Arxis, Inc. (ARXS) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Arxis Second Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. I would now like to turn the conference over to Bryan Wendlandt, Head of FP&A and Investor Relations. Please go ahead.

Good morning, and welcome to the Arxis Second 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 begin with the highlights from the quarter and what drove our performance, then spend a few minutes discussing why we continue to believe that Arxis is well positioned to compound over the long term. With that, let's get started on Slide 3. We delivered another excellent quarter with second quarter sales of $501 million, an increase of 25% year-over-year and adjusted EBITDA of $211 million, up 38%. The strong revenue growth translated into adjusted EBITDA margins of 42.2%, an expansion of 390 basis points year-over-year. Revenue growth was balanced across our key drivers. New business wins, pricing and acquisitions each contributed mid-single-digit growth with continued demand across our underlying markets contributing the remainder. This performance was broad-based. Each of our 3 end markets delivered double-digit growth. Both of our segments grew double digits and no single customer platform or program meaningfully drove these results. That breadth is consistent with the diversified business we've built. Beyond the operating performance, we also announced 3 additional acquisitions whose combined EBITDA exceeds our internal annual M&A target. I'll come back to those in a few minutes, but they demonstrate the same repeatable acquisition strategy we've built at Arxis in partnership with Arcline. Overall, our first half performance and increased secured revenue gives us increased confidence in the balance of the year and supports our decision to raise our full year guidance. Azad will walk through the updated outlook and assumptions in greater detail in a few minutes. Turning to Page 4. I want to briefly connect the quarter's results back to our differentiated business model and playbook because the performance reflects consistent execution against both. At our core, Arxis is an engineered components company. We develop proprietary products that solve difficult engineering problems and become deeply embedded in our customers' platforms. Once we're designed in, those positions typically remain in place for decades. Our confidence in the model comes from the combination of proprietary technologies, broad diversification and long platform life cycles. Together, those characteristics create a company designed to perform consistently over long periods of time. Finally, we are also balanced across our end markets and between our Electronic and Mechanical segments. While the products and applications may differ, the underlying business model is consistent across the entire company. On Page 5, what differentiates Arxis over the long term is our proprietary Arxis Edge playbook. It starts with our decentralized operating structure. Our business units move quickly, stay close to their customers and are empowered to make decisions. At the same time, the entire organization remains connected through a common operating system and shared processes. The second piece is our new business engine. We take a systematic approach to identifying and winning new opportunities by bringing together our engineers, sales teams and business units to solve customer problems. We align incentives across those teams so everyone is working towards the same objective. Year-to-date through June, new business bookings have remained very strong, and the growth of those new business bookings is in line with our overall organic growth rate. That level of activity more than supports our new business growth target and reinforces our confidence in our ability to consistently grow faster than the markets we serve. The final piece is our repeatable acquisition engine. Turning to Slide 6, I'll show you what that looks like in practice. Since our IPO in April, we've announced 3 additional acquisitions: Omnetics, MagCanica and Blue Line, which we just announced yesterday. From the outside, these businesses look very different. They make different products, solve different problems for our customers and operate in different niches. But underneath, they're all exactly the kind of business that we're looking for. Every one of them fits the same acquisition criteria we followed since Arxis was formed. They all bring additional technologies, customer relationships and engineering talent into the portfolio, giving us more opportunities to generate new business over time. For example, Omnetics brings industry-leading miniature interconnect technology, expanding our capabilities in harsh environment electronic interconnects. MagCanica has proprietary torque sensing technology that enhances our position in high-precision sensing applications and creates new opportunities across aerospace and defense. Blue Line expands our offering of proprietary sensing technologies, including high reliability precision position sensing and motion control systems. Finding businesses that fit the model is only part of the equation. Having a repeatable process to evaluate and execute those opportunities is just as important. The Omnetics acquisition is a good example of the power of the Arxis Arcline partnership. Let me walk through that on the next slide. Omnetics is a business I've admired for about 20 years because it fits the Arxis business model extremely well. It has proprietary technology, deep engineering capability and highly differentiated products that are designed into platforms for decades. The opportunity came to market right in the middle of our IPO process. During this time, we were focused on becoming a public company, but we did not want to miss out on a business like Omnetics. That's where having a unique partner like Arcline, whose principals will be long-term holders of our stock truly makes a difference. Our team stayed focused on understanding the business, developing the operating plan and determining how Omnetics would fit within Arxis, while Arcline worked in parallel on diligence, financing and transaction execution. That allowed us to move quickly without taking our eye off either priority. That's the real advantage of the partnership. It expands our capacity to identify and execute acquisitions while our teams remain focused on creating value. And that's not unique to Omnetics. It's the same process we followed across more than 35 acquisitions over the past 6 years. And it's one of the reasons we continue to see a significant runway ahead. With that, I'll turn it over to Azad to walk through the financials and our 2026 outlook.

Thanks, Kevin, and good morning, everyone. I'll begin on Slide 8. In summary, we delivered an outstanding second quarter with strength across the entire business. Sales were $501 million, an increase of 25% year-over-year, consisting of 21% organic growth and a 4% contribution from the Olden Steels, Micro-Tronics and MagCanica acquisitions. All 3 end markets delivered strong double-digit growth organically. Turning to profitability. Second quarter adjusted EBITDA was $211 million, with adjusted EBITDA margins expanding 390 basis points year-over-year to 42.2%. The margin expansion was driven by very strong revenue growth, which provided meaningful operating leverage. We also benefited from continued operational improvements, particularly within our Mechanical Components segment, where cost optimization initiatives continue to gain traction, along with disciplined pricing and the operating leverage generated by new business wins. Free cash flow was $127 million, an increase of 261% year-over-year, reflecting the higher earnings and improved net working capital. The working capital timing items that I discussed on the first quarter call are beginning to normalize, and we expect free cash flow generation to build through the second half of the year. Turning to Slide 9, I'll provide a brief update on our capital structure. Following another quarter of strong operating performance and free cash flow generation, our balance sheet remains well positioned to support our long-term capital allocation strategy. In April, we used a portion of the IPO proceeds to repay approximately $946 million of our Term Loan B, materially strengthening our balance sheet while significantly reducing annual interest expense by more than $70 million versus 2025. In June, we repriced the remaining Term Loan B by an additional 25 basis points, reducing annual cash interest expense by an incremental $5 million. As of June 30, net leverage was below 2x, and we had approximately $1.1 billion of available liquidity, including cash on hand, our fully undrawn revolving credit facility and available delayed draw term loan capacity. So we remain very well positioned to continue executing our disciplined acquisition strategy. Turning to Slide 10. As Kevin mentioned, we're raising our full year sales and adjusted EBITDA guidance to reflect the strong first half performance. On revenue, we now expect a range of $1.96 billion to $1.98 billion, an increase of $100 million at the midpoint versus our prior guidance. At the midpoint, that represents 24% year-over-year growth, including approximately 20% organic growth, which is an increase of 5 percentage points compared to our prior guidance. On adjusted EBITDA, we now expect a range of $790 million to $800 million, an increase of $70 million at the midpoint versus our prior guidance. Adjusted EBITDA margins are now expected to be 40.4%, up from 38.8% previously, representing an additional 160 basis points of margin expansion compared to the prior guidance. I would like to note that the updated outlook includes the expected contribution from the MagCanica and Blue Line acquisitions, but does not include the contribution from the pending Omnetics acquisition. On Slide 11, these are the organic growth assumptions embedded in our updated 2026 guidance by end market. Across the 3 end markets, we're assuming organic growth of approximately 20%, supported by healthy market demand, disciplined pricing and new business generation. As we progress through the year, additional bookings have increased our secured revenue, giving us greater visibility into the balance of 2026. That increased visibility supports our updated guidance and our confidence in approximately 20% organic growth this year. With that, I will turn it over to the operator to open the line for questions.

[Operator Instructions] our first question comes from Kristine Liwag with Morgan Stanley.

17% organic growth last quarter, 21% this quarter. You guys are just printing organic growth well above peers and significantly higher than the growth algorithm you guys have shared in the past. I was wondering, can you talk more about the underlying drivers of how you get to that 21%? How much of the new business win from Arxis Edge is driving this? And I know you raised the outlook for the year, but it still seems a little bit conservative considering what you've been able to print for the first half.

Yes. So yes, let me break it down into our VPC algorithm. The organic growth, the volume piece breaks down into 2 separate pieces. The new business remains at mid-single digit. The price that we're gaining remains at mid-single digits. So all of the delta that you're seeing is in the base business or the market growth rate, which is now coming in at low double-digit growth rate. So that's really the only change. So no difference in the new business, no difference in the price, really just continued market strength across all 3 end markets. And -- in terms of your second -- the second part of your question about what we're seeing for the full year, as a reminder, we use Arxis EDGE. We keep careful track of every single purchase order that comes in goes into Arxis EDGE, 6,000 purchase orders a month. We keep track of the secured revenue that we have by customer, by program, by market. And the secured revenue leads us to a full year revenue guidance number. Right now, we have 95% of the year secured, which is exactly where we should be at this point in the year. And that leads to the guidance number that we're providing. So we believe it's accurate because we have actual firm demand behind it. We're not forecasting based on trends or news. We're forecasting based on hard backlog.

Great. Super helpful. And if I could follow up on deals. The business model of the industrial compounder has been pretty popular in the industry. But what stands out also is that you guys have been able to find deals and close on them this year at a pace slightly above peers as well. Can you talk more about the pipeline of what you're seeing? And historically, you were around that 5 per year. Is that where we're still kind of tracking for this year and next year?

Yes. It's always hard to nail down the exact timing. As you know, we've done 35 acquisitions since we started building Arxis around 6 years ago. So we do about 5 or 6 per year if you average out all the years. But they're actually -- if you look back, there have been years with 2 acquisitions and there have been years with 12 acquisitions. So I don't want to commit to a certain number that happened per year. We've announced 3 since the IPO, but remember, we did one back in January as well, Micro-Tronics, so 4 so far this year have been announced. And the pipeline remains as active as ever. Just because we've announced 4 doesn't mean that we won't continue to try to do more acquisitions. We have plenty of capacity to source and integrate acquisitions. And remember, we have our partners at Arcline who do this for a living, 60 professionals that are out there looking for new deals and helping us close deals all the time. So the pipeline is as active as it's ever been. There are thousands of potential companies out there to buy, and we're evaluating many of them right now.

Our next question comes from Sheila Kahyaoglu with Jefferies.

Congrats on another great quarter. I wanted to hone in maybe on Omnetics and MagCanica. So 2 questions, I guess. One is any financials you could provide around that? Is it fair to say it's around $75 million of EBITDA? And KP, you said you've admired this company for half its lifespan essentially 20 years. I'm sure it was a very competitive process with peers like Amphenol probably looking at it. Can you talk about what got you guys interested, how you think about expanding the scope of this business and how Arcline was helpful in that process?

Okay. Let me try one at a time. Sheila. So first of all, I think you asked about the kind of the size of the deals. And if we just zoom out, I think this is very interesting to look at. We have Blue Line, MagCanica and Omnetics. And across the 3 deals, I'd call them small, medium and large. And that's important because we're able to do small, medium and large acquisitions all simultaneously. We do not discriminate based on the size of the deal. What we're really looking for is a fit from a business model perspective, and we want to have the ability to grow the EBITDA as fast or faster than the base business and buy down the multiple to less than 10 over 3 years, and we've described that criteria in the past. But they fit in different ways to the company. Blue Line will be a product line inside of a business unit. MagCanica will be a business unit and Omnetics part of a block that could be its own block because it's that size. And we can integrate them all simultaneously because they go into different parts of the company. So we're not giving specific numbers around the size of the individual acquisitions. But just as a framework to think about it, I think that's how I would think about it. Then you asked about Omnetics. And yes, it's a company that I've been aware of and been looking at for a long time. Like I said in the opening remarks, around 20 years now. It's a fantastic company. It's a connector company that has a lot of proprietary technology. It's got the same end market mix that Arxis has. So it's just perfect for us. It's differentiated. The business model of getting the proprietary products designed into platforms and then they stay there for decades, all the same as Arxis. What we'll be able to do is they have customers that we don't have. We have customers that they don't have. We'll be able to cross-sell the products. We'll be able to put them in Arxis EDGE and learn from them and they'll learn from us. And we'll use the BPC algorithm to expand the margins and get them up to the Arxis average margins over some period of time.

Our next question comes from Peter Arment with Baird.

great results. KP, maybe just to follow up on maybe Sheila's M&A question. I guess since.. Since coming public, maybe you've gotten on more people's radar screen. Has that picked up any further M&A conversations? Or is the pipeline well established and nothing new has come in since you come public?

To be honest, Yes, to be honest, it hasn't changed anything. The pipeline is large with thousands of companies in it across many different products and across many different markets. One thing that I would point out, though, is in the Omnetics process, and I failed to mention this earlier, it was a competitive process, but it was somewhat limited because remember, the Omnetics owners were looking for shares in a public company as consideration. And if we were not a public company, we would not have been able to participate in that process. So the timing really worked out perfectly. The process was kicked off during our IPO process. And as I said in the opening remarks, we -- I don't know that we would have been able to bring the company public, do a good job with that and be able to diligence and close the -- or work on the Omnetics deal simultaneously as well as we did without the partnership with Arcline. So that was really helpful. And then the fact that we became public right at that time, and we were able to use our new public equity to fund the deal was essential because that was a criteria of being able to do it. So yes, it maybe not expanding the pipeline, but it gave us a currency that we were able to use to acquire Omnetics, which was essential.

That's great color. And then just a quick follow-up. Just we've seen a lot of pressure on the primes to ramp up production kind of in missile, missile defense. You guys have some exposure through your business. Are you seeing any kind of like LTA agreements or anything that you're being asked to look at just to lock down long-term supply agreements?

There's a lot of conversations going on in that area with these framework agreements. So I would say we've heard about them, and we are talking to people about it, but we haven't done anything definitive yet. I think those -- remember, we're deep in the supply chain. So we're a few layers away from the government. We're -- in some cases, we supply directly to the primes. In other cases, we supply to Tier 2, 3 suppliers. So they're making their way through the supply chain. And like I said, we're having conversations, but nothing definitive yet.

Our next question comes from Connor Dessert with Goldman Sachs.

You got Connor on for Noah today. In your prepared remarks, you commented on the strength in the Mechanical segment's margin. And if I did my 10-Q math right this morning before the call, it looks like that margin stepped up to about 42.5% in the quarter from 37.5% last quarter. We had kind of imagine that margin approaching the electronic components margin over time, but the step-up kind of begs the question. Is that now the run rate margin of that business? Or were there some onetime items there that kind of come out and it's a little bit lower through the rest of the year and it approaches electronic components over time?

Connor, this is KP. I'll take that one. So first of all, yes, the mechanical components, really, that team did a fantastic job in Q2. I would zoom out and look at the whole first half as a better number to use for their kind of run rate margin, which is still over 40%. It's just 40.1% in the first half. And the 42%, just incredible operating leverage on some fixed costs. And -- but there's normal quarterly variation, which will kind of push things up and down by a few percentage points. So that's why I think it's better to look at the 40% for the first half kind of use that going forward. If I could take another minute and just maybe talk about how -- or add some color to how the Mechanical segment did this. I think it's just a testament to the playbook and to the decentralized structure that we have. Remember, we did a large acquisition in the Mechanical segment in 2024. And what the team has done over there is really decentralize that large acquisition. And when you decentralize a company and empower the individual business units and hold them accountable for results, really good things happen. 67% conversion margin is the conversion margin the Mechanical segment has achieved over the last year in the first half. And the -- they've grown 26%, like just over 20% organically. And they have exactly the same number of people that they had last July. So 20% organic growth, same number of people. And there's 2 main categories that we spend money on, material and people. And so if you can grow your business 20% and have the same number of people by decentralizing and empowering people, you get that kind of conversion margin of 67%. So that's what happened.

Okay. I appreciate all the color there. That's really helpful. And if I could ask one more quick one. Just looking at the organic growth outlook being raised at roughly 20% across the 3 end markets versus last quarter's outlook of mid-teens. Are there any drivers end market by end market that are driving the better outlook specifically? I guess I'm trying to understand what have you guys seen improve just in the last few months versus what may have been some looking back relative conservatism in the outlook by end market last quarter?

Yes. All end markets are now forecasted to grow at the same rate and the increase in our guidance is very uniform across the end markets. So it isn't one end market, and it isn't one thing within any of the end markets. It's -- we're very diversified across many platforms and customers, and the growth is very broad-based and diversified. So we feel really good about that. In terms of your question about maybe what changed then since the last time we spoke, it's pretty simple. What happened, we've had 3 additional months of bookings come in and 3 additional months to build secured revenue for the year. And those months came in much stronger than we expected. And so we booked more purchase orders. The backlog for the year increased faster than we thought. And so we're raising the guidance accordingly, and we're using secured revenue to do the calculations. And those calculations lead to kind of a constant growth rate across all 3 end markets because that's the way the backlog looks.

Our next question comes from Ken Herbert with RBC.

You've seen some nice improvement certainly in the second quarter in free cash flow. And I know Azad, I think in your remarks, you called out some of the working capital items gaining momentum. How should we think about cash generation into the second half of the year?

Sure, sure. So as you've heard me say, free cash flow conversion can be somewhat lumpy in a given quarter, but it generally does smooth out on an annual basis. As you said, in Q1, we saw that lumpiness at play. This quarter, free cash flow conversion was much stronger and largely driven by our record shipment levels. accounts receivables, payables, inventory and accrued expenses all behaved as we expected given our strong growth this quarter. And to your question, we do expect this improved conversion trend to continue through the balance of the year. And the full year free cash flow conversion, we expect to be very much in line with our internal targets.

Okay. That's helpful. And just at a high level, how do we think about -- with obviously the step-up in organic growth, are you seeing any pressure at capacity in any locations? Or is there any opportunity maybe that would be a positive to maybe step up CapEx as you think about meeting demand? Or just where are you in terms of capacity? And as organic growth continues to outperform, how do we think about that as an opportunity from an incremental margin perspective?