectations. - Jugal Vijayvargiya(CEO)

Contradiction Point 4

Tariff Impact and Financial Guidance

It involves differing explanations of how tariffs are affecting financial guidance, which is crucial for investor expectations and operational planning.

What impact have tariffs had on financial results, and what should we expect in 2026? - David Silver(Freedom Capital Markets)

2025Q3: The impact is mainly on the China business, down 20% YoY. Some raw material costs are being managed through price adjustments. China's trade dynamics will continue to be a factor. - Shelly Chadwick(CFO)

Do the tariff impacts factor into your guidance of maintaining over 20% EBITDA margin for the year? - Philip Gibbs(KeyBanc Capital Markets)

2025Q1: The goal is to achieve 23% EBITDA margin, but there's uncertainty about tariffs. The focus is on minimizing tariff impacts and driving performance improvements. The $0.10 to $0.15 Q2 impact and $0.40 to $0.50 back-half impact are identified, but the situation is evolving. - Jugal Vijayvargiya(CEO)

Contradiction Point 5

Sales Recovery Potential from Tariff Resolution

It involves differing expectations about the potential for recovering lost sales if tariff issues are resolved, which impacts sales projections and revenue expectations.

Is there potential for a China business recovery once uncertainties are resolved? - David Storms(Stonegate Capital Partners, Inc., Research Division)

2025Q3: The goal is to recover lost sales if tariff issues are resolved, but timing depends on negotiations. The focus is on regaining sales this year if possible, but some adjustments may extend into next year. - Jugal Vijayvargiya(CEO)

If macroeconomic uncertainties resolve in the next one to two quarters, can Q2 lost sales be recovered for the remainder of 2025? - Dave Storms(Stonegate Securities)

2025Q1: If there's a resolution, there's potential for recovery. However, customers are seeking more reliable supply chains, which we're addressing with acquisitions like Konasol. - Jugal Vijayvargiya(CEO)