Arxis, Inc. Q3 FY2026 earnings call

• Strong Financial Performance: Q3 revenue reached $564 million (up 36% YoY), driven by 29% organic growth and 7% from acquisitions. Adjusted EBITDA was $256 million (up 67% YoY) with an expanded margin of 45.4%. Free cash flow surged 117% to $150 million.
• Growth Drivers ('Ramp Capture'): Outperformance above the long-term algorithm is attributed to 'ramp capture,' where multiple platforms (e.g., Patriot, F-35, 737) ramped simultaneously in 2026. This increases the recurring revenue base without necessarily changing the underlying growth rate.
• M&A Strategy: Completed two acquisitions (Schatz Bearings and StratEdge) for ~$151 million (<10x 2027 EBITDA). These deals complement existing RF/microwave and bearing capabilities. The partnership with ArcLine remains core to sourcing and execution.
• Business Model & Operations: Growth is supported by proprietary technology, long platform lives, and a decentralized operating structure ('ArcSys Edge'). The company focuses on solving technical problems rather than acting as a secondary source for supply chain issues.
• Long-Term Algorithm: The long-term target remains high single-digit organic revenue growth and low double-digit adjusted EBITDA growth, assuming no outsized ramp capture or market tailwinds.

The transcript does not provide specific financial figures (revenue or EBITDA) broken down by individual product segments. Management states that performance was consistent across the portfolio, with both the electronic components and mechanical component segments delivering similar levels of strong organic growth. Revenue contribution percentages for these segments are not disclosed.

• Full Year 2026 Raised: Revenue guidance increased to $2.05–$2.07 billion (midpoint up $90M). Adjusted EBITDA guidance raised to $855–$865 million (midpoint up $65M), implying a margin of ~41.7%.
• FY2027 Outlook Introduced: Revenue expected at $2.4–$2.5 billion, representing 10–15% organic growth. Adjusted EBITDA projected at $1.01–$1.06 billion, with margins of 42.1–42.4%.
• Key Assumptions: 2027 guidance includes 10–15% organic growth driven by mid-single-digit pricing, mid-single-digit new business, and 0–5% continued ramp capture. Margin guidance includes 20–30 bps dilution from 2026 acquisitions.

• Normalization of Growth: Current growth rates exceed the long-term algorithm due to simultaneous platform ramps; management cautions against extrapolating these rates indefinitely.
• Acquisition Dilution: Recent M&A activity is expected to temporarily dilute margins (approx. 100 bps in Q4 2026) before being offset by integration efficiencies.
• Supply Chain Constraints: While ARCSIS is insulated as an upstream manufacturer, customers face supply chain struggles; however, the company’s strategy is to avoid short-term second-sourcing opportunities to maintain long-term strategic focus.

Q: Sheila Kahyaoglu (Jefferies) asked about Q4 seasonality and margin drivers given the robust Q3 results.

A: CEO Kevin Perhamus explained that Q4 revenue typically steps down due to fewer working days from holidays and intentional preventative maintenance. Regarding margins, he noted that while Q3 saw high-single-digit pricing (vs. normal mid-single-digit) and operating leverage, this is not a new standard. CFO Azad Badakhsh added that Q3 had ~40bps of M&A dilution, which will increase to ~100bps in Q4 as new acquisitions fully contribute, but full-year margin guidance remains strong at ~41.7%.

Q: Kristine Liwag (Morgan Stanley) inquired why organic growth significantly exceeded the historical 9% algorithm and if the 10-15% FY2027 guidance represents a return to normalized rates.

A: Perhamus attributed the outperformance to 'ramp capture,' where multiple key platforms (defense and commercial aerospace) ramped simultaneously in 2026, stacking demand. He confirmed that FY2027 guidance reflects a more normalized rate closer to the long-term algorithm, though still north of it due to visible continued ramping and secured revenue for next year.

Q: Peter Arment (Baird/Goldman Sachs) asked about the visibility of secured revenue for FY2027 and potential long-term agreements in defense missile programs.

A: Perhamus stated they aim to start the year with roughly half their targets filled, providing confidence in the 10-15% growth range. Regarding defense frameworks, he noted initial conversations are underway but nothing is committed yet; the company prefers purchase-order-to-purchase-order basis for better visibility and control rather than long-term fixed agreements.

Q: John Godyn (Citi) sought clarification on incremental margin outlook, specifically the role of price vs. productivity and whether new business margins differ from existing ones.

A: Perhamus reaffirmed the VPC algorithm assumes mid-single-digit pricing and cost control leading to 50% incremental EBITDA conversion. He noted that current higher conversion was partly due to one-time pricing adjustments from prior acquisitions but expects reversion to 50%. He emphasized that new business margins are consistent with existing business margins across all segments and markets.

Q: Ken Herbert (RBC Capital Markets) asked how the company balances pursuing new business opportunities amid supply chain constraints with maintaining price discipline and avoiding 'second-source' traps.

A: Perhamus clarified that ARCSIS does not strategically pursue second-source roles to fill customer supply gaps. Instead, their 'new business engine' focuses on engineering teams solving technical problems to get designed into platforms as primary suppliers. They manage capacity via decentralized general managers who invest in CapEx proactively, ensuring they can meet demand without compromising long-term strategic positioning.