ARXS — Q2 2026 Financial Report Analysis

Sales up 25%, but IPO costs wiped out the profit

Arxis makes specialised electronic and mechanical parts used in military, space, aircraft and industrial equipment. In its first quarter as a public company (it listed on Nasdaq on April 16, 2026), revenue rose 25.0% to $500.7 million. Most of that came from the businesses it already owned: organic revenue, which leaves out companies bought in the last 12 months, grew 21.0%. Management says the growth came from "broad-based growth across all of our end markets, led by Industrial Technology". Even so, operating income fell 61% to $32.7 million and the company posted a net loss of $4.9 million. The cause is one-time IPO costs, mainly a $107.1 million share-based compensation charge (pay given as stock rather than cash). Without those costs the underlying business did well.

At a glance

• 21.0% organic growth. Higher volumes added mid-teens growth and price increases added mid-single digits. Acquisitions added another $16.4 million (about 4 points of growth).
• 6.5% operating margin, down from 20.7%. Excluding the $107.1 million stock-pay charge, operating income would have been about 28% of revenue (our arithmetic). That is higher than a year ago.
• $946 million of debt repaid with IPO proceeds. Net interest expense fell 31% even after an $11.4 million debt-refinancing charge, and debt went from $2.63 billion at year-end to $1.72 billion.

Key figures, Q2 2026 (quarter ended June 30)

The prior-year column is the "Arxis Businesses". These are the same four sponsor-owned companies, combined in the filing as entities "under common control" before they were merged under Arxis, Inc. at the IPO. Revenue and operating lines are therefore directly comparable. Taxes and per-share figures are not, because the structure changed.

Adjusted EBITDA is the company's own profit measure. It is earnings before interest, tax, depreciation and amortisation, and it also leaves out stock pay, deal costs and other items management treats as non-recurring. It shows how the factories performed. It does not show what is left for shareholders.

Segments and end markets

Mechanical Components had both the fastest growth and the biggest margin gain, with segment adjusted EBITDA up $42.3 million. The filing gives two reasons: "higher sales volumes, which increased operating leverage" (fixed costs spread over more units) and cost work. Part of the growth was bought: the filing attributes some of it to the Oldham (UK seals, bought June 2025) and Micro-Tronics (bought January 2026) acquisitions. Electronic Components grew 20.6%, "primarily due to higher revenue across our Industrial Technology and Defense and Space end markets". It has almost no organic-vs-acquired split to worry about, because the recent deals sit mostly in the mechanical side.

By end market, combining both segments:

Defense and space is still almost half the business. Industrial technology grew fastest; the filing links it to "continued investment in automation and electrification." All three markets grew at more than 20%, so the quarter did not depend on one program or one customer group.

What the headline numbers hide

• The loss comes from IPO accounting, not the business. Share-based compensation was $107.1 million, against $2.2 million a year earlier. Most of it ($73.1 million) was a one-time catch-up charge: before the IPO, employees held equity awards in the old partnerships, and these were converted into Class A stock awards. Another $7.5 million was employer payroll tax on shares that vested. This is why SG&A (selling, general and administrative costs) jumped from 20.1% to 38.7% of revenue.
• Some of the stock pay will recur. The founder-related "convertible common stock" (a single share that can convert into Class B stock if share-price and service conditions are met) still has $124.3 million of unrecognised expense. That will be booked over 4.8 years, roughly $6.5 million a quarter. Ongoing RSU grants will add to it. GAAP margins will recover, but not all the way to the adjusted figures.
• Other one-off items in the quarter: an $11.4 million loss on paying off debt early (inside interest expense), and a $13.3 million accrual under a tax receivable agreement. Under that agreement Arxis must pay 85% of any cash tax it saves from deducting the convertible-stock compensation to the holder of that stock. In effect, most of that tax benefit goes to the holder rather than to public shareholders.
• The prior-year net loss is not a fair comparison. In Q2 2025 the combined businesses booked $58.3 million of tax on $29.1 million of pre-tax income, an effective rate of 200.6%. This quarter's tax rate was -247.2%, because $3.5 million of tax was charged on a $1.4 million pre-tax loss: the stock-pay charge cannot be deducted for tax. Neither quarter's bottom line shows normal earning power. For the first half, which is less distorted, net income was $48.4 million and the effective tax rate was 28.4%.
• Cash flow is good. First-half operating cash flow was $174.4 million, against $68.6 million a year earlier and $48.4 million of net income. Free cash flow after $22.3 million of capital spending was $152.1 million. Receivables rose to $273.4 million from $216.9 million at year-end, a 26% increase, about in line with 25% sales growth. Inventory freed up $15.1 million of cash because the company bought less material, although the balance-sheet figure rose to $337.7 million, partly because of the businesses it acquired.
• Acquisitions are a real but smaller part of growth. Acquired revenue was $16.4 million in the quarter, about 4 of the 25 points of growth. Arxis paid $185.8 million in cash for acquisitions in the first half (Micro-Tronics and MagCanica, a torque-sensor maker bought June 1).

Debt and ownership after the IPO

The IPO sold 46.6 million Class A shares at $28 and raised $1.22 billion net. Of that, $946 million went to paying down the term loan. At June 30, Arxis had $1.73 billion of term-loan borrowings, $494.7 million of cash, an undrawn $201 million delayed-draw term loan and $396.3 million of unused revolving credit. That puts net debt at about $1.24 billion, roughly 1.6 times first-half adjusted EBITDA annualised (our arithmetic, not a company figure). This is moderate for an acquisitive industrial company. In June, the lenders also cut the loan's interest margin by 0.25 percentage points.

The ownership is unusual. Public investors hold Class A shares (76.8 million outstanding), which carry one vote each. There are 340.7 million Class B shares, which carry 20 votes each. So the pre-IPO owners keep control even though public shareholders share profits equally per share. This is not an "Up-C" structure: the operating businesses are fully owned by Arxis, Inc., and there is no minority interest in the accounts.

Takeaway: The 21% organic growth and the 3.8-point rise in adjusted EBITDA margin show the business is doing well. The GAAP loss comes almost entirely from a one-time stock-pay catch-up tied to the IPO. What matters next is whether GAAP operating margin returns toward the mid-20s now that the IPO charges are booked, and how much of that remaining gap is permanent stock pay.

What to watch

The 10-Q gives no numerical guidance. Management describes demand as strong, citing "increasing U.S. and allied budgets", aircraft production rates and spending on industrial automation. Our view: Q3 will be the first quarter without most of the IPO charges. That makes it the first real test of Arxis's earnings power as a public company. Interest costs should also be clearly lower, at about $28 million a quarter once the $11.4 million refinancing charge is stripped out of Q2 (our arithmetic). Three things to watch:

1. Whether organic growth stays near 20% as year-ago comparisons get harder.
2. Whether more bolt-on deals get funded from cash and the delayed-draw loan (which can be drawn until February 2027), and so slow the reduction in debt.
3. How large the recurring stock-pay expense turns out to be once the one-time items are gone.