RBC Bearings Incorporated

Good morning, and thank you for joining us for RBC Bearing's Fiscal First Quarter 2026 Earnings Call. I'm Josh Carroll with the Investor Relations Team, and with me on today's call are Dr. Hartnett, Chairman, President, and Chief Executive Officer, Daniel Bergeron, Director, Vice President, and Chief Operating Officer, and Rob Sullivan, Vice President and Chief Financial Officer. As a reminder, some of the statements made today may be forward-looking and are under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied due to a variety of factors. We refer you to RBC Bearing's recent filings with the SEC for a more detailed discussion of the risk that could impact the company's future operating results and financial condition. These factors are also listed in the press release along with reconciliation between GAAP and non-GAAP financial information. With that, I'll now turn the call over to Dr. Hartnett.

Thank you, Josh, and good morning. You know, we had a great quarter, and we have some really good news to go through with you today. So thank you all for joining us. So I'm going to start today's call, as usual, with a short review of our financial results, and I'll finish our outlook on the industry and fiscal 26. Rob Sullivan will follow me with more details on the numbers. So our first quarter sales were $436 million. A 7.3% increase over last year driven by continued strong performance in our aerospace and defense segment and solid performance from our industrial businesses. Consolidated gross margin for the quarter was 44.8% versus 45.3% for the same period last year and adjusted diluted EPS was 284 versus 254 per share. Clearly, we're very pleased to see these strong margins and kick off our first quarter in fiscal 26. Free cash flow was another highlight of the period of 104.3 million, setting a new record for RBC. And adjusted EPS was $2.84 per share. Total A&D sales were up 10.4% year over year. with 9.6% growth on the commercial aerospace side and 11.9% in defense. On the industrial side, the segment grew 5.5% year over year with the distribution and aftermarket up 10%. In A&D, we continue to see broad strength across the portfolio. The aircraft aftermarket expanded 22.6% and the defense aftermarket contributed well also. yielding a total of 10.4% for the segment in the quarter. We cheer the progress Boeing is making on aircraft production and continue to pray for their continued success. Moving to industrial, we achieved a 5.5% growth this quarter. Most of our industrial markets contributed to this performance. Aggregate, metals and mining, food and beverage, forest products, warehousing, grain to name a few. Oil and gas as well as semiconductor remain weak. For RBC, the industrial economy felt strong, and the recent print of 3% U.S. GDP expansion confirmed our impression during the period. Certainly, the tax treatment for capacity investment in the Big Beautiful Bill recently signed pretends well for these sectors in the future quarters, and we expect this to be a very positive influence on demand for our products for the balance of this year and into next. Overall, our backlog for the first time exceeded $1 billion during the period, with $100 million of that being industrial products. Our relentless drive for organic growth through product innovation and market development creates new opportunities that are identified and sorted monthly at our ops meetings. This is often where high potential productive short and long-term options are identified and prioritized. These can be for markets as diverse as aero engine, space, guided weapons, marine, warehousing, airframe, bridge building, to name a few examples. This has become an increasingly important feature of our business plan, adding to meaningful revenues year in and year out. A little on defense, demand for our products remains at unprecedented levels. We expect to see the sector of our business expand in the high single to low double digits for many quarters into the future. We are adding to our capacities where needed to satisfy the expanding requirements of our customers. Our marine business is a primary driver in this regard, but there are many other subordinate drivers in this expansion. such as airframe, aero engine, and aero aftermarket. Clearly, the recent acquisition of VACO adds fuel to this fire. A little on VACO. VACO's marine business, which has historically represented half of their revenues, demand for their products, like ours, is very high, again driven by the build-out of the U.S. submarine fleet. Their business, like ours, must expand to meet the needs of the Navy, The synergy between RBC and VACO is strong, adding critical mass in the areas of engineering, manufacturing, contract management, and supply chain. We are only weeks into our ownership of this new business, and I will wait until our next conference call to further elaborate on our plans and potential. I am highly optimistic about our future together with this unusually synergistic business. As we begin Q2 and fiscal 26, the year is shaping up to be a very strong one for RBC. We are well positioned in our markets. We see unprecedented demand in several important areas of the market for our products. We hold a strong balance sheet and have created a well-defined business plan in most of our core businesses with a strong button-down five-year outlook that's executable. I will now turn the call over to Rob Sullivan.

Thank you, Mike. As Dr. Hartnett indicated, this is another strong quarter for RBC. Net sales growth of 7.3% drove gross profit growth of 6.1%, with gross margins of 44.8% for the quarter and 45.4% on an adjusted basis versus 45.3% for the same period last year. Our performance during the quarter was driven by a strong performance across our business segments, with industrial gross margins leading the way. Industrial gross margins during the quarter were 46%, and aerospace and defense margins were 42.3%. On an adjusted basis, industrial gross margins were 47.1% for the quarter. On the SG&A line, we had total costs of $73.9 million, or 16.9% of sales for the quarter. Included in that number were additional personnel and fringe costs, as well as continued investment in IT-related costs during the quarter. This ultimately resulted in adjusted EBITDA of $141.5 million, or 32.5% for the quarter. That reflects a 5.6% increase in EBITDA dollars year over year. Interest expense in the quarter was $12.2 million. This was down 29.1% year over year, reflecting the impact of the debt payments made in fiscal 2025 further enhanced by reduced interest rates this quarter as compared to this time last year. During the quarter, we only paid off approximately $6 million of debt as we held cash in anticipation of the VACO deal closing. The tax rate in our adjusted EPS calculation was 22.5%, consistent with last year's 22.4%. Altogether, this led to adjusted diluted EPS of $2.84, representing growth of 11.8% year over year. An impressive result given the choppiness in commercial aerospace production schedules and the macroeconomic softness in the industrial economy. Free cash flow in the quarter came in at $104.3 million with conversion of 152% in comparison to $88.4 million and 144% last year. The higher conversion rate was due to the increased earnings and working capital management during the quarter. In July, we drew down $200 million of our revolver to help finance the VACO acquisition with the remaining $75 million in payment coming from cash on hand. Looking ahead, our capital allocation strategy will remain focused on delevering by using the cash that we are generating to pay off that $200 million we drew by the end of the fiscal year. Looking into the second quarter, we're guiding revenues of $445 million to $455 million, representing year-over-year growth of 11.8% to 14.4%. That guidance embeds an operating environment that's been fairly similar to what we have been seeing over the last few quarters, with an additional benefit of owning backhoe for a little more than two months. On the margin side, we are projecting gross margins of 44 to 44.25% for the quarter, and SG&A is a percentage of sales to be between 17 and 17.25% for the quarter. Embedded in all this is an assumption that VACA will add approximately 15 to 20 million of revenue to our quarterly results in Q2, with gross margins between 25 and 30%. Very similar to Sargent when we closed on that acquisition. Keep in mind, this deal closed in the second half of July, and therefore this does not reflect the full quarter's worth of sales activity. To wrap it up, this is another strong quarter for RBC, which underscores the momentum we have built and the strength of our strategic execution. As Dr. Hartnett notes, we're well positioned to achieve our objectives and drive growth, driven by our core capabilities in engineering and operational excellence and innovative product development. Our focus will continue to remain on executing on our organic growth, integrating backhoe, enhancing operational efficiencies, and delivering robust free cash flow to create long-term value for all of our stakeholders. With that, operator, please open the call for Q&A.

Certainly. We'll now be conducting a question and answer session. If you'd like to be placed into question Q, please press star 1 on your telephone keypad. Once again, that's star 1 to be placed into question Q. A confirmation tone will indicate your line is in question Q. You may press star 2 if you'd like to remove your question from the queue. Our first question today is coming from Christine Lewek from Morgan Stanley. Your line is now live.

Hey, good morning, everyone.

Good morning, Christine.

So Mike, in your prepared remarks, you kind of talked about a five-year outlook there. So I was wondering what parts of that could you share with us? How are you thinking about the next five years? And what are the key components that you're measuring?

Well, We're going from major business to major business, and we're lining up our historical sales by account. And what the outlook for those accounts are, as you know, if it's Boeing or Airbus or Embraer or Pratt or GE or one of the other big drivers of the aerospace industry, they're all customers of ours. And their business outlook is pretty well defined and within limits. And so we use that and knowing our content and knowing what the expansion of our content would be over that term based upon some of the things that we're working on now and expect to convert. We boil that all into revenues by account and margins by account. and expand it over a course of five years. And we do that for basically all of our businesses, but obviously the big ones get the most attention. And so that leads us to the point of planning, do we have the right capacity to satisfy the business demands for these customers? And so, you know, with that, we kind of look at what our capitalization is in each one of those business units and what's, you know, where it needs expansion, you know, improvement, and where likely the mix is going to be the strongest and maybe our production ability to support that mix is weak. So it gives us sort of a timeline to build out our thoughts on how to expand those businesses. And we have several businesses that have very, very positive outlooks over the next five years, given where they're positioned in their markets. And I don't know if I answered all your questions, but that's our process.

I mean, it sounds like a pretty positive one. So with the capacity that you have in place and you had built out a lot of capacity kind of going into COVID in preparation for these new programs, does this mean that you have to spend more money on CapEx? And how should we think about the margin? If the build rates play out as the OEMs have described or are planning for, what does that ultimately mean for potential margin expansion and revenue growth for your aerospace business?

Well, certainly for the aerospace business, it's very positive. And, you know, actually right now we're actually air freighting manufacturing equipment from Europe into some of the plants to expand the capacity on an accelerated business because business is a little bit stronger in certain areas than we had anticipated. So I think in terms of how much CapEx will will, uh, employ over that period of time. Um, you know, I, I, I think we're like between our depreciation is like three or three to 4% of our, our revenues. And I, I think we're going to kind of stay in that range. Um, we have, uh, we have some, some real estate that, uh, we'll probably end up liquidating and, uh, and consolidating a couple of businesses over time, which, uh, which sort of will net us back to that 3% to 4% kind of range.

Great. Thank you. And if I could follow up on the big, beautiful bill comment that you mentioned. I mean, you guys are core to U.S. infrastructure build. When you think about the opportunity set that's outlined in that bill, can you just, you know, with the portfolio today, can you give us a reminder of where you are in the cycle? Are you going to be earlier cycle on those builds, mid? And how quickly – ultimately for your business, could you see how orders materialize? And is that, you know, what kind of drove that $100 million backlog for industrial that you called out earlier?

Yeah. Well, I think a lot of our industrial customers are small. Not all of them are small, but a lot of them are small. And so I think the tax treatment in that bill allowing them to expense their industrial equipment and minimize their tax bill in any given year is, is, um, catnip. And, um, and so we, we would expect, we would expect to see, um, a lot of expansion on those, uh, of demand from those smaller customers. And, uh, And so that's probably how it's going to affect our industrial business the most. I'm not sure on the aircraft and aerospace and defense side, everybody's a pretty large customer and they probably don't pay taxes now anyway. So I'm not sure how impactful that bill will be, but we're expecting it to be more favorable on the industrial side than the aerospace side.

Great. Thank you very much.

Thank you. Our next question today is coming from Michael Tramoli from Truist Securities. Your line is now live.

Thanks for taking the question. Nice results, as always. Rob, can you maybe help us with just more of the modeling details for VACO? I mean, should we be – I think we had the full year run rate revenue for march should we be thinking they're getting similar growth tailwinds from other naval exposed companies so you know maybe 10 to 11 million monthly revenue contribution to to work with our models and does all of this revenue go into uh the a d segment specifically in defense and i guess just thinking about margins you know it it seems like if we use that midpoint of what you gave, you know, maybe it's 150 basis points of dilution this year, but anything else you can share with us?

You know, it's early days, right? We've really had them under our tent for about two weeks now. So, you know, I think we'll have a lot more to share on where it's all going to go for the broader year by next quarter. I kind of laid out what I thought the impact is going to be for for this coming quarter. But, you know, I think generally speaking, you know, where our margins are running, if you look at our, despite, you know, any dilutive impact, if you look at our gross margins for Q2 and the range that we provided, it's still exhibiting year-over-year expansion from where we were at this time last year. So it's not overall as meaningfully impactful as a result. And just about, you know, any acquisition we were going to put under our tent, you know, would have some measure of impact in the short term. But that's our playbook, right? And that's what we've done with Sargent. That's what we've done with Dodge. So that's kind of how we're looking at this thing. So, you know, I think they're running at a $30 million a quarter run rate on sales over the last 12 months. And that's kind of the barometer that we were using. And so more to come certainly in the future. Okay.

Okay, that's helpful. Yeah, I was saying 150 basis points dilution. I was actually looking at my 26 exit rate. Yeah, you should still get year-over-year expansion. Are we putting all these revenues in the A&D sector, or is anything going into industrial just so we can have models calibrated? Yeah, no, it's A&D. Okay, okay, helpful. And then maybe separately – Mike, what do you see in commercial aerospace? We've seen some different trends, maybe some destocking on the airframe side. Engine continues to be strong. I think your year-over-year growth, I think if I've got it right, in the OE side maybe showed some deceleration with a big pickup in aftermarket. But anything else you can talk to, build rates, color, order trends?

Well, I mean, I think the build rates are pretty public news, right? And so our content per build rate is pretty well defined. The, you know, the, we do expect to, in a measured way, expect expand our content on some of these ships over the next six to 12 months. And I think that's probably the biggest positive we're seeing right now. And currently we're negotiating contracts with all of these OEMs on expanding and our statement of work and the term of the statement of work over the next five years. And the discussions are very positive. So I think it's looking good for us.

Okay. Okay, thanks.

I'll jump back in the queue. Thanks, guys. Thanks. Thank you. Next question is coming from Steve Barger from KeyBank Capital Markets. Your line is now live.

Hey, thanks. Good morning. Mike, you talked about some of the impacts from the one big, beautiful bill on smaller customers, but we've been hearing a few industrial companies talk a little more positively about the back half and even 2026 before seeing that benefit. So to the extent you can pull stimulus apart from general demand, does it feel like we've turned the corner into a sustainable industrial expansion?

It certainly felt that way in the first quarter. I mean, our industrial distribution business in the first quarter was up 10%. That's pretty good for an industrial distribution business to be up 10% in a quarter. So, you know, our metrics are telling us that, yes, things are getting stronger. My own metric is is the number of tractor trailers on the highways that are between me and my exit seem to be exponentially larger this year than they were last year. And everybody that comes to work complains about the traffic now. So to me, that's a very good sign that the economy is really being stimulated.

Yeah. Makes sense. It's great to see you hit the $1 billion backlog milestone. You said most of that is aero and dispense. What's the duration of that backlog? Is that multiple years?

It is multiple years. And, you know, we think we have an honest-to-goodness chance of doubling that over the next 12 months. Wow.

Just from all the defense programs primarily, or does that include commercial? What would drive that?

Mainly defense.

Got it. Okay. And when you talk about doubling that over the next 12 months, would that push the backlog to end of decade, or how would we think about the monetization schedule of that?

Well, a lot of the center of mass on that is our build-outs of equipment between now and 2030, 2031, 2032. So that's sort of how these contracts are coming together.

Got it. And last one for me. We know you and your team make detailed plans, just like how you talked about the five-year process I know it's really early in owning VACO, but can you talk about first steps of integration? Can you take a shot at margin progression in coming quarters and years and how you see that playing out just based on your experience from other deals?

Yeah, well, you know, on Sargent, you know, VACO is kind of Sargent's little brother for half of their revenues, you know, particularly the marine half. And it's RBC's aerospace little brother for the other half, for the space half. So we have it well covered. When we did Sargent, we expanded over time their margins by about 1,000 basis points, right? I'm not sure exactly what the historical timeframe was that we did that, but it was probably between We acquired Sargent in 2015, and the wheels came off with the pandemic early 2020. So it was probably in that period of time that we expanded it. I don't think VACO is going to take that long, and I think they're going to see a similar ramp. And we're thinking 18 to 24 months. just would be a good bogey. Nothing is hard. Nothing is unknown. As Rumsfeld says, it's all known knowns to us. And it's a matter of sort of execution. And we literally have teams of people on the West Coast there every day, sort of, you know, sorting through and creating a roadmap. And, you know, that goes in an area, geographic area, where, you know, we have over an employment base of over a thousand people in seven or eight plants and very highly synergistic to what they do and and how they do it and what skill sets they have and what they have for supply chain and what we have for supply chain. They're very, very similar businesses. So I think it's going to be much easier to accelerate the improvement of that business than it was for Sargent. And maybe not as easy as Dodge.

That's great detail. Looking forward to seeing how that progresses. So drive safe out there.

Yeah, thanks. Thank you. Next question is coming from Scott Deutschhold from Deutsche Bank. Your line is now live.

Hey, good morning. Dr. Hartnett, did the upgrade of the GTF engine to the GTF Advantage create an opportunity for RBC to potentially increase its share position on the program? Meaning just did the changes in the engineering of the engine and the upgrades for certain parts create some openings for you all to come in and increase your content?

Yes. Yes, yes, and yes.

We're going to increase our content.

Any more specifics or?

I hesitate to talk more about it, but we're going to increase our content substantially on that engine.

Okay. Do you have a sense for when that begins to ramp up for you all? Do you see it a little bit in the second half of this year and more 2026 in terms of when we see those gains?

I think it's going to start slowly. in calendar 26 and ramp through 2030. Okay.

And then, Dr. Hartnett, it sounds like we'll hear more on VACO in the future, but can you maybe just spend a few moments with respect to the revenue synergy strategy with VACO, particularly as it relates to space?

Yeah. I mean, well, sure. I think the space business is probably the hardest part for us to sort through. RBC has a pretty good business in space with a completely different customer base than Backo has with completely different products than Backo has. Backo has really a nice core space business. And then some business in space that needs to be rethought. And so we're sort of working our way through that. Net-net, some of the VACO customers have always been target customers for RBC on the space side. So we're going to have good introductions there. We'll be able to ride VACO's coattails. into those customers. On the other hand, VACO can ride RBC's coattails into customers in the space business that they don't have. So I think that's what we see as the benefit right now. And I think VACO's engineering strength in what they do and what they produce for products is if not unique, very limited design engineering test skills available at that level in the country. And so they really have some very unique talents and tools, which we hope to be able to employ with going forward in RBC's space business benefit.

That's great. And last question, if I can. Just on the aerospace and defense ramp, do you foresee any supply chain constraints on your end over the next few years, particularly as it relates to your ability to obtain sufficient volumes of specialty alleys, or do you already have firm delivery commitment growth lined up with suppliers of those alleys?

Well, you know, that's kind of a – I think on the supply chain side, non-alloy, I think we're fine. You know, where VACO is on the supply chain side is something that we're trying to sort through. But we have so much production capacity ourselves in L.A. that I don't think I don't think it's going to be a big issue. Um, so we're very vertically integrated, uh, from the, you know, once we receive the material. Now, receiving the material, that's another issue. Um, there are some materials that are not a problem, um, and, um, that are, you know, semi-exotic. They're stainless steels and, uh, We use them in, you know, pretty good quantities, and they're a little bit on the commodity side in terms of the ability to, you know, procure these. So that's all fine. On some of the more exotics, you know, we've been tested for years on – on how to secure and procure some of these exotic materials and have actually bought extensive inventories of the exotics to protect our production base. Those at one point in time were impossible to get and that seems to have improved that And it's more normalized, but nevertheless, it's still, you know, you can't get some of this stuff for 60 weeks. So your planning cycle needs to be way out there in order to make sure that your customer deliveries don't get affected by somebody that can't get you material. So that's a little bit of a challenge, but it's on an 80-20 basis. It's definitely in the 20 category, not the 80 category.

Thank you very much and great results. Thank you.

Thank you. Next question is coming from Pete Skibitsky from Olympic Global. Your line is now live.

Thanks, guys. Nice quarter. Mike, I want to circle back to industrial one more time. PMIs have stayed below 50, but revenue has really kind of accelerated here in the last couple of quarters. You mentioned GDP and the tax changes. We're a month here into the second quarter. Do you have some degree of confidence that industrial is now kind of a mid single digit grower versus maybe, you know, more tepid growth? If we, you know, the way we're thinking about it six months ago.

I think it's, it's sector dependent, you know, um, you look at, you look at certain sectors and it's, it's, uh, it's off. But our major sectors have performed very well, up year to year. And so I guess if I'm in Texas, I'm not feeling great about life in the oil patch. On the other hand, if I'm doing grain or aggregate in various parts of the country, I'm doing fine. Forest products seems to be doing great. Food and beverage seems to be doing great. So the consumable side of the world is okay. The larger OEM side of the world is definitely slow. We haven't seen the turn into larger OEMs. But on the consumable side, it's definitely turned.

Okay. So maybe we shouldn't get too carried away with our assumptions there yet?

Well, I think the impact of this bill is yet to be seen. It's only weeks old, right? And I think that's going to have a real positive effect. Will farmers buy more combines because they can expense them in a given year? Some might. It might help people like deer.

Yeah. Yeah. Okay. Fair enough. Um, and just last one for me in the first quarter and maybe, you know, quarter a day and second quarter, have you seen any impacts at all positive or negative from, from tariffs?

Um, you know, tariffs, first of all, we're very, very, um, USA or oriented. uh, and USA organized and, and so our production and, and, and sales sales is, uh, is, is mainly influenced by what happens in the country. Um, but there, you know, we, we are impacted by tariffs and, um, and to the extent, to the extent that we needed to, um, we've sort of, um, um, neutralize the impact of our tariff exposure to our P&L with price adjustments or adjustments in our contracts and supply agreements. And we have some customers who say, okay, we understand there's a tariff that's on us. We're the importer of record and just pass it through. So we're happy to do that. Others are more argumentative about it. And so we try to work with them as cooperatively as possible. And how that's going to turn out remains to be seen. And others, we've just adjusted the price.

Yeah, yeah, fair enough. Thanks for the caller.

Okay.

Thank you. Next question is coming from Jordan Leonese from Bank of America. Your line is now live.

Hey, good morning. On Arrow, just given that it looks like production is stabilizing, how should we think about contract renewals that you guys have coming up and pricing power going forward?

I mean, I think we've developed a really strong reputation with our customers and it was really done through execution. And that starts with quality, starts with our on-time delivery. And so we're thrilled with what the news has demonstrated or illustrated in terms of the production rates and the stabilization and some of the large OEMs. But I think it's more just the reputation that we've earned through our performance over the years. That gives us the ability to successfully develop the long-term agreements that we've been able to do in the past and the ones we're looking forward to in the future in 26.

Got it. Thank you.

Thank you. We've reached the end of our question and answer session. I'd like to turn the floor back over to Dr. Hartner for any further closing comments.

Okay. Well, I think that concludes our conference call for the day. And I appreciate everybody's questions and participation and look forward to talking to you again. I guess it's mid-fall. So good day.

Thank you. That does conclude today's teleconference. Let me just connect our line at this time and have a wonderful day. We thank you for your participation today.