Arxis (ARXS) Q3 2026 Earnings Call: Prognose dank Ramp Capture angehoben

Wichtigste Erkenntnisse

• Arxis wies für das dritte Quartal des Geschäftsjahres 2026 einen Umsatz von 564 Millionen US-Dollar aus, was einem Anstieg von 36 % gegenüber dem Vorjahr entspricht. Dies beinhaltet ein organisches Wachstum von 29 % sowie einen Konsolidierungsbeitrag aus Übernahmen von 7 %.
• Das bereinigte EBITDA stieg um 67 % auf 256 Millionen US-Dollar, während sich die bereinigte EBITDA-Marge, gestützt auf höhere Volumina, Preisanpassungen im hohen einstelligen Prozentbereich sowie Produktivitätsinitiativen, um 840 Basispunkte auf 45,4 % ausweitete.
• Der freie Cashflow stieg um 117 % auf 150 Millionen US-Dollar. Der Nettoverschuldungsgrad ging von 1,8x am Ende des zweiten Quartals auf 1,6x zurück.
• Das Management hob die Prognose für das Geschäftsjahr 2026 auf einen Umsatz von 2,05 bis 2,07 Milliarden US-Dollar und ein bereinigtes EBITDA von 855 bis 865 Millionen US-Dollar an.
• Für das Geschäftsjahr 2027 erwartet das Unternehmen einen Umsatz von 2,4 bis 2,5 Milliarden US-Dollar, ein organisches Wachstum von 10 % bis 15 % und ein bereinigtes EBITDA von 1,01 bis 1,06 Milliarden US-Dollar.
• Das Management führte das über dem langfristigen Modell liegende Wachstum auf den Hochlauf von Programmen („ramp capture“) zurück, da die Produktion über mehrere Plattformen hinweg stieg, darunter die Patriot- und andere Raketenprogramme, die elektronische Kampfführung der F-35, die 737 sowie Industrieanwendungen.

Wichtigste Finanzdaten

Das organische Wachstum in Q3 beinhaltete ein Neugeschäftswachstum im mittleren einstelligen Prozentbereich, Preisanpassungen im hohen einstelligen Prozentbereich sowie ein Wachstum im mittleren Zehnprozentbereich durch höhere Produktion auf bestehenden Plattformen. Das Management gab an, dass die Marge des Quartals zudem von operativem Hebel und Kostenoptimierung profitierte.

Geschäfts- und operative Entwicklung

Die Segmente Electronic Components und Mechanical Components erzielten ein ähnlich hohes organisches Wachstum. Das Management beschrieb die Nachfrage zudem als breit gefächert über die drei Endmärkte des Unternehmens hinweg.

Der Bereich Verteidigung und Raumfahrt profitierte von höheren Volumina auf etablierten Plattformen sowie einer gesteigerten Produktion bei Programmen der nächsten Generation. Die zivile Luftfahrt legte dank steigender Flugzeugproduktion und einer gesunden Nachfrage im Ersatzteilgeschäft (Aftermarket) zu. Die Industrietechnologie verzeichnete Stärke in den Bereichen Medizintechnik, Öl und Gas, Halbleiterausrüstung, Telekommunikation und Datenkommunikation sowie Quantencomputing.

Das Management erklärte, dass der Produktionshochlauf sowohl Produktionssteigerungen der Kunden als auch den skalierten Einsatz neuer Arxis-Komponenten auf bestehenden Plattformen widerspiegelt. Obwohl diese gleichzeitigen Hochläufe das Wachstum im Jahr 2026 über das langfristige Rahmenmodell des Unternehmens hinaus steigerten, rechnet das Management nicht damit, dass die aktuelle Wachstumsrate auf unbestimmte Zeit anhält.

Arxis schloss im bisherigen Jahresverlauf sechs Übernahmen ab, darunter Schatz Bearing und StratEdge im September. Der Gesamtkaufpreis belief sich auf rund 151 Millionen US-Dollar bzw. weniger als das 10-Fache des geschätzten bereinigten EBITDA für 2027. StratEdge ergänzt das Portfolio um Keramikgehäuse für Hochfrequenz- und Hochleistungselektronik, während Schatz das Präzisionslager-Portfolio des Unternehmens erweitert.

Prognose des Managements

Der Mittelwert der aktualisierten Umsatzprognose für das Geschäftsjahr 2026 stieg gegenüber dem vorherigen Ausblick um 90 Millionen US-Dollar, während der Mittelwert für das bereinigte EBITDA um 65 Millionen US-Dollar anstieg. Die Prognose enthält rund 60 Millionen US-Dollar an zusätzlichem Umsatz und 20 Millionen US-Dollar an zusätzlichem bereinigten EBITDA aus den Übernahmen von Omnetics, Schatz und StratEdge.

Das Management erwartet für das Geschäftsjahr 2026 eine Verwässerung der Marge von etwa 30 bis 40 Basispunkten durch die im Laufe des Jahres abgeschlossenen Akquisitionen. Für das Geschäftsjahr 2027 wird eine akquisitionsbedingte Verwässerung von rund 20 bis 30 Basispunkten erwartet.

Das Unternehmen erwartet im Geschäftsjahr 2026 in jedem seiner drei Endmärkte ein organisches Wachstum von etwa 20 % oder mehr. Für das Geschäftsjahr 2027 erwartet das Management ein vergleichbares organisches Wachstum von 10 % bis 15 % über alle Endmärkte sowie über die Segmente Electronic Components und Mechanical Components hinweg. Das Rahmenmodell für das Wachstum 2027 setzt sich aus Preisanpassungen im mittleren einstelligen Prozentbereich, Neugeschäft im mittleren einstelligen Prozentbereich und einem anhaltenden Hochlaufgewinn von 0 % bis 5 % zusammen.

Arxis behielt sein langfristiges Modell eines organischen Umsatzwachstums im hohen einstelligen Prozentbereich und eines bereinigten EBITDA-Wachstums im niedrigen zweistelligen Prozentbereich bei einer inkrementellen EBITDA-Konvertierung von rund 50 % bei.

Risiken und Beobachtungspunkte

Es wird erwartet, dass Umsatz und Margen im vierten Quartal im Vergleich zum Vorquartal aufgrund von weniger Arbeitstagen, Feiertagen und der normalen vorbeugenden Wartung zum Jahresende sinken. Das Management rechnet für das vierte Quartal zudem mit einer akquisitionsbedingten Margenverwässerung von etwa 100 Basispunkten, da kürzlich abgeschlossene Transaktionen für ein volles Quartal beitragen.

Es wird erwartet, dass die Preisanpassungen im hohen einstelligen Prozentbereich aus Q3 in Q4 wieder auf ein Niveau im mittleren einstelligen Prozentbereich zurückgehen. Das Management warnte daher davor, die bereinigte EBITDA-Marge von 45,4 % aus Q3 als neue Run-Rate zu betrachten, und verwies stattdessen auf den Ganzjahresausblick von rund 41,7 %.

Das Unternehmen schreibt die gleichzeitigen Plattform-Hochläufe des Jahres 2026 nicht unbegrenzt fort. Kapazitätserweiterungen werden schrittweise vorgenommen, sobald die Kundennachfrage durch Bestellungen sichtbar wird.

Laut Management wirken sich Lieferkettenengpässe derzeit nicht direkt auf Arxis aus, obwohl solche Probleme Kunden oder Zulieferer weiter oben in der Wertschöpfungskette betreffen könnten. Die Gespräche über längerfristige Vereinbarungen für Raketenprogramme sind weiterhin vorläufig; es wurden keine festen Zusagen bekannt gegeben.

Highlights aus der Fragerunde mit Analysten

• Saisonalität in Q4: Das Management führte den erwarteten Rückgang gegenüber dem Vorquartal auf weniger Arbeitstage und geplante vorbeugende Wartungsarbeiten zurück und nicht auf eine schwächere zugrunde liegende Nachfrage.
• Sichtbarkeit für 2027: Arxis strebt an, jedes Jahr mit rund der Hälfte des erwarteten Umsatzes als abgesichert zu beginnen. Laut Management stützten der bestehende abgesicherte Umsatz und kurzfristige Aufträge die Entscheidung, die Prognose für 2027 frühzeitig abzugeben.
• Margennormalisierung: Q3 profitierte von überdurchschnittlich starken Preisanpassungen und operativem Hebel. Das Management erwartet, dass sich die inkrementellen Margen wieder dem 50-%-Rahmenmodell des Unternehmens annähern.
• M&A-Pipeline: Arxis verfolgt mehr als 1.000 Unternehmen in seinem EDGE-System. Das Management gab an, dass die Pipeline gut gefüllt bleibt, wobei kleinere Übernahmeziele generell zu niedrigeren Multiplikatoren verfügbar sind als größere Transaktionen.
• Schatz-Integration: Schatz wird an der Seite von Kamatics integriert. Das Management erklärte, dass die Unternehmen über komplementäre Produkte verfügen, wobei Schatz eine Lücke im Lager-Portfolio von Arxis schließt und Cross-Selling-Chancen eröffnet.
• Kapazitätsstrategie: Geschäftsführer in rund 70 Werken und 51 Geschäftseinheiten bauen Kapazitäten stufenweise aus, sobald tatsächliche Bestellungen die Nachfrage stützen.

Vollständiges Transkript des Earnings Calls

Vollständiges Transkript der Telefonkonferenz

Ausführungen des Managements

Operator

Good morning, and thank you for standing by. Welcome to the Arxis Third Quarter 2026 Earnings Conference Call. [Operator Instructions] Please be advised that 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.

Bryan Wendlandt

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.

Kevin Perhamus

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 Components 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 continue 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 10x 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. And 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 our 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 '26 and full year 2027.

Azad Badakhsh

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 1.6x, down from 1.8x 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 provides 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 to $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 to $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're 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. We now expect organic growth of approximately 20% or greater across each of our three end markets, supported by continued customer demand and new business activity. This broad-based performance supports our increased full year guidance. And finally, on Slide 13, we're pleased to provide our initial outlook for next year. For FY 2027, we expect revenue of $2.4 billion to $2.5 billion, representing organic growth of 10% to 15% and adjusted EBITDA of $1.01 billion to $1.06 billion with an adjusted EBITDA margin of 42.1% to 42.4%.

Please note that 2027 adjusted EBITDA margin guidance includes approximately 20 to 30 basis points of dilution from acquisitions completed in 2026. Our 2027 guidance reflects continued ramp capture, which is expanding our revenue base faster than our long-term growth algorithm. That raises the revenue base we compound from. It doesn't change the growth rate. Our long-term algorithm of high single-digit organic revenue growth and low double-digit adjusted EBITDA growth is unchanged. Overall, we expect another year of strong organic growth and continued margin expansion. With that, I'll turn the call over to the operator for questions.

Operator

[Operator Instructions] Our first question comes from Sheila Kahyaoglu of Jefferies.

Fragen und Antworten

Sheila Kahyaoglu

The results are so good. I don't know what to ask actually. But maybe if we could talk about the top line first to start. Can you hear me okay, by the way? -- maybe just on the top line, can you give us a better feel for seasonality of the business as it relates to what's implied in Q4? I know you've talked about purposeful factory planning in the past and getting ready for that. And I guess what are some of the -- what have you assumed for Q4 performance, whether there's still a sense of that or to outperform what you've guided here?

Kevin Perhamus

Yes. No, you're exactly right. We've seen this in prior years as well. We stepped down a little bit from the Q3 revenue number because there are simply less working days in Q4. And that's a combination of holidays and then some intentional preventative maintenance that we do at the end of the year to gear up and get ready for next year. So that's all you're seeing. It's as simple as that.

Sheila Kahyaoglu

Okay. Perfect. And then maybe if I could just follow up with the -- if you could tease out what drove some of the robust margins in the quarter, 45%. It seems like it did carry some M&A dilution as well. So maybe if you could just level set us on the operating performance. Is this a new standard that you're going to put up here?

Kevin Perhamus

Yes, there was a little bit of dilution from the acquisitions, not that much. What really drove the results in the quarter was high single-digit pricing came through, and normally, that's mid-single digits. So we had a little bump from that and then the operating leverage. So I wouldn't call it a new standard. I would encourage you to zoom out and look at the full year guide, which is about 41.7% for EBITDA. So it's -- I think that's a better number to use and as a jumping off point as we go into next year.

Azad Badakhsh

Sheila, I'll just jump in and answer the question specifically about dilution. In Q3, we did see about 40 basis points of dilution. So our reported margin of 45.4% would have been approximately 45.8%, excluding the impact. In Q4, that dilution is going to increase as the full contribution of the three acquisitions that we just completed kick in. So expect dilution of about 100 basis points in Q4.

Operator

Our next question comes from Kristine Liwag of Morgan Stanley.

Kristine Liwag

Echoing what Sheila said on the performance, a very good revenue growth. But maybe taking a look back at 2026 so far, I mean, you look at the organic growth you guys have printed, you're at 17% in 1Q, 21% in 2Q and 29% in 3Q. I mean this is significantly above the growth algorithm you guys have talked about, which was historically 9%. So when we kind of take a look back here, where did you see the most difference in what your initial outlook was? Did you have more market share capture? Did you have better pricing? Are sunsetting things just not sunsetting? Because I think in terms of end markets, that's kind of fairly uniform in the industry. So you guys are doing something a little bit more special than peers, and it would be helpful to take a look back and see what drove that.

Kevin Perhamus

Yes, sure. I think that gives us a good opportunity to reiterate the concept that we talked about in the opening remarks, which is the ramp capture. We're designed in on platforms, and those platforms are built at a certain rate. It just so happens that in 2026, many of the platforms that we are designed in on ramped simultaneously. And it's somewhat intentional because we target growing platforms and the platforms that are growing tend to need our products because they are on the cutting edge of technology and performance. And so many of those platforms ramp simultaneously and stacked up in the Layer Cake model to create an outsized growth rate. We're cautious, though, to not extrapolate those ramps into the future, which is why we look at the long-term algorithm of high single-digit growth, and we talk about that over decades. But this is a little bit of an unusual time because of all the ramps happening simultaneously.

Kristine Liwag

Okay. Great. So the 10% to 15% is more going back to a more normalized rate. Is that a fair look?

Kevin Perhamus

That is fair. Yes, closer to a more normalized rate, but north of our long-term algorithm just because we can see that there will be some continued ramp. And that's visible to us already as we look into EDGE and we see our secured revenue and how it's shaping up for next year.

Kristine Liwag

Great. Super helpful. And if I could sneak a last one in. Regarding M&A, we've seen the valuation of a lot of aerospace defense assets in the public markets anyway drop. I was wondering when you look at the availability of pricing and availability of assets in the private market, how is the pool looking? Does this kind of pricing dislocation we're seeing in the public markets, is that echoed in the private? And how do you see your pipeline?

Kevin Perhamus

Yes. Honestly, it's not changed much at all. The pipeline is full. We're working on lots and lots of deals. We track over 1,000 companies in our EDGE system. And we're working on many things simultaneously. The market does sort of bifurcate down into large deals and small deals. The large deals are trading at higher multiples. And I don't think that, that's changed. And the smaller deals, which is like less than $25 million of EBITDA type companies tend to trade for the lower multiples, and that's actually reflected in what we announced in terms of Schatz and StratEdge. We'll be at less than 10x in 2027 on those two deals. So yes, it's -- we haven't seen anything change.

Operator

And our next question comes from Peter Arment of Baird.

Peter Arment

I'll echo everyone else's sentiments, nice results. K.P., can you remind us a little bit about your algorithm when you think about forward guidance for '27, like how much coverage you maybe have today and where you expect to be to start the year?

Kevin Perhamus

Yes. Sure. We like to start the year roughly half filled in. And I say roughly because it's a real -- it's a bottoms-up exercise. It's not tops down. It depends on the business units. So we can see that we are between what we already have secured for 2027 and what we have coming in the door very soon that we're going to be in a good position against that metric. And that's why we were confident enough to give this guidance here early, earlier than we probably expected to that we're going to see positive growth next year. So next year's guidance is 10% to 15%, which is mid-single-digit price, mid-single-digit new business and then 0 to 5% of continued ramp capture.

Peter Arment

Super helpful. And then just a quick follow-up. With all these missile framework agreements being established and you guys are being a strong supplier into the defense and space end market, are you seeing any potential opportunities there on some of these missile framing, any long-term agreements possible? Or any color there would be helpful.

Kevin Perhamus

There have been some initial conversations with customers. They're making their way through the supply chain, probably haven't all reached us yet. But we haven't committed to anything. We continue to -- we like to operate on a purchase order to purchase order basis because it gives us better visibility and we can -- we have more control. So there are conversations happening, but nothing firm yet.

Operator

And our next question comes from John Godyn of Citi.

John Godyn

I wanted to just focus on the incremental margin outlook. Obviously, you guys are performing very well. Maybe you can talk about the role of price versus productivity in driving the 50% incremental margins as we look out next year and any other puts and takes that we should be thinking through?

Kevin Perhamus

Yes, so we're just continuing to assume mid-single-digit price, mid-single-digit new business. And then the two of those things together create -- and sorry, the third piece is the cost control down to a very low single-digit growth rate. And when you put those three things together, it results in a 50% conversion margin plus just based on the gross margin that we have in our products. So the VPC algorithm, it's unchanged. It certainly -- we outperformed this year, and we've talked about why that is. There were some acquisitions that came through in '24 and '25 that had more opportunity for pricing adjustment and cost reductions. And so those have resulted in a higher conversion margin this year, but we think it will revert back to the 50% as we go forward.

John Godyn

Got it. And when we think about kind of the new business, new volume that's being added, that comes in at 50% incrementals as well? Or is that higher or lower than the enterprise average?

Kevin Perhamus

Yes. The new business margin is very similar to the existing business margin. The margin is very consistent across electronic and mechanical and across the three markets. So -- and lastly, in the OE and aftermarket. So our margins are pretty consistent across all the different ways that we slice the business.

John Godyn

Okay. And then just last one. Normally, I wouldn't ask you guys about supply chain, but things like semiconductors, et cetera, are coming up more and more as supply chain issues, you guys are knocking on 50% electronic components. So this is more just a temperature check. Anything in the supply chain of note? And how are you handling that?

Kevin Perhamus

No, nothing in our supply chain that -- those issues could impact the supply chain further upstream from us. But we're at the beginning of the supply chain. We're converting, in most cases, raw chemicals or metals into products. So not impacted.

Operator

And our next question comes from Scott Mikus of Melius Research.

Scott Mikus

Nice quarter. K.P., quick question, just kind of high level. I mean, whether we look at companies like TransDigm, Danaher, Roper, Ingersoll Rand, Fortive, Rollins, et cetera, we've just seen a lot of stocks that are M&A compounders not worked over the past roughly 3 to 5 years. I'm just curious, when you sit with Rajeev and the rest of the Board, why do you think those compounders stopped working? And when you're discussing with the Board, how do you make sure that doesn't happen to Arxis?

Kevin Perhamus

Yes. So we're focused on ourselves, so I really can't comment on the other compounders. But what we think is going to work over the long term and probably differentiate us is that we have the VPC algorithm. We have Arxis EDGE, right? So we can drive new business, and we're really focused on winning new business all the time that's coming through at a very steady mid-single-digit rate. And then we have the unique relationship with Arcline that others don't have, where we're going to be able to probably execute on more M&A than others. We can do big deals, small deals. We can do many deals simultaneously and being able to stay focused on new business, price and acquisitions simultaneously while controlling costs, not -- maybe not everybody can do that. We have a unique structure and a unique relationship that sets us apart.

Azad Badakhsh

Scott, the only other thing I would add is we're really religious about sticking to business models that we will only buy companies if they check our business model scorecard.

Operator

And our next question comes from Myles Walton of Wolfe Research.

Gregory Dahlberg

This is Greg Dahlberg on for Myles. I was just curious, in the 2027 outlook, is there any bifurcation in organic growth by segment? And then maybe following on to that, could you provide growth expectations by end market next year?

Kevin Perhamus

Yes. There is no bifurcation by segment or end market. We actually think all three of the end markets are going to grow in the same -- kind of the same rate, 10% to 15% organically. And the same is true for electronic and mechanical. So pretty consistent, very diversified as always.

Gregory Dahlberg

Easy enough. And then, Azad, maybe can you touch on your expectations for cash conversion next year?

Azad Badakhsh

Sure. Cash conversion for next year is going to be exactly what it -- the exact same framework it always is, which is we always focus on operational free cash flow, which is just simply EBITDA less CapEx, less change in net working capital. So you have a pretty good sense of EBITDA from our guide and revenue. Change in net working capital and CapEx, each contribute about 3% of revenue. So the math for operational free cash flow is pretty simple. And then I think the rest between interest and taxes is pretty easy to model.

Operator

And our next question comes from Noah Poponak of Goldman Sachs.

Connor Dessert

You got Connor on for Noah this morning. I had a quick question on what the updated full year margin guide implies for the next quarter. So I think if I have my math right, the 41.7% at the midpoint implies a little over 500 bps of compression quarter-over-quarter. And I thought that you guys are anticipating the 100 bps of dilution from M&A next quarter. Can you help us maybe understand what's recurring versus nonrecurring in the margin improvement we saw this quarter and how that's expected to continue into the next?

Kevin Perhamus

Connor, so as we said, high single-digit pricing came through in Q3. That will revert back to mid-single-digit pricing in Q4. And then the operating leverage that we saw in Q3 will reverse a little bit because there's less revenue caused by less working days in Q4. And so it's as simple as that. It's -- there's nothing else going on there.

Connor Dessert

Okay. And then, K.P., just on that operating leverage you saw in the third quarter. I know that the Mechanical Components segment saw really strong operating leverage in 2Q, and that's why the margin stepped up from 1Q to 2Q. Last quarter on the call, I think you guys were anticipating that the rest of your margins for mechanical would kind of be in line with the broader first half margin, closer to 40%. So did that operating leverage continue in mechanical along with better pricing? Or was there just more productivity that you're able to eke out of the segment than you previously thought?

Kevin Perhamus

Yes. No, both segments actually benefited from the high single-digit pricing that came through and the operating leverage. So both outperformed the 40%, averaged out to 45.4% for the quarter. But as we look to the full year and you zoom out, they average out to 41.7%.

Operator

And our next question comes from Ken Herbert of RBC Capital Markets.

Kenneth Herbert

K.P. and Azad, I just wanted to maybe take a higher -- ask a higher-level question here on the supply chains today. It seems like we continue to hear about continued struggles for defense, but also aerospace ramping of a lot of basic electronic components and other subsystems. And it would appear to really play to your ability to drive greater volume growth through more second sourcing opportunities just as the supply chain really struggles and a lot of OEMs are looking for other solutions and suppliers that can execute.

How do you balance what probably is a fairly robust opportunity environment today with wanting to continue to maintain the price discipline? Obviously, new business is a big part of your equation, but I can imagine there's a healthy debate on which business to win and durability of that business. Can you just walk through your approach to that? Because it seems like that would get at the core of your ability to really maintain the incremental margins with obviously driving the new business growth as well.

Kevin Perhamus

Yes, that's a good question, Ken. We are hearing about supply chain constraints. It's not impacting us. I think we've done a really good job of investing and staying in front of it with our decentralized model. Each general manager has been managing their CapEx and their capacity well enough to not cause those issues here. There could be customers that come to us with issues around supply chain and then we can jump in and help out. But I would say as a matter of practice and as a matter of strategy, it is not our strategy to go off and try to pick off and second source products.

Our whole new business engine is a little bit different. We form teams of people, salespeople and engineers work together and then go to our customers and solve technical problems, usually, not supply chain problems and get our products designed into their platforms where they stay for a long time. So it's -- it could be a short-term opportunity, but it wouldn't change our long-term strategy around what we focus on. We focus on helping to solve technical problems and get our products designed in usually as the only source.

Kenneth Herbert

That's helpful, K.P. And as you think about specifically your comments on supporting the ramp, what's your confidence on some of these major missile ammunition programs in particular, that you'll see sort of the expected volumes 3 to 5 years from now? Are you capacitizing to support those ramps and building the business to support 3x to 4x the volume or maybe taking it a bit more gated, I guess, as you think about the next few years?

Kevin Perhamus

Yes. We step our capacity up as we see the demand come to fruition in the form of actual purchase orders. And so we're across the 70-odd factories that we have in the 51 business units, we're looking at that very carefully, again, decentralized. So the general managers are very focused on that. And yes, I don't see any -- it's happening already in some places, and we add incremental capacity to those facilities, and we're able to meet the demands. So we don't see that becoming an issue.

Operator

And our next question comes from Noah Levitz of William Blair.

Noah Levitz

To start off, are there any particular component areas that are seeing heavier demand than others, for example, bearings? And then just on that, you noted that Schatz is your fourth bearing-related acquisition. I'm curious if you can walk us through how integration, cross-selling go between these very similar type businesses. How do you expect Schatz to cross-sell, for example, with Kamatics and others? And then are there areas of overlap where you kind of have to work through those dynamics between those similar businesses?

Kevin Perhamus

Yes. Noah, so the first question about, is it hitting any one particular product set? The answer is no. It's very diversified. It's across all of our electronic and mechanical components. So that one is easy. It's obviously not exactly uniform across, but I mean, it's very diversified. So the ramp capture is happening in just about every single one of our business units. And then to your second question about Schatz and how it integrates, Schatz becomes part of the block that Kamatics is in. They're actually geographically not that far away from each other. And so those two teams are working together.

Schatz is being integrated into Arxis EDGE, and there's already cross-selling opportunities being identified and all of the normal integration steps that we take are going well already at Schatz. The products are complementary between what Schatz makes and what Kamatics makes. There's -- Schatz actually filled a product gap that we had so that we can offer more bearing products to our customers. And there isn't actually any overlap or competition per se between those two businesses. So it's a really good fit. And the two teams are working really well together to grow the business now.

Noah Levitz

Great. And then just a quick one for Azad. Can you talk about the preventative maintenance that you mentioned for the fourth quarter? And just is it similar or comparable to what you experienced 4Q of '25? Is this just a normal way that we should think about the fourth quarter?

Azad Badakhsh

Yes, that's right. It's just normal course preventative maintenance. As a result of the less working days, that's often the best time of the year to do some of that preventative maintenance. So it's just normal course.

Operator

I show no further questions at this time. I'd like to turn it back to Kevin Perhamus for closing remarks.

Kevin Perhamus

Yes. Thanks, everyone. We appreciate your time today, and we look forward to speaking with you again next quarter.

Operator

This concludes today's conference call. Thank you for participating, and you may now disconnect.