Arxis, Inc. Class A Common Stock Q2 FY2026 earnings call

Core Business Model and Competitive Differentiation

• ArcSys' long-term competitive advantage comes from the proprietary ArcSys Edge playbook, built on three pillars:
  • Decentralized operating structure: Business units operate quickly, stay close to customers, and are empowered to make independent decisions, while aligned across the company via a common operating system and shared processes.
  • Systematic new business engine: Cross-functional teams (engineering, sales, business units) collaborate to identify and win new customer opportunities, with aligned incentives to drive shared growth. Year-to-date new business bookings are strong, growing in line with overall organic growth and meeting the company's long-term new business targets.
  • Repeatable acquisition engine: A structured process to source and integrate targets that fit ArcSys' core business model.
• ArcSys maintains balanced market exposure across end markets and between its electronic and mechanical segments, with a consistent underlying business model across the entire portfolio.

Acquisition Activity Post-IPO

• Since its April 2026 IPO, ArcSys has announced four acquisitions: Microtronics (January), Omnetics, Mechanica, and Blueline (announced the day before the call). All acquisitions fit ArcSys' target criteria: they add proprietary technologies, new customer relationships, and engineering talent to the portfolio, with long platform lifecycles consistent with ArcSys' model.
• Key acquisition contributions: Omnetics adds industry-leading miniature harsh-environment interconnect technology; Mechanica adds proprietary torque sensing that strengthens ArcSys' position in high-precision sensing and creates new aerospace and defense opportunities; Blueline expands proprietary high-reliability precision position sensing and motion control offerings.
• The partnership with long-term ArcSys shareholder ArcLine expands acquisition execution capacity: ArcLine handles diligence, financing, and transaction execution in parallel while ArcSys' internal team focuses on core strategic priorities and business integration, allowing the company to pursue multiple deals simultaneously without diverting focus from core operations. ArcLine's 60-person team also supports ongoing deal sourcing.

Financial and Operational Performance

• Q2 2026 adjusted EBITDA was $211 million, with adjusted EBITDA margin expanding 390 basis points year-over-year to 42.2%, driven by strong revenue growth that created meaningful operating leverage, plus ongoing operational improvements.
• Q2 free cash flow was $127 million, up 261% year-over-year, driven by higher earnings and normalizing working capital timing effects. The company expects free cash flow generation to strengthen through the second half of 2026.
• The balance sheet is strongly positioned: following repayment of $946 million of term loan B with IPO proceeds and subsequent repricing, annual interest expense has been reduced by more than $75 million versus 2025. As of Q2 end, net leverage is below 2x, with $1.1 billion of available liquidity to support the ongoing acquisition strategy.

Overall company Q2 2026 revenue was $501 million, up 25% year-over-year, with 21% organic growth and 4% contribution from completed acquisitions (Oldham Seals, Microtronics, Mechanica). All three end markets delivered strong double-digit organic growth. The mechanical components segment achieved a 40.1% run-rate margin through the first half of 2026 (with 42.5% margin in Q2, including normal quarterly variation), grew 20%+ organically year-over-year, and benefited from ongoing cost optimization, disciplined pricing, and operating leverage from new business wins that drove meaningful margin expansion. Organic growth is projected to be approximately 20% year-over-year across all three end markets for full-year 2026, with broad-based, uniform strength across all segments and end markets.

• ArcSys raised its full-year 2026 guidance to reflect stronger-than-expected first half performance and higher secured backlog:
  • Full-year revenue guidance is now $1.96 billion to $1.98 billion, representing a $100 million increase at the midpoint versus prior guidance, and 24% year-over-year growth at the midpoint.
  • Organic full-year growth guidance is increased to approximately 20%, a 5 percentage point upward revision from prior guidance, with uniform growth expected across all three end markets.
  • Adjusted EBITDA guidance is now $790 million to $800 million, a $70 million increase at the midpoint versus prior guidance.
  • Adjusted EBITDA margin guidance is raised to 40.4%, up from 38.8% in prior guidance, representing an additional 160 basis points of expected margin expansion.
  • The updated guidance includes expected contributions from the Mechanica and Blueline acquisitions, but excludes any contribution from the pending Omnetics acquisition.
• Full-year 2026 CapEx is projected to be approximately 3% of revenue (~$60 million), which includes all growth CapEx required to meet current demand projections.
• Free cash flow conversion is expected to continue its improving trend through the second half of 2026, with full-year conversion expected to meet internal targets.
• Management does not provide guidance for 2027 at this time, and will release 2027 guidance following full-year 2026 planning.

No material risks or operational failures were discussed during this earnings call.

Q: The company has delivered much higher organic growth (21% in Q2) than its historical algorithm, and guidance was conservative relative to first half results. What is driving the outperformance, and why is the guidance set at its current level?

A: The only change from the historical VPC algorithm is stronger-than-expected base market growth, which is now tracking low double-digit, while new business contributions and pricing gains remain at their historical mid-single-digit levels. Growth is broad-based across all end markets. Guidance is set based on firm secured backlog, not forecasted trends: the company currently has 95% of full-year 2026 revenue secured in backlog, which supports the current guidance range.

Q: Since going public, has M&A activity or the deal pipeline changed? How active is the current pipeline, and what is the expected annual deal pace?

A: Going public has not meaningfully expanded the existing pipeline, which has thousands of target companies and has remained very active. However, public equity currency allowed ArcSys to compete for Omnetics, whose owners required public share consideration. Historically, ArcSys averages 5-6 acquisitions per year over the long term, with annual volume varying from 2 to 12 deals. Four acquisitions have been announced in 2026 to date, and the company has ample capacity to source and integrate additional deals this year.

Q: Q2 margin for the mechanical segment stepped up sharply quarter-over-quarter, approaching electronic segment margins faster than expected. Is this step-up sustainable?

A: The 42.5% Q2 margin included normal quarterly variation; the first half run-rate margin of 40.1% is a more accurate reflection of the current trend. The strong margin performance is the result of decentralized management of a 2024 large mechanical segment acquisition, which delivered 20% organic growth with the same headcount as the prior year, driving significant operating leverage. This result validates the company's decentralized operating playbook.

Q: Is the company seeing demand for long-term supply agreements (LTA) for missile and missile defense programs, which are seeing increased prime contractor production ramps?

A: The company is having active conversations about long-term framework agreements for missile and defense supply. As a deep-tier supplier (sometimes direct to primes, sometimes to tier 2/3 suppliers), these agreements are still working their way through the supply chain, and no definitive LTAs have been finalized to date.