RBC Bearings Incorporated (RBC) Earnings

Management highlights

- Overall Financial & Operational Performance * RBC Bearings delivered a strong Q1 FY27 start, with 19.2% year-over-year net sales growth, 28.1% year-over-year adjusted EBITDA growth to $181.2 million, and $146.9 million in free cash flow. * The company eliminated $77 million of debt in Q1, with an additional $50 million of term loan debt repaid after quarter end, and remains on track to pay off all remaining term loan debt by November 2026. Gross margin expanded to 47.7% (adjusted) from 45.4% year-over-year, driven by higher volume operating efficiencies, favorable product mix, one-time contract resolutions, and a temporary 100 basis point benefit from tariff refunds. * Interest expense fell 17.2% year-over-year due to improved leverage and lower interest rates, and adjusted diluted EPS grew 36.6% year-over-year to $3.88. - End Market Demand Trends * A&D segment sees healthy order activity, growing RFQ volumes, new contract awards, and rising customer requests for additional capacity, with production ramping for commercial aircraft and engines across North American and European sites. The space sub-segment has strong building momentum from both commercial and government customer investments, and remains in the early stages of long-term significant growth. * Marine business has strong demand for production growth; most prior supply chain knots have been resolved, with significant shipment expansion planned for the second half of FY27. * Industrial end markets remain broadly healthy, with growth across aggregate/cement, food and beverage, warehousing, semiconductors, and grain sectors; only the metals sector was flat year-over-year, with no meaningful declines. - Core Strategic Priorities * Management prioritizes efficient operational execution, customer support, and targeted capacity and capability investments to meet growing multi-industry demand. * Key company differentiators cited are strong service levels, strong brands, leading market position, technical expertise, and employee talent, which form the foundation for stakeholder value.

Guidance

- For Q2 FY27, management guides net revenue between $505 million and $515 million, representing 10.9% to 13.1% year-over-year growth - For the first half of FY27, aggregate net revenue is expected to reach $1.024 billion to $1.035 billion, representing 14.9% to 16.1% year-over-year growth - Adjusted gross margins for Q2 FY27 are guided between 45.5% and 45.75%, which reflects the absence of the one-time Q1 tariff refund and contract resolution benefits, as well as typical seasonal margin patterns - SG&A as a percentage of net sales for Q2 FY27 is expected to fall between 16.5% and 16.75%

Segment performance

RBC Bearings operates two core product segments: Aerospace and Defense (A&D) and Industrial. A&D generated 43% of total Q1 FY27 revenue, with year-over-year growth of 36.9% (16.6% organic, excluding the VATCO acquisition). A&D gross margin for the quarter was 44.5%, representing an 180 basis point year-over-year expansion. Within A&D, commercial aerospace revenue grew 21.8% (20.3% organic), defense revenue grew 64.6% (10% organic), and the space sub-segment contributed $25 million in Q1 revenue (on a run rate to exceed its full FY26 total of $70 million, now serving over a dozen customers). The industrial segment generated 57% of total Q1 FY27 revenue, with year-over-year sales growth of 8.4%. Within industrial, OEM revenue increased 21.5% and distribution revenue grew 3.1%. Industrial gross margin for the quarter was 50.2%, representing a 300 basis point year-over-year expansion. The marine sub-segment (part of industrial) holds a total company backlog of $2.3 billion, most of which is marine.

Risks & headwinds

- Overbooking production capacity to capture short-term new demand would risk eroding service levels for existing long-term core customers, creating the same delivery issues seen at competitors - Labor access is uneven across geographic regions: labor shortages are a challenge in parts of the U.S., including parts of Southern California and the Northeast U.S., though the company's large Mexican facilities do not face labor shortages - Complex, specialized marine supply chains can still contain unforeseen bottlenecks; legacy suppliers exiting the market (for reasons such as retirement) can create difficult-to-resolve metallurgical and production challenges - Southern California A&D and space suppliers are operating at maximum capacity, creating tight upstream supply conditions - Customers may see minor aftermarket headwinds from the Middle East conflict and higher jet fuel prices, though management has not yet experienced any direct impacts to RBC Bearings

Analyst Q&A

• Q: The strong Q1 gross margin is well above the guided Q2 margin range. Were there one-time factors driving Q1's outperformance, and how conservative is the Q2 margin outlook? /

  A: There were two main one-time benefits: 100 basis points from temporary tariff refunds, and 50-60 basis points from incremental contract resolution gains. Q4 and Q1 are also historically RBC's strongest margin quarters due to seasonality, which was factored into the Q2 forecast. The one-time benefits do not repeat in Q2, leading to the guided lower margin range.

• Q: How will the margin dynamic between industrial and A&D evolve long-term? Will A&D margins catch up to industrial's 50%+ levels? /

  A: A&D margins will definitely continue to expand as they catch up to industrial margins, though full convergence is not guaranteed. The main drivers of A&D margin expansion are new inflation-adjusted contracts replacing older underpriced contracts, and the insourcing of previously outsourced bottleneck processes that have constrained margins in prior years. Management expects A&D margins to improve by 150 basis points between the end of FY26 and end of FY27.

• Q: Flat sequential backlog was unexpected given strong end market demand. What explains this, and how much future demand is not reflected in reported backlog? /

  A: Many large long-term A&D contracts (including sole-source programs for major programs like Virginia-class submarines) are not fully reflected in reported backlog, as only 12 months of demand is typically added. Large future contract awards will lead to material backlog increases when they formally release, which for major programs may not occur for 12 to 18 months. Management's visibility into future demand far exceeds the current reported backlog.

• Q: Competitors are struggling to meet demand, but a customer noted RBC is not aggressive about capturing new share. Is there a reason for this cautious approach? /

  A: RBC prioritizes maintaining capacity for its existing long-term core customers with multi-year contracts, who are the foundation of the business. Taking on too much new short-term demand from customers unwilling to make long-term commitments would force RBC to overbook capacity and hurt service levels for existing customers, which management will not do. Any new share gain that does not risk existing customer commitments will be pursued, but service reliability is the top priority.