Arxis, Inc. Class A Common Stock 2026 Q3 Earnings Call

Please go ahead. Good morning, and welcome to the Arxis third quarter 2026 results conference call.

Joining me today are Kevin Perhamus, President and Chief Executive Officer, and Azad Badakhsh, Chief Financial Officer of Arxis. Before we begin, I'd like to remind everyone that today's discussion will contain forward-looking statements relating to future events and expectations. Actual results may differ materially from those projected due to a number of risks and uncertainties. Please refer to our most recent SEC filings and today's earnings materials for a discussion of factors that could cause actual results to differ materially from those forward-looking statements. During today's call, we may also reference certain non-GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are included in today's earnings release and related presentation materials. With that, I'll turn the call over to Kevin.

Thanks, Bryan, and good morning, everyone. I'll start with our third quarter performance, then discuss how we are growing in excess of our long-term algorithm and review the business model that supports that growth. Let's turn to slide 3. We delivered another excellent quarter with revenue of $564 million, up 36% year over year, and adjusted EBITDA of $256 million, up 67%. Adjusted EBITDA margin expanded 840 basis points to 45.4%. Organic revenue growth was 29%, driven by mid-single-digit new business growth, high single-digit pricing, and mid-teens growth from higher production on existing platforms. Acquisitions completed year to date contributed high single-digit growth to reported revenue. Performance was consistent across the portfolio. Both our electronic components and mechanical component segments delivered similar levels of strong organic growth. In defense and space, growth was driven by higher volumes on established platforms and increased production on next-generation programs.

Commercial aerospace benefited from increasing aircraft production rates and healthy aftermarket demand. Within industrial technology, we saw strength across a wide range of applications, including medical technology, oil and gas, semiconductor equipment, telecom and datacom, and quantum computing. We also continued to execute our disciplined M&A strategy. In partnership with Arcline, we completed two acquisitions in September, Schatz Bearing and StratEdge, bringing our year-to-date total to six acquisitions. I'll discuss both of these deals in more detail shortly. Our strong performance this year, along with contributions from recent acquisitions, supports another increase to our full year 2026 guidance. We are also introducing our 2027 outlook. Let me explain what's driving our growth and how we expect that momentum to carry into next year. Let's turn to slide 4.

As we introduce our 2027 guidance, I want to take a moment to revisit our layer cake revenue model and explain one of the key drivers behind our current growth, a concept we call ramp capture. It comes from two things, growing with customers as they increase production and winning new content on existing platforms with our technology, which then scales to full rate. This happens as we use EDGE to design our products into the right platforms with increasing production rates. This year, many of our customers increased production at the same time, lifting growth above our long-term algorithm. We saw this on platforms where our content is designed in, including Patriot and other missile programs, F-35 electronic warfare, commercial aerospace, including the 737, and industrial applications. Our guidance reflects continued ramp capture in 2026 and 2027. We don't expect to keep growing at this year's rates.

These programs are building a larger portfolio of recurring revenue. What changes is the revenue base, not the growth rate. Beyond 2027, we expect our long-term algorithm of high single-digit organic revenue growth and low double-digit adjusted EBITDA growth to compound over time on this larger base. Turning to slide 5, we continue to execute our M&A strategy by adding complementary businesses that strengthen our portfolio and support long-term growth. Our two most recent acquisitions, StratEdge and Schatz, are good examples. Starting with StratEdge, they manufacture specialized ceramic packages for high-frequency, high-power electronics used in advanced defense systems. One of their key applications is missile defense, where their products support the seeker electronics and manage extreme heat while maintaining electrical performance. This is highly specialized technology that complements our existing RF and microwave capabilities. The second acquisition is Schatz Bearing, our fourth bearings business alongside Kamatics, GRW, and RWG.

Schatz adds precision bearings for aerospace, defense, and industrial applications. Like our existing bearings businesses, Schatz brings highly engineered products, proprietary technologies, and strong customer relationships, making it an excellent fit with our business model. Together, the combined purchase price for these two acquisitions was approximately $151 million, which is less than 10 times estimated 2027 adjusted EBITDA, further demonstrating our disciplined approach to acquire high-quality businesses at attractive valuations. Our partnership with Arcline is core to our M&A strategy. Arcline's 70-person team brings deep expertise in sourcing, diligence, and transaction execution, while our operating teams provide the technical expertise, customer relationships, and integration capabilities to help acquired businesses grow. We've built a highly repeatable M&A engine that brings together our operating expertise and Arcline's investment capabilities, and our combined capabilities give us a strong platform for continued growth.

Turning to slide 6, we've discussed how we're growing through ramp capture and acquisitions. Both are grounded in our business model. Arxis designs and manufactures proprietary, highly engineered components for mission-critical applications. Many of them deliver cutting-edge performance at the extreme. High heat, shock, vibration, and the demands of space and missile flight, where off-the-shelf parts fail. Our engineers work directly with our customers' engineers to develop custom solutions that get designed into the platform's bill of materials, typically as the only qualified part. Qualifying a part for these environments is demanding and expensive. So once designed in, our parts remain in place for decades. As platform requirements become more complex, demand for many of our technologies and products grows. Customers are designing them into new platforms, and we're winning new programs as a result.

That combination of proprietary technology, long platform lives, and diversification across customers and end markets creates a durable business across both our electronic and mechanical components segments. On slide 7, EDGE is how we organize our teams to pursue new business and execute across the company. It starts with a decentralized operating structure that keeps our teams close to customers and accountable for performance, supported by common processes across the company. Our new business engine brings engineers and sales teams together to identify opportunities, solve customer problems, and win new programs. Our repeatable acquisition engine, unified by our long-standing partnership with Arcline, complements that organic growth. Our 2026 execution demonstrates how these elements work together. On slide 8, our long-term growth algorithm remains unchanged. We target high single-digit organic revenue growth driven by mid-single-digit new business generation and mid-single-digit pricing, with approximately 50% incremental EBITDA conversion.

That translates into low double-digit organic EBITDA growth. M&A provides an additional layer of growth supported by a repeatable acquisition strategy. Our long-term algorithm isn't built around today's demand environment. It's built around what we believe we can consistently deliver over decades. We all know markets can change, which is why our algorithm doesn't assume any contribution from outsized ramp capture or underlying market growth. With that, I'll turn it over to Azad to walk through our third quarter results and our guidance for the remainder of 2026 and full year 2027.

Thanks, Kevin, and good morning, everyone. I'll begin on slide 9. Q3 revenue was $564 million, an increase of 36% year over year, consisting of 29% organic growth and a 7% contribution from acquisitions. Turning to profitability, Q3 adjusted EBITDA was $256 million, with margins expanding 840 basis points year over year to 45.4%. Margin expansion was driven by operating leverage from higher sales volumes, strong pricing realization, and continued productivity and cost optimization initiatives. Free cash flow was $150 million in the quarter, up 117% year over year, reflecting higher earnings and improved net working capital dynamics. These results demonstrate our ability to convert earnings into cash. Turning to slide 10, our balance sheet remains well-positioned, supported by earnings growth and healthy cash generation. During the quarter, we further reduced net leverage to 1.6 times, down from 1.8 times at the end of the second quarter.

Together with the capital structure improvements completed as a result of our debt paydown from the IPO and repricing, our low leverage profile and strong cash generation provide significant capacity to support our continued M&A momentum. Looking ahead, we remain focused on disciplined capital allocation, maintaining a prudent leverage profile, and preserving the capacity to pursue attractive acquisition opportunities. Turning to slide 11, we're raising our full year revenue and adjusted EBITDA guidance based on strong year-to-date performance and increased visibility into the remainder of 2026. We now expect revenue of $2.05 billion-$2.07 billion, an increase of $90 million at the midpoint compared to our prior guidance. At the midpoint, this represents approximately 29% year over year growth, including 22% organic growth. We're raising adjusted EBITDA guidance to $855 million-$865 million, up $65 million at the midpoint.

This implies an adjusted EBITDA margin of approximately 41.7%, up 130 basis points from our prior guidance. The increase is driven by higher volumes attributable to ramp capture and stronger operating leverage across our existing businesses. Our updated guidance also includes approximately $60 million of incremental revenue and $20 million of incremental adjusted EBITDA from the recent acquisitions of Omnetics, Schatz, and StratEdge. We are raising our margin outlook despite approximately 30 to 40 basis points of dilution from the acquisitions completed this year. We expect this dilution to be temporary as we drive margin improvement through the execution of our proven VPC playbook and the implementation of Arxis EDGE. Turning to slide 12, we show our latest organic growth expectations by end market, incorporating our third quarter results and outlook for the remainder of the year.