RBC Bearings Incorporated Q2 FY2026 earnings call

• Financial Results: Second quarter net sales were $455.3 million, a 14.4% increase. Consolidated gross margin was 44.1%, adjusted EPS was $2.88, and free cash flow was $71.7 million.
• A&D Segment: Strong growth with backlog expansion. Approximately $500 million of the backlog growth was from the VACCO acquisition. Capacity is being expanded in marine and aircraft plants to meet demand from submarine, aircraft, and engine customers. Proprietary components for submarines and aircraft are key drivers.
• Industrial Segment: Mixed performance with industrial distribution up 3.3% and OEM down 4.7%. Continued weakness in certain markets, but positive on the industrial aftermarket.
• VACCO Acquisition: $24.7 million of net sales in the quarter from VACCO, working on integrating it and aiming to expand its margins to align with RBC's historic margins.
• Capital Allocation: Focus on deleveraging, with a finalized credit facility amendment extending the revolver until 2030 and intent to pay off the term loan by November 2026.

Aerospace and Defense: Total A&D sales were up 38.8% year-on-year. Commercial aerospace expanded 21.6%, defense 73.3%. Organically, commercial aerospace increased by 21.2% and defense by 22.4%. 44% of revenues were from this segment. Backlog was up to $1.6 billion from $940 million in March and $860 million last year, with an expectation to reach $2 billion by year-end. Industrial: Overall up 0.7%. Industrial distribution was up 3.3% while the OEM sector was down 4.7%. 56% of revenues were from this segment. Continued weakness in markets like oil, semiconductor machinery, and European machine tools was noted, but the industrial aftermarket showed demand in areas such as aggregates, metals, etc.

• Q3 revenues guided between $454 million and $462 million, representing year-over-year growth of 15.1% to 17.1%. Organic net sales expected to increase 7.4% to 9.5%.
• Adjusted gross margins projected at 44% to 44.25% for the quarter, with SG&A as a percentage of sales between 17% and 17.25%.
• Focus on executing the organic growth strategy, integrating VACCO, driving operational efficiencies, and achieving strong free cash flow conversion.

Q: Follow up on the backlog growth, including how much was from the VACCO acquisition and the $2B backlog by year-end.

A: Approximately $500 million of the backlog increase is due to the VACCO acquisition. The remainder of the business is up over 20% from last year. They are negotiating contracts and expect to conclude them within the month to approach the $2 billion backlog.

Q: Regarding Boeing production rates, aerospace plant utilization, and margin expansion.

A: Currently, aerospace plant capacity utilization is at 100%, and they are adding capacity, shifts, and manpower. Adding capacity will lead to better absorption of overheads and margin expansion.

Q: Aero OEM growth in the quarter, specifically commercial, and industrial distribution sequential decline.

A: Commercial OEM grew 27.9% this quarter, while commercial distribution was basically flat (down 2%). Industrial distribution was up 3.3% but down 8% sequentially, likely due to strong performance in the first quarter causing a sequential decline.

Q: VACCO margin expansion, engineering capacity, and AI use.

A: VACCO is running in the mid-20s on an adjusted basis, and they expect margin expansion over time through operational synergy. Engineering staff is sufficient, and AI is used for design optimization, such as getting quick design recommendations for tribological coupling issues.

Q: Boeing contract renegotiation impact on margins and status of negotiations.

A: Most benefit from renegotiations should be seen in shipments starting after January 1. Negotiations with airframe companies were ongoing for 2 years, and while neither side was completely happy, they weren't disappointed.

Q: AI review and implications on engineering staff.

A: AI provides suggestions that are reviewed for relevance. It stimulates thinking but doesn't immediately reduce the need for engineers; it's used as a starting point for research and design.