Prepared remarks
Greetings. Welcome to the Materion Second Quarter 2026 Earnings Conference Call. 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 the call over 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 to precision. We delivered the highest quarterly sales and earnings in our company's history. All three 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 five 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 three 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 and 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 and data center. Additionally, as Jugal mentioned, all three 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 and 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 Electronic Materials. 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 value-added 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.
Questions and answers
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. 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. 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 was around $300 million of open RFQs. So with everything going on in the world and the general spending that the U.S. is projecting as well as 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 going forward as well. It's an important market for us and one that we are very well suited, with our material set, to continue to see growth.
That is very helpful. And then just one more. Can you take a minute or two 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?
Precision Optics has had a strong run over the last five quarters. We made a leadership change and implemented business changes in that area, and it's paid great dividends. The top line has improved and the bottom line has improved even more, and we expect the top and bottom line to continue to do well going forward. We've had significant support from new business activity. The team has been involved in several areas. In particular, the growing semiconductor market, defense and space have been important drivers. Life sciences is an important market for them, and industrial is an important market as well. So market growth and market tailwinds have helped. More importantly, the new business initiatives that the teams have focused on have materialized and are showing up in the growth rate; others will continue to materialize and contribute further growth. On the operational side, the team has made significant progress on manufacturing, productivity and yields, rightsizing the business to appropriate sales levels and ensuring timely delivery to customers, thereby delivering margin growth. Delivering more than 20% margins is a milestone for that business, and our expectation is that the business will continue to improve and contribute to the midterm target we have for the overall company of 23% margin. We're excited about what the business has achieved and even more excited about what it can achieve over the next three to five 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.
This is a very exciting market for us. We've talked about it over the last few years—this used to be a niche market but it has emerged into one with accelerated growth. To give perspective, we said up to last quarter that our business in the last few years had increased fivefold; now we're up to sixfold growth in the last three to four years. The continued growth in the space market is exciting. You mentioned it's off a small base; I would say it's not that small. It is a relatively good-sized business for us. When you look at aerospace and defense for the quarter, you could approximate perhaps around 25% of the business being directionally in the space side of things, so it's fairly sizable. Our biggest markets on that slide are launch and satellites—those are our two largest areas. We have significant content on the launch side and significant content on the satellite side. Looking at growth areas, in-space propulsion and surface power are high growth opportunities. When you think about powering and providing remote or continuous power, we are actively engaged in a number of efforts in that area. There are some niche, science-oriented activities, but launch and satellites are strong markets, and the power side is a very high growth opportunity. Ground-to-space infrastructure is an emerging market as well. Overall, it's an 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. We're really excited about the performance of that business this quarter—32% is a big step forward from where the business has been. There are a number of factors at work. Mix was certainly in play here; we had a very favorable mix in Q2 given what orders came in and what we shipped. As we look at the order book for the full year, that is probably a richer mix than we'll see all year. It's undeniable that there's been a big step forward in the business. It's partly volume, but it's largely the improvements that have been made and making sure we get the value for our products. I expect that structurally margins will be well ahead of last year. This is not a new floor, as I always say.
Mike, it's important to note that when the business was at mid-teens or high-teens margins, we were clear that this is not where we want Electronic Materials to be. Electronic Materials deserves higher margins. We're not satisfied; we want to continue to drive better sales and profitability. We must manage and balance growth with profitability. We're a balanced company in supplying the semiconductor market, across power semiconductors, communications, data storage, logic and memory, including high-bandwidth memory. Data storage demand from data centers is growing. We provide breadth of product across the semiconductor value chain. Our objective is to avoid reverting to prior low-margin levels and to continue building a balanced portfolio with Electronic Materials-level margins.
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—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?
We learned a lot during the COVID period about how to manage supply, constraints and our operations. We also learned how to manage pricing mechanisms during inflationary periods to ensure appropriate returns. Our teams continue to manage these discussions with customers. If we see inflationary impacts such as higher energy, we make sure there's appropriate dialogue with customers and adjust prices as needed. Price is an important enabler to our growth across the board because we want to capture the value we deliver and receive an appropriate return. That is important for addressing cost increases when they occur.
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, your R&D expense is flattish and your revenues are up well above double digits. Is it correct to think 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 around staffing and resourcing to support this well above trendline growth for your company?
Good observation, David. R&D is an extremely important enabler—innovation is core to what we do and ensuring we provide the solutions customers need. We are focused on R&D, and many R&D activities are funded by customers and government entities. When we work with customers, we make sure those activities are jointly funded, similar to how we approach CapEx. That affects how our reported R&D spend appears. We also leverage our portfolio in platform development and grow with existing technologies and solutions. R&D remains an important enabler, and we aim to be research and development–heavy in a cost-effective way, leveraging customer support as appropriate.
Okay. Great. The next question 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 strong growth period and several companies experienced overordering or prebuying that worked itself out over the next couple of years. As you look at your order book overall, what gives you confidence that the orders you're filling now are genuine current demand and not inventory buildup or safety stocks for your customers?
Good question. Our order book is broad-based across end markets, not concentrated in one or two areas. We believe the orders are for consumption now and in the next six to nine months rather than inventory buildup. For defense, given global developments and spending, we believe these are for builds happening now. In space, the same applies. For commercial aerospace, increasing build rates at Boeing and Airbus—and activity from other OEMs—point to orders for actual builds. New energy applications are driven by development and production needs. Semiconductor orders are tied to builds in memory and logic for AI and data center applications. Overall, our order book is diversified and represents demand that is occurring now, not inventory buildup for the next three to five years.
I'll just repeat my comment was not about your company in particular but about a range of companies I was tracking. Last question is housekeeping. Going through one of the earlier slides, I believe when you were talking about revenues, you used the term onetime items or special items that may have boosted either revenue or EBITDA this quarter. Did I hear that correctly? If so, what did that refer to?
Yes, you heard correctly. We had a few onetime items this quarter that went positive. It was a modest amount, roughly a few million dollars—two to three million in total. Nothing material. Examples include a refund, a settlement and a bit of royalty income. A number of smaller positive items helped the results slightly but nothing overly material.
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.
In terms of specific details, we can provide what we've already shared. This program will likely run about a year to 1.5 years. We're in the process now and would expect this level of sales to be finished out by the end of next year. We get contracts that vary—from $1 million up to much larger multiyear awards. A year or 1.5 years ago, we announced combined contracts in space worth about $200 million, which were multiyear. Contracts vary in size—small and large. This is a fantastic win for critical materials used in engine performance, and we're excited about it over the next four to six quarters.
That's great commentary. I appreciate that. And then maybe one more. Going back to defense and some of the drivers you mentioned earlier that are driving that market, a second order impact has been on 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 lag relative to the defense market? Anything you're seeing there?
Energy has been an important market historically; we're a major player in oil and gas and continue to be. The oil rig count hasn't necessarily increased, but we continue to have good applications in that sector. More exciting for us are new energy applications we've been working on. If those materialize, they could significantly boost our energy market. Overall, the energy market has been steady, and it's been boosted for us by the development of 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 the record backlog and strength in the order book, can you talk about where you stand on capacity and how you're thinking about the need for additional growth CapEx in the coming years?
We pay a lot of attention to CapEx and how we can get CapEx support from customers, government entities and partnerships. We want to be prudent about the level of CapEx spending. At the same time, we focus on driving more efficiency in plants, productivity and yields to get more output from existing equipment. We've been investing at the rate needed to deliver growth without outspending it. From a capacity standpoint, we are well positioned to support current growth and the growth expected next year. It's solid capital management from our team.
A quick housekeeping comment on CapEx. 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 amount will go through CapEx, but it 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 higher, but we'll have funds come in that offset it.
This is part of our strategy—we develop joint activities with customers and take meaningful responsibility to co-invest when appropriate.
Okay. And then I guess last question is early but you're looking at roughly 30% EPS growth this year, record backlog, record margins, strong order patterns. As investors start to think longer term, are there any modeling assumptions you're willing to share at this point for how we might think about sales growth or margin performance into next year?
For 2027, we'll put our forecast together later this year and share it in the January timeframe. What I can tell you is the general direction of the markets—defense, space, AI and data center, high-performance logic and memory, and energy needs tied to data center growth. We will combine these market trends and our role in those markets to form guidance for 2027 and beyond, and we'll share that with you at the appropriate 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.