Negative Points

• Organic growth in Q3 included a timing benefit, with some Q4 activity pulled forward, which may temper Q4 growth.

• Working capital increased due to higher accounts receivable, reflecting rapid demand for technology solutions, though management notes it's a timing dynamic.

• Capital deployment for M&A fell short of initial ambitions due to market conditions and disciplined valuation approach, potentially slowing strategic expansion.

• Investments in Europe and Canada are expected to accelerate in Q4 and into fiscal 2027, which could pressure near-term margins.

• The company faces challenges in maintaining high organic growth rates, as some demand for technology solutions is less predictable and not bankable annually.

• M&A valuations in defense and space markets are rising, making it harder to find accretive deals at reasonable prices.

• Essential Industries margins, while improving, are still below the company average, with a target to exit fiscal 2026 in the high single digits.

Q & A Highlights

Q: Can you provide an overview of the new 15-year, ~$300 million contract with Raytheon UK, including the background of the relationship, the scheduling of revenue, and the potential magnitude of the variable component? A: Patrick Houston (CEO) explained that this is a renewal of work originally won through the acquisition of Mabway about 3.5 years ago, supporting the UK MOD's land forces training. The new agreement with Raytheon UK continues this work for 15 years, starting in October 2026. The structure includes a base commitment of capacity, with a variable component planned annually that is expected to be approximately the same size as the base level, potentially doubling the total contract value.

Q: How should we think about the sustainability of the strong organic growth and the timing benefit mentioned in Q3, and what is the outlook for Q4? A: William Majic (Acting CFO) stated that the long-term organic growth target remains mid-single digits. The Q3 performance benefited from a timing benefit that pulled some Q4 activity into Q3, as well as strong but less predictable demand for technology solutions. While the company capitalized on this demand, it is not something that can be banked on every year, so the long-term organic growth target remains unchanged.

Q: With the strong macro backdrop in Defense & Space, can you qualify or quantify the bidding pipeline and the scale of opportunities you are seeing? A: William Majic (Acting CFO) noted that due to market conditions and the increased scale of the business, Calian is seeing larger opportunities in its pipeline. This is a positive development, but it also reinforces the need to continue investing in the business to capitalize on these larger, more complex contracts.

Q: Given the strong organic growth in Essential Industries, what would growth look like excluding the less predictable US commercial operations, and is there an update on the portfolio review regarding potential divestitures? A: Patrick Houston (CEO) suggested looking at organic growth over a longer period for trending. While the company is targeting high single-digit growth, this year's execution is delivering much better. On divestitures, he confirmed that the portfolio review is on track to reach a conclusion by the end of the summer.

Q: Can you provide more color on the capital deployment strategy, specifically why the pace of M&A was slower than expected and how you view valuations in your target markets? A: Patrick Houston (CEO) attributed the slower capital deployment to a focus on strategic fit rather than valuations. While valuations have inched up in the defense market, Calian is focused on finding companies with strong synergies that can accelerate growth post-acquisition. He emphasized a disciplined but creative approach to deal structures to maintain the pace of acquisitions.

Q: You mentioned a review of the capital structure. How should we expect that to evolve, and could it involve changes to lower WACC, more debt, or potential equity financing? A: Patrick Houston (CEO) stated that he has challenged the team to be ready on all fronts to take advantage of the strong opportunity set. The capital structure is a component of this, and the company is looking at all options to ensure it can act decisively when the right opportunities come into focus.

Q: Can you discuss the sustainability of the 11%+ adjusted EBITDA margin, and what is the timeline for the margin strategy in Essential Industries? A: William Majic (Acting CFO) said the company looks at margins on a longer-term basis and has been growing both gross margin and EBITDA percentage significantly year-over-year. While some near-term investments may impact margins in the coming quarters, the focus is on creating a scalable business that drives higher revenue growth while maintaining or increasing the EBITDA margin profile.

Q: Are the companies you are targeting for M&A accretive to your current margin profile, and what are the key criteria for potential acquisitions? A: Patrick Houston (CEO) noted that historically, most transactions have been accretive, and the company still strives for that. However, as margins increase, this becomes more difficult. The criteria include strategic fit, the ability to pursue larger programs, and the potential for "one plus one equals three" synergies, with margin being one of several important lenses.

Q: Are there any other large contracts coming up for renewal in the near term, and what is the level of visibility into securing those renewals? A: Patrick Houston (CEO) indicated that none of the major anchor contracts are coming up for renewal in fiscal 2027. The timeline for major contract renewals is further out, in fiscal 2028 and 2029, providing a clear line of sight and reducing near-term renewal risk.

Q: Can you share an update on the initiatives to expand Calian's footprint and capture defense spending in Europe? A: Patrick Houston (CEO) described this as a four-year journey built on small acquisitions that have driven strong double-digit organic growth. The company is now investing more in business development support to pursue opportunities in existing and new European geographies. Given the sustained pace of European defense spending, Calian is positioning itself to respond to this long-term demand.

For the complete transcript of the earnings call, please refer to the full earnings call transcript .