RBC Bearings Incorporated 2027 Q1 Earnings Call

Good morning, thank you for joining us for RBC Bearings' fiscal first quarter 2027 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, 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. We 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 all that said, I'll now turn the call over to Dr. Hartnett.

Thank you, Josh. Good morning, thank you for joining us. I'll begin today's call with a brief review of our first quarter results and discuss the trends we are seeing across the end markets before turning the call over to Rob, who will provide additional details on our financial performance. We delivered a strong start to fiscal 2027, with first quarter net sales increasing 19.2% year-over-year to $519.5 million. This was driven by exceptional demand in our aerospace and defense business, followed by strong growth across our industrial segment. Consolidated and adjusted gross margins for the quarter were 47.7%. Adjusted EPS increased 36.6% year-over-year to $3.88, compared to $2.84 in the prior year's period. Adjusted EBITDA rose 28.1% to $181.2 million, up from $141.5 million last year.

Free cash flow remained a strong $146.9 million, we eliminated $77 million of debt during the first quarter. Turning now to our two business segments. Approximately 57% of our revenue during the quarter came from the industrial segment. The remaining 43% came from our A&D business. A&D has continued to perform exceptionally well, with segment revenue increasing 36.9% compared to the prior year period, 16.6% of which was organic. I'll dive now a little bit into our two business segments, starting with aerospace and defense. Commercial aerospace growth was 21.8%, 20.3% on an organic basis. Defense was up 64.6%, 10% organically. Across the A&D business, we are observing healthy order activity, increasing RFQ volumes, contract inkings, and daily customer requests for additional capacity. We continue to expand production rates for commercial aircraft and engines at several production sites in North America and Europe.

As you know, our products are deeply embedded across the A&D markets. We see a very healthy demand outlook. Our space sector, we see an impressive and building momentum. As you may recall from our last earnings call, our space business generated approximately $70 million of revenue during fiscal 2026. In the first quarter alone, our space business contributed $25 million to revenue, putting it on a strong run rate for fiscal 2027. We now serve more than a dozen space customers. Robust investments by our major customers across both commercial and government space markets abound. We believe this business is still in the early stages of becoming a significant and long-term growth opportunity for RBC. Shifting gears now to marine. Our marine business demands production growth and a lot of it. Our backlogs now stands at $2.3 billion, much of which is marine.

Given the complexity of these designs, production can be challenging at times with knots in the supply chain that can appear. We have untied most of those knots and are planning to expand shipments from this sector significantly in the second half of our year. We think most of those problems are now behind us. Turning now to our industrial business. Performance remained strong during the period, with OEM revenue increasing 21.5% and distribution revenue growing 3.1%. During the quarter, we saw growth across sectors of aggregate and cement, food and beverage, warehousing, semiconductors, and grain industries. Only a small number of our end markets in industrial showed a very modest decline during the period, reinforcing our view that industrial environment remains healthy and poised for continued growth.

Overall, we are excited and energized by the strength and outlook of our core business sectors. Our priorities remain focused, execute efficiently, support our customers, and invest in the capacity and capabilities needed to meet the growing multi-industry demands for RBC products. We believe our differentiators make the difference. These are outstanding service levels, strong brands, leading market positions, technical expertise, and most of all, our employees. People who work every day to make RBC the very best we can be and provide the foundation needed to serve well all stakeholders. With that, I'll turn the call over to Rob.

Thank you, Mike. We started off fiscal 2027 with a strong first quarter that exceeded our expectations, with net sales growing 19.2%, which led to a 26.9% increase in our reported gross margin. Gross margins were 47.7% for the quarter, compared to 45.4% on an adjusted basis for the same period last year. The gross margins this quarter reflect the benefits of increased volumes running through our production facilities, driving operating efficiencies, favorable mix, and the benefit of contract resolutions realized during the quarter. Further, the timing of tariff refunds, which temporarily alleviated the impact of ongoing global tariff costs, provided almost 100 basis points of benefit to gross margins this quarter. First quarter A&D sales increased 36.9% year-over-year. With the VACCO acquisition excluded, our A&D business saw an increase in sales of 16.6%, which highlights the continued strong growth of both our legacy commercial and defense markets.

Net sales from our industrial business increased 8.4% during the period. A&D gross margins during the quarter were 44.5%, and industrial margins were 50.2%. We are pleased with the expanded gross margin in both segments, with A&D margins expanding more than 180 basis points year-over-year and industrial adjusted gross margins expanding more than 300 basis points year-over-year. On the SG&A line, we had total costs of $85.8 million, or 16.5% of net sales for the quarter. This ultimately resulted in an adjusted EBITDA of $181.2 million or 34.9% of sales for the quarter. That represents an approximate 28% increase in adjusted EBITDA dollars during the quarter compared to the same period last year. Interest expense for the quarter was $10.1 million.

This was down 17.2% year-over-year, reflecting the improved leverage position achieved over the last 12 months, coupled with lower interest rates compared to this time last year. We paid off $77 million of debt during the quarter and another $50 million on the term loan since the end of the quarter. The tax rate in our adjusted EPS calculation was 22% compared to last year's 22.5%. This led to an adjusted diluted earnings per share of $3.88, representing growth of 36.6% year-over-year. Free cash flow in the quarter came in at $146.9 million, with conversion of 144.7% of net income compared to $104.3 million and 152.3% last year.

Our capital allocation strategy continues to remain focused on deleveraging by using the cash that we generate to pay off our outstanding debt, and we continue to remain on track to pay off the remainder of the term loan by November of 2026. Looking into the second quarter of fiscal 2027, we are guiding revenues of $505 million to $515 million, representing year-over-year growth of 10.9%-13.1%. On a six-month basis, that would mean sales are expected to be $1.024 billion-$1.035 billion, representing growth of 14.9%-16.1% year-over-year. Adjusted gross margins in the next quarter are expected to be in the range of 45.5%-45.75%, and SG&A as a percentage of net sales is expected to be in the range of 16.5%-16.75%. With that, operator, please open the call for Q&A.