RBC - NYSE

Good morning, and thank you for joining us for RBC Bearings fiscal third quarter 2026 earnings call. I am Joshua 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, Vice President and Chief Financial Officer. As a reminder, some of the statements made today may be forward-looking, 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. I refer you to RBC Bearings' recent filings with the SEC for a more detailed discussion of the risks that could impact the company's future operating results and financial condition. These factors are also listed in the press release along with a reconciliation between GAAP and non-GAAP financial information. With that, I will now turn the call over to Dr. Hartnett.

Okay. Thank you, and good morning, everyone, and thank you for joining us. As usual, I am going to start today's call with a short review of our financial results and the outlook for the industry with our sectors. Rob Sullivan will follow me with some detailed details on the results. Third quarter net sales were $161 million, a 17% increase over last year. We experienced continued strong performance in our A&D segment and growth from our industrial businesses. Consolidated gross margin for the quarter was 44.3%, or 45.1% on an adjusted basis. Adjusted diluted EPS was $3.04 versus $2.34 a year ago, a 30% improvement. EBITDA came in at $149.6 million versus last year, $122.6 million, up 22%. Free cash flow for the period was a strong $99.1 million, and we paid down an additional $81 million of debt in the third quarter. 56% of our revenues were industrial, 44% from the A&D sector. Total A&D sales were up 41.5% year on year. Commercial aerospace expanded 21.5%, and defense expansion was 86.2%. Rob Sullivan will talk more about these details later in the call. Demand across the A&D sectors continues to be robust. As evidenced, we have modestly exceeded our $2 billion backlog mark that we spoke about last call. Remember, most of our A&D business is contracted and managed through daily or weekly orders, or polls communicated to us electronically, and as a result, represent only a modest footprint in today's backlog statement. If these joint contract obligations were extended based upon the statement of work content awarded, and projected build rates, they would likely exceed another half to a full billion dollars of backlog. Today, the strength and outlook on the A&D sector can only be described as extremely robust. Clearly, we are at a national inflection point in the commercial aircraft and defense industries. Let me explain with an overview of some of our key markets. So we will start with submarines. Submarines are facing accelerated fleet build-out. The number one defense priority today is submarines. This drives an unprecedented demand for our proprietary quiet running valves both for new construction and replacement. To support the current fleet, 66 Virginia ships are planned, 25 have been commissioned to date, and 12 Columbia class ships are planned. Number two, missiles and guided arms. Support for broad multiyear refurbishment initiative, for offensive and defensive missiles, and vision targeting systems, both here and overseas, create a strong environment for our precision assemblies and fuel management products. In Europe, NATO's 5% GDP initiative is growing demand for our products from the ground warfare system builders in Europe. This creates strong new requirements for RBC products developed over the past decade. In the USA, the refurbishment of new and refurbishment and new construction aircraft systems as well as the maintenance of untold numbers of helicopters and airframe platforms, including engines, creates strong and continuous needs for our proprietary components. We expect an expanded defense spending bill will likely accelerate the repair activities further. We also support the expanding need for both engineering support and staple components for systems that the big three space explorers are building, as well as others. They are racing to the moon and/or creating low earth satellite systems requiring sophisticated precision assemblies for targeting, thrust vectoring, fuel management, structural members, etcetera. I think you can see the picture that we are faced with right now in the A&D sector. Of course, all of these macro extremes in space and defense are simultaneous with the unprecedented build rates for commercial aircraft, including engines. RBC is deeply embedded in all of these areas, which create a tremendous continuous market for our product both at the OEM and the replacement levels. We are working diligently to add machinery and staff to several of our existing sites guided by our five-year per site plan to support these growing A&D revenues. Well, I hope this brief abstract gives you a 40,000-foot view of what our world is today in the A&D sector. We can certainly go into specific programs, outlook, products, proprietary positioning as well as the moats to any depth needed at another time. We have been working well over a generation to achieve industrialized catalog and fortify the portfolio that you see today. So let's turn to the industrial businesses now. Overall, our industrial business was up 3.1%. Industrial distribution was up 1.5%, while the OEM sector was up 7%. We saw strength in aggregate and cement, food and beverage, and the warehousing markets during the period. Recently, we have been seeing positive trends in some of these markets in terms of order demand, which will show as revenue as they work their way through lead time. The semiconductor industry is the biggest standout in this regard. Broad industrial demand strengthened measurably in late December and continued throughout January. In addition, we are introducing several new products to the industrial lineup for FY '27, many of which have been in testing and development since the Dodge acquisition. Combined, they promise to bend our curve on industrial growth. Also, we are opening a service center in the Midwest to better attend to the needs of our and tailor our product response to more customers in that region. I hope I gave you a feel for our environment and the momentum that exists at RBC today. I will turn the call over to Rob Sullivan for more discussion on the third quarter and the fourth quarter outlook.

Thank you, Mike. As Dr. Hartnett mentioned, we had another strong quarter. Net sales grew 17%, which led to a 16.9% increase in our reported gross margin. Gross margins were 44.3% for the quarter, or 45.1% on an adjusted basis compared to 44.3% in the same period last year. During the quarter, we delivered strong performance across our business segments, specifically within aerospace and defense, which has demonstrated strong growth, as Dr. Hartnett stated. Third quarter A&D sales increased 41.5% year over year. Importantly, the increase was 21.7% excluding sales from VACCO, demonstrating significant expansion from both our legacy commercial and defense markets. A&D gross margins during the quarter were 40.1% or 42.2% on an adjusted basis. Industrial margins were 47.5%, or 47.4% on an adjusted basis. Excluding VACCO, our aerospace and defense gross margins were 43.4% during the period. We are encouraged by the margin progress we have achieved within A&D, driven by increased efficiencies achieved in our plans, coupled with improving pricing on customer contracts. Looking ahead, we expect these benefits to continue to further support margin improvement while recognizing the impact will be gradual as these benefits flow through. On the SG&A line, we had total costs of $77.9 million or 16.9% of net sales for the quarter. This ultimately resulted in an adjusted EBITDA of $149.6 million or 32.4% of sales for the quarter. That represents an approximate 22% increase in adjusted EBITDA dollars during the quarter compared to the same period last year. Interest expense for the quarter was $13 million. This was down 8.5% year over year, reflecting the improved leverage position achieved over the last twelve months, coupled with lower interest rates compared to this time last year. We paid off $81 million of debt during the quarter and another $67 million since the end of this third quarter. The tax rate in our adjusted EPS calculation was 22.1% compared to last year's 22.2%. This led to adjusted diluted earnings per share of $3.04 representing growth of 29.9% year over year. Free cash flow in the quarter came in at $99.1 million with conversion of 147% compared to $73 million and 127% last year. The higher conversion rate was due to the increased earnings and working capital management during the quarter. As we have noted previously, our capital allocation strategy going forward will remain focused on deleveraging by using the cash that we generate to pay off outstanding debt. Our expectation is to pay off the remainder of the term loan by November 2026. Looking into the fourth quarter, we are guiding revenues of $495 million to $550 million representing year over year growth of 13.1% to 15.4%. On the gross margin side, we are projecting adjusted gross margins of 45% to 45.25% for the quarter and SG&A as a percentage of sales to be between 16% and 16.25% for the period. With that, operator, please open the call for Q&A. Thank you. Before pressing the star keys.

Our first question is from Kristine Liwag with Morgan Stanley. Please proceed.

Hey, good morning, everyone. Rob and Dr. Hartnett, I just wanted to follow up regarding your commentary on the industrial business. So you mentioned that you are seeing strength in aggregate and cement, food and beverage, and warehousing. You have got the new products that you are introducing for fiscal year 2027, and, you know, it sounds like the semiconductor has been doing really well. I was wondering for these can you provide what is embedded in your 4Q revenue outlook? And also when we go into 2027, how do you think about growth for these end markets?

Yeah. Kristine, you know, the way we have our April in terms of what we are forecasting for year over year growth. Maybe slightly conservative on the industrial side. So, you know, we are just expecting more of the same. Obviously, we saw the PMI this week was positive.

So if that trend were to continue, that would be a certainly a bullish sign for our business.

Okay, great. And then if I could follow up with VACCO, the quiet running valves is a really differentiated technology. I was wondering outside submarines, are there other use cases for this product?

Mike, you on? So Kristine, it is Dan Bergeron. For Sargent Aerospace, their products are specifically for submarines. And on the VACCO side, there are some applications for them in space on satellites.

Gotcha. Super helpful. And then does it you know, I mean, just following up on my question, with the improving outlook and also when we think about the order activity that you have faced, is it fair to say that fiscal year 2027 would be a higher growth year for an industrial than fiscal year 2026?

We are expecting that, Kristine. Yes.

Yes.

Great. Thank you.

Our next question is from Michael Ciarmoli with Truist Securities. Please proceed.

This is Alexandra Mandry on for Ciarmoli with Truist Securities. And thanks for taking my question. We have seen that backlog growth has been strong and at all-time highs with that 30% year over year growth. So could you add some more color in terms of order composition and submarket breakdown? And also, what is the relationship with backlog and revenue going forward?

Okay. There was a number of questions there. The first question was the composition of the backlog. And I think Rob has that. Yeah. I but I can tell you that over 90% of our backlog, backlog is really our A&D market. Most of our industrial business tends to move in and out and does not really get stuck in the backlog. And in terms of the duration, which I think was another part of your question, you know, some of these contracts specifically with Sargent or VACCO can be, you know, multiyear going well beyond the next, you know, twelve to twenty-four months.

Great. And then I guess, like, can you break down the backlog further between the sub within A&D?

You know, I do not have all that detail right in front of me to share with you at this time. You know, we just kind of look at the segment level. But, obviously, with Sargent and VACCO, there is a significant portion of our backlog with the marine products.

That makes sense. And then I guess just one other one. So on the fiscal 1Q 2026 call, you mentioned using roughly $30 million run rate for VACCO quarterly revenue. So given that, did you divest maybe from any contracts or make any other changes? That would reflect that slight performance discrepancy?

I mean, they were at 29 this quarter, so they were pretty close to that $30 million run rate. There is just timing. We are in the middle of integration, and these contracts can be a little bit lumpy quarter to quarter, but I would say we feel pretty good with where that business is operating and are optimistic for the next year.

Great. Thank you.

Our next question is from Steve Barger with KeyBanc Capital Markets. Please proceed.

Good morning, Dr. Hartnett and Rob. This is Christian

Well, I think one of the outperformance number one, the Dodge brand is a very strong brand in the industrial marketplace, particularly the industrial MRO marketplace. And that marketplace is pretty short cycle. And as a result of having being such short cycle, your product availability needs to be high in order to capture the sale. And so Dodge does an outstanding job at managing their product availability and their hit rates. And stocking of their core products. So I think we are probably industry best in that regard. And so that helps performance when times are tough. There was a second part of your question, Steven. I forget what it was.

Yeah. It was just based on like your current business and mix. Do you think that can continue into calendar 2026?

Yeah. It should. I absolutely think it should. You know, we are expecting a stronger industrial economy in '26. Certainly, it started January started off well. Semicon has come back in a significant way, which was dormant for a long period of time, and that is an important sector for us. So yeah, I think we are going to do better on the industrial side. And calendar '26.

That is great. And then just switching gears to Aero and Defense. A couple quarters ago, you mentioned some synergies on the space side with VACCO and legacy RBC. Just any quick update there and maybe more broadly, any updates on how you are thinking about the broader space industry and what specific markets or applications that you currently are not exposed to or not involved in that could be interesting. Does that require more engineering expertise or capacity? Just any kind of thoughts there. Thank you.

Yes. Well, VACCO is a, you know, a company we learn more about. You know, every month. And one of the things that we are learning about VACCO is they have a very good product program that services the space market with staples that the space market requires in order to build out satellites. And they have a tremendous brand and following in these staples. And so it is a little bit like the bearing business, if you have a stocking position on these staples, you are liable to get the order. And you are liable to significantly improve your sales. And so we are looking at their product offering and deciding exactly which products we should be stocking. And to some extent, we think if we had those products in stock, people would actually develop or design satellite systems around those products because when it is undefined, it is undefined. And people kind of grow their own spoke. So, we could help guide the industry by making these products more available. And at the same time, improve our sales to the satellite OEMs. And there are quite a few of these people.

That is great. Appreciate the color. Thank you, guys.

Our next question is from Scott Deuschle with Deutsche Bank. Please proceed.

Hey, good morning. Dr. Hartnett, can you clarify whether the new Airbus contract included a meaningful shipset content increase on any of your programs?

Yeah. Yes. It did. I guess it is definitely, you what do you define as meaningful? I mean, we I am just running through some of the programs, the new programs that we captured in my own mind here on the Airbus contract. So yeah, I would say it is probably increased Airbus content 20%. That sort of thing.

Okay. Can you say when that might layer into your revenue? Is there maybe a one to two-year lag as you tool up for that higher content? Or could you see it sooner?

We expect to see it in this particular quarter.

Okay. That is great. And can you also give us a sense for how large the missile business is today? Relative to defense overall? And would you expect missile revenue growth to outpace commercial aerospace given some of these big contracts Lockheed and Raytheon have gotten?

Yeah. I mean, missiles are they are a funny breed. I mean, they are used for all sorts of things. You know, there is the HIMARS and there is the JDAMS, and then those are bombs. And there is the hypersonics and then there is the standard missiles that go into just our part of the F-16 package. And so we are pretty much across the board on all of these programs. I cannot you know, it is hard to see exactly how big this missile business can be. Particularly when they start building out hypersonics. But you know, all those hypersonics are going to go on the Columbia's and the Virginia's. So we are definitely going to be part of that program in a meaningful way. But I do not have an answer for you with regard to how big the overall missile business can be at RBC versus commercial aircraft. I do not think it is going to be as large anywhere near as large as our commercial aircraft business.

Okay. And then Rob, I was wondering if you could pull apart the gross margin guidance by segment for the fourth quarter. In particular, help us understand the rate of sequential gross margin improvement in A&D given that pricing step up? You have coming through?

Yeah. I mean, I think one of the best ways to look at it is, you know, we are guiding you to a gross margin that is, you know, at the high end incrementals where we were in Q3. And we would expect aerospace and defense to be growing at a rate faster than industrial. So that should imply that there should be some increment to what we have seen in aerospace and defense. So as I said, it was about 42.2 this quarter. You know, you should see some gradual improvement in this quarter that is getting us to that guidance. So that is how it breaks down. I think industrials should more or less look where they, you know, they have been. You know, I think we have some opportunities, but we have a little bit of headwind just from some absorption challenges that we always have in the third fiscal quarter. With the holidays and just fewer earned hours. But generally speaking, industrial should look like it did in the third quarter, I would expect.

Okay. Thank you.

Our next question is from Pete Skibitski with Alembic Global. Please proceed.

Just a couple for me. Mike, can you update us or remind us kind of where you guys are at on the production rates right now for the core Boeing and Airbus programs?

Oh, yeah. Well, I think Boeing is, you know, they are pushing towards they are at 38 737s a month. Looking to go to 42, looking to go to 50. An overall objective of getting to 60. The exact dates that those that occurs, I do not have them in front of me, but I do have, you know, in one of my files. But the 60 is not that far off. And then the July is, you know, six as I remember, six going to eight per month. And that is a significant step up for us. We have a plant that is, you know, very dependent upon the 787 shift. And so that is very helpful. And then you know, the triple seven, triple seven x, seems to be coming into its own. But I think that is only a few ships a month in the distant future. I do not have that number in front of me.

Okay. And just are you guys producing kind of in line with where Boeing is? Or are you I think typically, I do not know, six to nine months ahead of their production rates. Is that where you are at right now? Or do you feel like you are there maybe working off some inventory?

I think, you know, in one of our smaller plants, Boeing is working off some inventory and that sort of turns around in July. And all of the other plants, they are pretty much lockstep with their production rates.

Okay. Okay. Got it. One last one for me, maybe for Rob. Hey, Rob, you guys were kind of hot this quarter on the CapEx spend, inflected up a bit. Are you still on is that just timing or you still on tap to be about 3.5% spend for the full year? And maybe continuing that level into fiscal 2027?

Yeah. We have made some strategic investments in some capacity build-outs, but I think we will still end up three and a half less than 4% for the full year.

Okay. Got it. Thanks, guys.

Our next question is from Tim Thein with Raymond James. Please proceed.

Great. Thank you. Had two on the Industrial business. On the I think, Rob, you said earlier that what is embedded in the fourth quarter guide is a growth rate for that business. Comparable to what you did, call it 3% in the third, if I heard that correct. I am just curious, is that in terms of your obviously, this is a business a lot harder to predict than A&D in the short term. But I am curious what you have seen kind of in recent months trends and just in terms of order activity. Does that get you to a similar kind of outcome? Or is that I do not just maybe just help us in terms of what you have actually seen in terms of incoming order trends relative to that number?

Yeah. I know. We you know, what is built in for the fourth quarter is probably even a little bit below that 3%. But to be honest, the orders have been pretty good. In the recent months. So we feel really comfortable with what we are forecasting.

Okay. And then, just as part of is it as you integrate Dodge, there is a lot of investment that the company has made over the years in terms of making that more of a global business. Where are you in terms of realizing some of those growth initiatives? You highlighted the service center piece earlier. I do not know if that is because obviously, I am not international. But maybe just if there is a way to kind of help us in terms of the underlying growth prospects of Dodge, Yes, that is all. Thank you.

Yeah. You know, I think we are still in the middle innings. On that process, and we realized a tremendous amount of synergy on the cost side with Dodge as we have all talked about in the past. I think we are in the middle innings, and then some of those new initiatives being put in place. We have had a lot of great meetings and discussions around that new service center. Some new product initiatives that, you know, that we are in the process of deploying. So I think there are some bright things ahead on that business.

Thank you.

Our next question is from Jordan Lyonnais with Bank of America. Please proceed.

Hey, good morning. Thank you for taking the question. I wanted to touch on missiles again. If we the frameworks that Lockheed and Raytheon now have, when we start to see those turn into real contracts in production, how are you guys thinking about CapEx or do you need additional investments, to hit these quadruple production rates? Thank you.

Well, it is the question you asked is the same question the missile builders ask us. Do you guys have the capacity to take on this much demand? And we do. And so we do have to add some equipment. The equipment that we add is certainly within that 3.5% that Rob has been talking about. So it is modest, and it is it usually it is just going to use our capital base that we have in place today for the most part to a more effective level. So, yeah, you should not see any surprises on the cap side in order to tool up this business.

Great. Thank you so much.

Our next question is from Ross Sparenblek with William Blair. Please proceed.

Good morning. Just starting with VACCO, I mean, it looks like some really strong performance on the margin side in the quarter. Can you maybe just help us parse out the success there? If this is one time and if we should expect that to be the largest kind of margin contributor to aerospace and defense gross margins in the fourth quarter?

Well, aerospace gross margins in the fourth quarter ought to be pretty good, Ross. And it is a little bit difficult for us to predict how good, but I suspect they are going to be better than they were in the third quarter. You know, given volumes and pricing and sort of the other factors that go into the calculus to make it all work well. So, yeah, those margins will definitely expand. When we put together the outlook for the fourth quarter, you know, it implies a 7.5% organic growth rate in a 14% total growth rate. You know, versus last year's fourth quarter. The 7.5%, you know, sort of balances aircraft and defense out at 10%, whereas, industrial is somewhere less than 5% in order to get to the 7.5%. So we are looking at an aircraft. You know, we use an aircraft you know, a little bit north of 10%. Against a third quarter, which was 21.3%. So I think, you know, I think the fourth quarter outlook is very conservative. But we elected to make it conservative because really, for no other reason than to be conservative. So notwithstanding that, I think we expect to have a very strong fourth quarter. We have great market positioning. Strong teams, good order book, it is a matter of it is only a matter of execution. And there is one thing about RBC, we always execute. So I think in the fourth quarter, I think investors are going to be very pleased with the results.

Yeah. And that is pretty clear with the gross margins from VACCO in the quarter. I do not get the impression that it is a lot of operating leverage there. I mean, was it more cost out and what is kind of maybe the revised outlook on where those margins can go? It feels like we should be converging with, you know, consolidated aerospace more aerospace and defense gross margins sooner rather than later.

Yeah. I would think those margins are going to you know, A&D margins are going to chase up towards the industrial margins. I do not know if they will reach them, but they are going to close the gap.

Okay. That is helpful. And then maybe just another one on the industrial business. So it looks like your peers are kind of guiding for low single digits 2026. You maybe help us think through kind of the more sorry?

The peers are guiding to what for '26?

Looking like low single digits. Kind of a, you consolidated. And I think a lot of that is kind of cyclicality maybe the heavy machinery, capital goods, and that is the more cyclical piece of your industrial business. Anything to call out in the channel there? I mean, do you think inventory is balanced? And if we do start to see elevated build rates like the OEMs are expecting, how soon should we expect a catch-up there?

Yeah. I think our industrial business will be sort of better than the single digits. It will be we are expecting sort of high single digits as worst case. So but we are not, you know, we are not coming out with full year guidance. We never do. And but we are looking at it. We are pretty optimistic about what is involved in the year ahead.

Alright. Well, thank you very much. Congrats on the quarter, guys.

Thank you. Thanks.

With no further questions, I would like to turn the conference back over to Dr. Hartnett for closing remarks.

Okay. Well, this concludes our third quarter conference call, and we thank you all for taking the time today to participate and look forward to talking again probably late May. Good day.