Executive Summary / Key Takeaways

• RBC Bearings Incorporated (NYSE:RBC) stands as a highly specialized manufacturer of precision bearings and components, strategically positioned at the high-end of the Aerospace/Defense and Industrial markets, leveraging its differentiated technology and operational excellence.
• The company delivered robust financial performance in the second quarter of fiscal 2026, with net sales increasing 14.4% year-over-year, driven by a significant 38.8% surge in its Aerospace/Defense segment and steady contributions from Industrial.
• A substantial and growing backlog, expected to approach $2 billion by year-end fiscal 2026, underscores unprecedented demand in defense programs and a strong recovery in commercial aerospace, necessitating ongoing capacity expansions.
• Strategic acquisitions, notably Dodge Industrial and the recent VACCO Industries, are proving highly accretive, enhancing market reach, product portfolios, and driving significant margin synergies.
• RBC's disciplined capital allocation, focused on deleveraging and opportunistic M&A, combined with its technological moat and operational efficiency, positions the company for sustained growth and margin expansion.

Precision Engineering at the Core: RBC's Enduring Competitive Edge

RBC Bearings Incorporated, founded in 1919, has meticulously carved out a niche as a leading international manufacturer of highly engineered precision bearings, components, and essential systems. The company's enduring strategy centers on the higher end of the bearing market, where its specialized manufacturing and engineering capabilities provide a distinct competitive advantage, fostering profitability and market leadership. This focus has enabled RBC to broaden its end markets, product offerings, and customer base through its extensive global footprint, comprising 60 facilities across 11 countries, including 43 manufacturing sites.

The markets RBC serves are inherently cyclical, yet the company has adeptly mitigated these fluctuations through a strategic blend of single and sole-source relationships, long-term purchase agreements, diversification across market segments, and a consistent drive to increase aftermarket sales. This approach ensures a more predictable revenue stream and strengthens customer loyalty in critical applications.

Competitive Landscape and Positioning

RBC operates in a competitive environment, but its strategic focus on precision and customization sets it apart. While larger, more diversified players like Timken (TKR), SKF (SKFRY), Schaeffler Group (SCFLF), and NSK (NPSKY) offer broader portfolios, RBC excels in specialized, high-value segments, particularly within Aerospace/Defense. For instance, RBC's high-precision aerospace ball bearings and self-lubricating designs offer superior performance and reliability under demanding conditions, a qualitative edge that can lead to stronger customer loyalty and recurring revenue in defense contracts. This contrasts with Timken's more generalized industrial approach or SKF's broader digital integration focus.

RBC's "Made in the USA" orientation also serves as a significant differentiator, particularly in the context of evolving trade policies and tariffs. This domestic production base positions RBC favorably to benefit from potential shifts towards localized supply chains, as management believes a strong tariff on China would be a "net good for RBC" due to its minimal direct competition in high-end Chinese imports and its ability to absorb costs or renegotiate contracts for Mexican operations. Significant barriers to entry, including high R&D requirements, stringent regulatory approvals, and established supply chains, further protect RBC's market position by limiting new entrants.

Technological Differentiators: The Moat of Precision

At the heart of RBC's competitive moat lies its core differentiated technology in highly engineered precision bearings and components. The company's expertise spans plain bearings with self-lubricating or metal-to-metal designs, roller bearings for industrial and military aircraft, and high-precision ball bearings for high-speed applications. These proprietary designs translate into tangible benefits, offering qualitatively superior performance under challenging conditions, enhanced system longevity, and significant friction reduction in critical mechanical systems.

A notable example of this technological edge is RBC's increasing content on the GTF Advantage engine. Management anticipates a "substantial" increase in its content on this engine, with the ramp-up expected to begin slowly in calendar 2026 and accelerate through 2030. This long-term engagement underscores the value of RBC's specialized components in next-generation aerospace platforms. Beyond product design, RBC actively integrates advanced technologies into its operations. The company leverages Artificial Intelligence (AI) for engineering problem-solving, with management noting that AI can provide "excellent" reports in "30 seconds" that would otherwise take a week for engineering teams to compile. This rapid access to insights stimulates innovative thinking and accelerates design improvements. Furthermore, RBC's plants utilize robotics and non-contact measurement technologies, enhancing manufacturing precision and efficiency. For investors, these technological differentiators are paramount. They contribute directly to RBC's competitive moat, enabling premium pricing, fostering deep customer relationships, and driving long-term growth by embedding RBC's critical components into essential systems across its diverse end markets.

Strategic Acquisitions: Fueling Growth and Synergies

A cornerstone of RBC's growth strategy has been its disciplined and highly successful approach to mergers and acquisitions, with 30 acquisitions completed since 1992. These transactions have consistently broadened the company's end markets, product offerings, and geographic reach, while simultaneously enhancing profitability through operational improvements and the introduction of new proprietary products.

The acquisition of Dodge Industrial, Inc. in fiscal 2022 serves as a prime example. Initially focused on cost synergies, the integration quickly evolved to drive significant revenue synergies. This strategic move resulted in "double-digit OEM sales growth for the past three quarters" of fiscal 2025 and an impressive "over 1,000 basis points in margin expansion within 18 months" of ownership. This success has set a high benchmark for future acquisitions.

More recently, on July 18, 2025, RBC completed the acquisition of VACCO Industries for approximately $275 million in cash. VACCO, a manufacturer of valves, manifolds, regulators, and filters for space and naval defense applications, immediately contributed $24.7 million to RBC's Aerospace/Defense net sales in the second quarter of fiscal 2026. Management anticipates "tremendous capacity for some operational synergy" from VACCO, projecting a "similar ramp" in margin improvement to that achieved with Sargent (approximately 1000 basis points over several years), with a target of 18 to 24 months for significant integration benefits. The synergy between RBC and VACCO is particularly strong in engineering, manufacturing, contract management, and supply chain, leveraging RBC's existing West Coast plant infrastructure to "substantially kick up production rates" for VACCO's products.

RBC's M&A strategy remains highly selective, prioritizing candidates that offer strong synergy, top-tier management teams, and a strategic fit with existing markets and customers. With its balance sheet in an "increasingly attractive position" following significant debt reduction, RBC is well-prepared to pursue additional accretive M&A opportunities, though it maintains a disciplined approach, focusing on internal organic growth opportunities first.

Financial Performance: A Trajectory of Strength

RBC Bearings continues to demonstrate robust financial health and operational effectiveness, reflected in its recent performance. For the second quarter of fiscal 2026, the company reported net sales of $455.3 million, marking a 14.4% increase over the prior year. This growth was primarily fueled by a substantial 38.8% increase in the Aerospace/Defense segment, complemented by a steady 0.7% rise in the Industrial segment. Net income attributable to common stockholders for the quarter reached $60 million, up from $48.5 million in the same period last fiscal year, translating to an adjusted diluted EPS of $2.88, a 25.8% increase.

Profitability remains a core strength, with a consolidated gross margin of 44.1% of net sales in Q2 fiscal 2026, compared to 43.7% in the prior year. The Industrial segment continued to exhibit strong margins at 48.2%, while Aerospace/Defense recorded 38.7% (42.3% on an organic basis). It is important to note that the VACCO acquisition introduced a $3.3 million unfavorable purchase accounting adjustment impacting gross margin in Q2 fiscal 2026, an effect expected to cease by Q1 fiscal 2027. Selling, general, and administrative (SGA) expenses increased due to continued investment in human capital and the inclusion of VACCO, which contributed $2.9 million. Interest expense, net, decreased by 14.1% year-over-year, benefiting from debt reduction efforts and lower interest rates, partially offset by the $200 million draw for the VACCO acquisition.

RBC's cash flow generation is consistently strong, with free cash flow reaching $71.7 million in Q2 fiscal 2026 and net cash provided by operating activities totaling $208.4 million for the first six months of fiscal 2026.

The company's disciplined capital allocation strategy has led to significant deleveraging, with trailing net leverage reduced to 1.7 turns by the end of fiscal 2025. The recent extension of the Revolving Credit Facility to October 2030 and the planned repayment of the Term Loan by November 2026 further bolster liquidity. Additionally, the automatic conversion of mandatory convertible preferred stock on October 15, 2025, eliminated a $23 million annual cash dividend payment, which will "further accelerate additional debt repayment going forward."

Segmental Deep Dive and Operational Excellence

Aerospace/Defense Segment

The Aerospace/Defense segment is a primary growth engine for RBC. In Q2 fiscal 2026, net sales surged by 38.8% year-over-year, with organic growth in commercial aerospace at 21.2% and defense at 22.4%. Defense sales alone were up 73.3%, including $24.3 million from VACCO. This segment is experiencing "impressive demand and momentum is strong," with the backlog reaching $1.6 billion as of September 27, 2025, and expected to approach $2 billion by year-end fiscal 2026. A significant portion of this backlog, approximately 90%, is attributed to A&D, with orders extending into the 2030s for critical programs like submarine components (Virginia and Columbia boats) and MRO supplies.

Capacity utilization for the airframe business is "pretty much at 100% everywhere," prompting aggressive expansion efforts. RBC is adding shifts, manpower, and capital, and relocating machinery to address demand imbalances in plants that generate approximately 70% of its A&D revenues. These efforts are expected to continue for at least the next two years, driving increased throughput. The recovery in commercial aerospace, coupled with Boeing's recent FAA approval to expand production rates, signals that "business is good and about to get better." Furthermore, new contracts with Boeing (BA) and Airbus (EADSY), effective January 2026, are anticipated to reflect a 30-35% increase in pricing, accounting for the rise in the Producer Price Index since previous agreements.

Industrial Segment

While the Industrial segment's net sales growth was more modest at 0.7% in Q2 fiscal 2026 (3.1% for H1 fiscal 2026), it demonstrated resilience and strategic strength. The industrial aftermarket showed robust demand across sectors such as aggregates, metals, grains, food and beverage, forest products, and warehousing. However, weakness persisted in the oil, semiconductor machinery, and European machine tools markets. The contraction in oil and gas is attributed to an "inventory correction" expected to normalize over nine months, while the semiconductor market is "starting to see that trickle back."

The "One Big Beautiful Bill Act," enacted in July 2025, is expected to positively influence industrial demand by restoring immediate deductibility of certain capital expenditures and full expensing of domestic research and development costs. This legislation, combined with a perceived "drill baby drill" period and the "inevitable" future lowering of interest rates, is anticipated to stimulate new project quoting. The successful integration of Dodge Industrial continues to yield revenue synergies, with management noting that "Dodge had several products that were through the test cycle when we acquired the business, but weren't capitalized... and we were able to turn on some of those new products pretty quickly."

Outlook and Guidance: A Clear Flight Path

RBC Bearings' management has provided a clear and optimistic outlook for the remainder of fiscal 2026, underpinned by strong market tailwinds and strategic execution. For the third quarter of fiscal 2026, the company expects net sales to range between $454 million and $462 million, representing year-over-year growth of 15.1% to 17.1%. Organically, net sales are projected to increase by 7.4% to 9.5%. Adjusted gross margins are guided to be between 44% and 44.25% for the quarter, with SG&A as a percentage of sales expected to be between 17% and 17.25%. Capital expenditures for the full fiscal year 2026 are anticipated to be between 3% and 3.5% of net sales.

The Aerospace/Defense business is on track for "mid-teens growth for the full year," with defense expected to grow "at least in the mid-to-high single-digits and likely more." The Industrial business is projected to finish the year "roughly flat with a healthy second half exit to the year." Management's confidence is further bolstered by the potential for all three of its end markets—commercial aerospace, defense, and industrial—to grow in unison in fiscal 2026, a prospect that has not been seen in some time. The outlook for overall margin expansion is "more positive," with full-year gross margin expansion of 50 to 100 basis points expected, likely weighted towards the back half of the year.

Risks and Challenges: Navigating the Terrain

Despite the strong outlook, RBC Bearings faces several pertinent risks and challenges. Capacity constraints in its A&D plants, where demand significantly outstrips current production capabilities, necessitate ongoing investments in labor, machinery, and facility expansions. The supply chain for exotic materials, with lead times extending up to 60 weeks, requires meticulous planning to avoid production delays.

The Industrial segment remains susceptible to macroeconomic sensitivities, including fluctuations in interest rates, consumer spending, and overall GDP expansion. Integrating recent acquisitions like VACCO, while promising, carries inherent risks related to achieving projected synergies and operational efficiencies within the targeted 18-24 month timeframe. Furthermore, approximately 11% of RBC's net sales are impacted by foreign currency fluctuations, posing a risk to reported earnings and cash flows. However, the company actively mitigates these currency risks through derivative financial instruments.

Conclusion

RBC Bearings Incorporated stands as a compelling investment thesis, characterized by its specialized market leadership, robust financial performance, and a clear strategic roadmap for growth. The company's deep-rooted expertise in precision engineering, coupled with its relentless pursuit of operational excellence and disciplined M&A, has forged a formidable competitive moat. The dual engines of growth—unprecedented demand in the Aerospace/Defense sector, fueled by long-term defense contracts and a recovering commercial aerospace market, alongside strategic initiatives in the Industrial segment—position RBC for sustained expansion.

With a strong balance sheet, a commitment to deleveraging, and a technologically differentiated product portfolio, RBC is well-equipped to capitalize on favorable industry trends and strategic opportunities. The anticipated synchronized growth across its key end markets in fiscal 2026, coupled with continued margin expansion and the successful integration of VACCO, underscores a positive trajectory for shareholder value creation. RBC's ability to consistently deliver highly engineered solutions for critical applications, supported by a proactive approach to capacity management and technological innovation, firmly establishes its enduring relevance and potential for long-term outperformance.