RBC Bearings Incorporated

Good morning, and thank you for joining us for RBC Barings Fiscal Second Quarter 2026 earnings call. I'm Josh Carroll with the Investor Relations Team. 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, the 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 Barron'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 the reconciliation between GAAP and non-GAAP financial information. With that, I'll now turn the call over to Dr. Hartman.

Good morning, and thank you. So good morning, everyone, and thank you for joining us. As usual, I'm going to start today's call with a short review of our financial results with some comments, and I'll finish our outlook on the industry in fiscal 2026. Rob Sullivan will follow me with some more details on the results. Second quarter net sales were $455.3 million, a 14.4% increase over last year. driven by continued strong performance in our aerospace and defense segment and steady performance from our industrial businesses. Consolidated gross margin for the quarter was 44.1% versus 43.7% for the same period last year, and adjusted EPS was 288 versus 229 last year. Clearly, our performance exceeded our expectations for the second quarter of fiscal 26, and the company is showing good momentum moving into the second half of RBC's year. Pre-cash flow for the period was a strong $71.7 million. 56% of our revenues were industrial sector and 44% aerospace and defense, with the aerospace and defense sector now racing to parity, we think, next year. Total A&D sales were up 38.8% year-on-year. Commercial aerospace expanded 21.6%. Defense expansion was 73.3%. Organically, the performance looks like this. Commercial aerospace increased by 21.2%. Defense increased by 22.4%. Demand across the A&D sector is impressive and momentum is strong. Backlog is up to $1.6 billion today, from $940 million in March and $860 million last year at this time. We fully expect to approach $2 billion in backlog by year's end, which will be an amazing milestone. especially when you consider that more than half of our revenues preclude backlog production. Although revenues are currently capped by production capacity, we are working hard to expand manufacturing capacities in our marine and aircraft RBC plants, adding more capacity each quarter. Clearly, this will be impactful to margins. Primary drivers here are submarine aircraft and engine customers. Proprietary components are quiet valves and actuators for submarines. That is the Virginia and Columbia boats, as well as MRO supplies for existing fleets. Both Sargent and Vacco are the RBC contributors here. On airframe and engines, as Boeing and Airbus and Embraer continue increasing build rates to unprecedented levels, production of our products, of course, must follow. As most of you know, we have substantial content in these airframes and engines where we supply precision and line bearings as well as integrated structural components across aircraft and engine spectrum. And with Boeing's recent FAA approval to expand production rates, business is good and about to get better. It's important to understand that building rates of submarines and commercial aircraft are at levels not seen in over a generation since the early 1980s for submarines for reasons, both good and bad. We are current. We, we currently are booking some orders for deliveries into the 2030s. RBC is dead center in the middle of this effort today with considerable number of proprietary sole and single source products governed by multi-year contracts in the majority of cases. Let's turn over to our industrial business now. Overall, our industrial business was up 0.7%. Industrial distribution was up 3.3%, while the OEM sector was off 4.7%. Continued weakness in the markets of oil, semiconductor machinery, and European machine tools continue. Our industrial OEM business is a 70-30 split with 30% of 30% being the OEM component. We are encouraged to see the continued demand in the industrial aftermarket across many of the markets that we monitor. These include aggregates, metals, grains, food and beverage, forest products, warehousing, to name a few. I'll now turn the call over to Rob Sullivan, who will give some colored commentary on the financial treatments and the Q3 Outlook.

Thank you, Mike. As Dr. Hartnett mentioned, this was another strong quarter for RBC. Net sales grew 14.4%, driving a 15.4% increase in gross margin. Gross margins were 44.1% for the quarter, or 44.9% on an adjusted basis, compared to 43.7% in the same period last year. During the quarter, we delivered strong performance across our business segments, specifically within A&D, which has been seeing strong growth, as Dr. Hartnett previously noted. A&D gross margins during the quarter were 38.7%, or 42.3% on an organic basis, and industrial margins were 48.2%. Included in the aerospace results were 24.7 million of net sales from VACO during the period, which was acquired on July 18th this quarter. On the SG&A line, we had total costs of 77.4 million, or 17% of net sales for the quarter. This ultimately resulted in an adjusted EBITDA of 145.3 million, or 31.9% for the quarter. That represents an approximate 17.7% increase in EBITDA dollars compared to last year. Interest expense for the quarter was 13.4 million, This was down 14.1% year-over-year, reflecting the impact of debt payments made over the last 12 months and lower interest rates partially offset by the impact of borrowing $200 million on the revolver in July to assist in paying for the acquisition of ACCO. During the second quarter, we paid off $45 million on our term loan balance. We made an additional $40 million payment on September 30th, which will be reflected in next quarter's results. Diluted earnings per share were $1.90 compared to $1.65 for the same period last year. Adjusted diluted earnings per share were $2.88, representing a 25.8% increase over $2.29 for the same period last year. The tax rate in our adjusted EPS calculation was 22% compared to last year's 22.1%. Free cash flow in the quarter came in at $71.7 million with conversion of 119.5%. and compares to $26.8 million and 49.4% last year. The higher conversion rate was due to the increased earnings and working capital management during the quarter. As we have previously noted, our capital allocation strategy going forward will remain focused on deleveraging by using the cash that we are generating to pay off the term loan and then the revolver balance. This week, we finalized an amendment to our credit facility extending the revolver until 2030. We intend to pay the term loan off by November of 2026. Looking into the third quarter, we are guiding revenues of $454 million to $462 million, representing year-over-year growth of 15.1% to 17.1%. This guidance embeds an operating environment that's been fairly similar to what we have been seeing over the past few quarters, with the additional benefit of owning VACO for a full quarter. On an organic basis, net sales are expected to increase 7.4% to 9.5%. On the margin side, we are projecting adjusted gross margins of 44% to 44.25% for the quarter, and SG&A as a percentage of sales to be between 17% and 17.25% for the period. We continue to remain well positioned to achieve our objectives and drive sustainable growth, leveraging our core strengths in engineering excellence, operational efficiency, and innovative product development. Looking ahead, our focus will remain squarely on executing on organic growth strategy, further integrating VATCO, driving operational efficiencies, and delivering strong free cash flow conversion that will create long-term value for all our stakeholders. With that, operator, please open the call for Q&A.