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Good morning, and thank you for joining us for RBC Bearings Fiscal Fourth Quarter 2026 Earnings Call. I'm Josh Carroll with the Investor Relations team. With me on today's call are Dr. 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 and under the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected or implied 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 the reconciliation between GAAP and non-GAAP financial information.

With that, I'll now turn the call over to Dr. Hartnett.

Thank you, Josh, and good morning, and thank you all for joining us this morning. As usual, I'll begin today's call with a brief review of our financial results and highlight several key trends we see across the sectors. Now turn the call over to Rob Sullivan, who will provide additional details on our financial performance for the fourth quarter.

Fourth quarter net sales increased 18.3% year-over-year to $518 million, driven by continued momentum in our A&D segment and steady growth in our Industrial businesses. Consolidated gross margin was 44.4% for the quarter or 45.3% on an adjusted basis. Adjusted diluted EPS increased year-over-year to $3.62 compared to $2.83 in the prior year period. Adjusted EBITDA rose 21% to $168.9 million, up from $139.8 million last year. Free cash flow remained a strong $67.5 million, and we paid down an additional $116 million of debt during the quarter.

Now turning to our 2 business segments. Approximately 57% of our revenue during the quarter came from our Industrial segment, 43% came from our A&D segment. Our A&D business has continued to deliver exceptional performance with segment revenue increasing 41.2% compared to the prior year period. This strong momentum in Aerospace & Defense is further reflected in our backlog, which has continued to expand and currently stands at approximately $2.3 billion. This growth continues to be driven by robust demand across the defense and space markets. Along with unprecedented commercial aircraft build rates at the major builders. For the full year, A&D segment was up 32%, and of which 19.1% was organic.

With regard to our business segments, commercial aircraft was up 17.8%, 17.3% of which was organic. Defense was up 65.4% and 22.1% was organic. Our key revenue drivers, first, as many of you know, marine has been a significant contributor to our backlog growth driven by accelerating build-out of the submarine fleet. Given the strategic importance of submarines within today's defense strategies, we expect this to remain a meaningful tailwind as production rates continue to ramp across all subcontractors for both the Virginia and Columbia class programs, as well as fleet spares. We are adding machinery and floor space to accommodate increased production rates as we speak.

Next is missiles. Missile-related revenue was up significantly this year with revenue for this sector exceeding $45 million in the fiscal year. Some of this gain did come from our recent VACCO acquisition. This growth really reflects increased content we have across several top missile programs, and the expanding demand we are seeing given the current global conditions, we are planning for sustained growth and requirements for this sector in the current and future years.

We've also seen an impressive ramp in our space business as investments in this sector continue to hit record levels. During the year, we saw our space revenues come in just above $70 million, including $30 million from 8 months contribution by VACCO. This inventive growth, especially considering that space-related revenue was only $4 million for RBC back in 2021. As this trend accelerates and private investment grows, space infrastructure is being viewed not only as a major strategic national priority, but as a substantial and essential commercial reality.

On top of this strong momentum, we are also supporting the unprecedented production rates for commercial aircraft and engines. As you know, we are deeply embedded across these markets on 3 continents. And as a result, we expect to see continued growth at both the OEM and aftermarket levels.

Turning now to our Industrial business. Performance remained steady and up during the period with OEM revenue increasing 7.8% and distribution revenue growing at 4.5%. During the quarter, we saw strength in aggregates, warehousing, food and beverage, grain and semiconductor end markets. As we look to the fiscal year 2027, we are encouraged by the continued strength of our operating environment and the building momentum across many businesses.

We firmly believe our strong service levels, coupled with our brands, our renowned brands, market positions, and technical expertise provide for continued strong financial results along into the future. This was a record year for RBC. And as always, it is a true team effort. I want to thank our employees across the organization for their hard work, dedication and unwavering commitment to executing our strategy and serving our clients with excellence.

With that, I'll turn the call over to Rob, who will walk us through the financials.

Thank you, Mike. We closed fiscal year 2026 with another strong quarter that exceeded our expectations with net sales growing 18.3%, which led to an 18.9% increase in our reported gross margin. Gross margins were 44.4% for the quarter or 45.3% on an adjusted basis compared to 44.2% in the same period last year. Fourth quarter A&D sales increased 41.2% year-over-year, with the VACCO acquisition excluded, our A&D business saw an increase in sales of 22.8%, which highlights the continued strong growth in our legacy commercial and defense markets. A&D gross margins during the quarter were 41.6% or 44.2% on an adjusted basis and Industrial margins were 46.5% or 46.2% on an adjusted basis.

Excluding VACCO, our Aerospace & Defense gross margins were 43.7% during the period. We are encouraged by the margin improvement we've achieved within A&D, driven by increased efficiencies, volumes and newly awarded contracts in the period. 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 cost of $86.9 million or 16.8% of net sales for the quarter. This ultimately resulted in an adjusted EBITDA of $168.9 million or 32.6% of sales for the quarter. That represents an approximate 21% increase in adjusted EBITDA dollars during the quarter compared to the same period last year. Interest expense for the quarter was $11.2 million. This was down 12.5% 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 $116 million of debt during the quarter and another $27 million since the end of the fourth quarter. The tax rate in our adjusted EPS calculation was 21% compared to last year's 21.7%. This led to adjusted diluted earnings per share of $3.62, representing growth of 27.9% year-over-year.

Free cash flow in the quarter came in at $67.5 million, with conversion of 73.6% compared to $55 million and 75.7% last year. For the full year, free cash flow was $342.6 million, with conversion of 119.1% compared to $243.8 million and 99% 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 first quarter of fiscal year 2027, we are guiding revenues of $500 million to $510 million, representing year-over-year growth of 14.7% to 17%. Adjusted gross margin is expected to be in the range of 45.25% to 45.5%, and SG&A as a percentage of net sales is expected to be in the range of 16.5% to 16.75%.

with that, operator, please open the call for Q&A.

[Operator Instructions] And our first question comes from the line of Kristine Liwag with Morgan Stanley.

I wanted to dive a little bit deeper into your comments about the missile end markets. So first, you talked about how VACCO was able to increase share of content on programs. Can you expand more about what that looked like? And also the genesis of this question ultimately, with the multiyear agreements that we're seeing the Department of War, signed with the missile providers, we're seeing volumes of 200 to 1,000% growth in the next 5 to 7 years. So I just want to understand more how VACCO plays into that? And then also with VACCO's deeper relationships with some of these customers, are there avenues in which RBC Bearings can increase total company share into some of these end markets to solve for the shortages that the industry is facing.

Well, Kristine. There was a lot of questions in there.

Sorry. I hope you answered them all though, Mike.

Well, VACCO provides some pretty unique components to manage fuel sales. And in the case where the fuel system is generated by liquid propulsion VACCO has products that are pretty widely used, particularly on some of the more significant programs like the Tomahawk. So we expect to see more expansion with VACCO on these missile programs as time goes on and sort of enough said there.

But on the RBC side, I mean, we're probably we sort of took a little survey of around our plants to see exactly which systems we were servicing. And it's pretty broad range of systems. And it certainly gets the well-known Patriot and the GMLRS and the [ Hawks ] and but there's also the standard missile, the [ Jalans ], the [ Aster ] missile in Europe, and there's a next-gen missile that's recently been developed to replace the [ fire ]. So we're on all those systems. And it is -- and we are definitely expanding our production capability to participate further in all of these programs. So that's happening now. I'm not sure I got all of your questions answered, but I think I might have touched on a few of them.

Yes. That's super helpful to get the context for those programs. But I guess, Mike, as you kind of look at the significant growth the industry needs to build to be able to meet the capacity needs of the Pentagon. It just seems like a very big number, right? So I guess my follow-up question to that is you had your existing share and you've got this volume, and it sounds like you'll be prepared for that. But are there other avenues where you could take higher chipset content in these programs, so you would get the double benefit of the volume plus potential share increase?

Yes. The answer there is yes, and we're working on that now. And so we're working on both -- the volume is pretty substantial on some of these programs. I think one of the programs I didn't mention was the hypersonic missile program, which we're also part of, which is a significant program for us. So yes, I mean, we're going to have our hands full with volume. And at the same time, we're increasing mix. And increasing the mix is a little bit slower because it requires tooling and that sort of thing. But it's within -- it's within a 3-year -- certainly, within a 3-year period.

Great. That's super helpful. And you also called out your space revenue exposure, which is larger right now than your missile exposure. For this end market, can you give us an idea about your customer set? Are these traditional base companies? Are these the new space companies? What's your role in that ecosystem? And where do you see the growth coming from?

Well, it's both. It's both the existing people that service the space industry since Apollo, it's the Boeings and the Lockheeds and the [ Northrops ] and the Raytheons, the Collins and so on. So it's that standard group, which we been long associated with , but it's also the new people, such as of course, SpaceX and Blue and Rocket Lab and a few others whose names don't come to mind quickly.

So I mean, it's both sides of the street. It's -- right now, I'd like to think of it as 50 years ago when it was the Apollo program, the only table in the casino was NASA. And now it's a huge casino with many tables, NASA being one of the tables. And so there's just a lot of places to do business for our particular mix of talent and manufacturing skills. And so we're really very actively engaged in trying to determine how to take that forward in the best possible way for our shareholders.

Great. Very great to see a solid quarter from you.

Thank you.

Our next question are from the line of Steve Barger with KeyBanc Capital Markets.

Mike, for the last few quarters to include your comments today, you've talked about adding equipment and head count to support customer ramps. I'm curious, where are you tightest capacity-wise by end market or program? And what do you think the entire company is capacitized to from a revenue standpoint.

Well, you're asking even a bigger question, Steve. Well, certainly, we're tight on producing marine hardware. There's no question about that. It's got our attention, and we're adding equipment and floor space and test labs and people to accommodate that. I mean the submarine business has been sort of dormant since they canceled the [ Seawolf ]. And now it has to -- the entire support system is in this extremely aggressive ramp and doing everything they can to keep up with the priority right now being the Colombia. And so it's -- yes, it's taxing. We're up to it. We're making progress. We're adding capacity. We'll probably we're attempting to double our revenues over a short period of time, years, not months, Steve. It's all production related, but we're definitely going to double our revenues in that sector over the next 24 to 36 months.

And then just overall company, like you're running at $500 million run rate, so $2 billion annualized. How much does the current footprint with incremental kind of tweaks like support $2.5 billion or $3 billion? Just trying to get a sense for when you need a more robust and long life kind of capacity expansion or CapEx cycle?

Well, the CapEx cycle, this past year has been adding bricks and mortars and sort of move some plants around, because the infrastructure in existing plants got a little tired and it seemed better to build a new one than it did to fix the old one. So we spent a little bit of money on brick and mortar. And -- but going forward, it's going to go into equipment. And so we expect to be in that 3.5%, maybe 4% range, some years, and it will be hard equipment.

And in terms of production ability, we have some great plants in Mexico that are well staffed and well tooled, and our big production aids for us. And so -- and our ability to flex those plants was high. So that really helps with the capacity situation. It's more difficult to hire in the United States in many areas. It's taxing, it's less difficult in Mexico. And so it's -- that's been part of our strategy in terms of increasing our tool growth.

Got it. And then for a follow-up, with multiple programs ramping at the same time, are you seeing supply chain constraints for the things outside your control that could affect the programs you sell into? Any issues with castings or forgings or things that you source?

Yes. On the A&D side, there's always the issue of titanium. There may be -- we haven't seen it yet, but we're watching aluminum. High alloy steel is available at a price that's extraordinary. But if you have the money, you'll get this deal. So those are some of the areas to watch for us.

Next question is from the line of Scott Deuschle with Deutsche Bank.

Dr. Hartnett, can you give us any sense as to what level of commercial aerospace growth you're planning for in fiscal 2027?

Well, yes, certainly, the demand will be greater than our growth and our growth will be beyond what we're planning for growth in commercial aerospace 15%.

Okay. And would you expect defense and space together to grow faster or slower in commercial aerospace?

Faster.

Okay. Good news. And then there's been some recent notable strength in the industrial automation market recently. I guess, can you remind us as to how much exposure you have to industrial automation and then speak to the demand trends that RBC is seeing in that vertical specifically.

Industrial Automation as a supplier to industrial automation. Yes. Yes. Well, I mean, that part of it is a supplier to that, that's a little bit of a small sector for us, but it's we like it. I mean it's -- I think we're in the $40 million to $50 million a year range kind of in that mean -- that's space. And yes, certainly, semicon fits into that space nicely where we supply robotic components for chip manufacturing. And that demand has been strong. It hasn't shown up in FY '26. Is a significant contributor, but it will in '27.

Okay. And then can you share any detail on what the current level of annualized sales is for RBC into the humanoid robot sector? And what type of growth you've been seeing there recently?

It's small. It's for us, that's still sample making. And we continue to support the industry as it's being developed. We don't see any values there from anybody.

The next question is from the line of Peter Skibitski with Alembic Global.

Nice quarter. Mike, in the way of understanding kind of recent trends, are you guys seeing any headwinds in the commercial aerospace aftermarket, just from airlines kind of tightening their belts in this higher jet fuel environment, if we think about April and kind of May to date.

I'd say we haven't seen it yet. We're watching it. We're -- it's on the bubble.

Okay. And your aftermarket, is it more leverage to the engine than to the airframe?

Yes.

Okay. Okay. I guess last one for me. Just on -- can you update us on where you're at with the -- your commercial OEM, the LTA repricings. I'm just wondering if all of your LTAs have repriced at this point to sort of the post-COVID inflation environment. I think that written now that January 1, 2026, you'd have -- I don't know if it was 100% of your contracts would be repriced at that point or some lower percent. I'm just wondering if you could shed light on that.

Yes. I would say that's about 60%, there's still another 40% to go.

Okay. I guess by the end of this fiscal year or maybe 2 more fiscal years?

Effective January '27.

[Operator Instructions] The next question is from the line of Alexandra Mandery with Truist.

Nice results. I just want to see if you could provide any further details underpinning the fiscal 1Q guidance and any initial thoughts on fiscal 2027.

Yes. Just like we typically do when we put these together, we have a range of outcomes both in aerospace and industrial, and that's kind of where we led to the [ 5 to 5 ] on sales. The aerospace margins have obviously been accelerating, and we're very happy with that. That was contemplated when we were looking at the consolidated margins you see in Q1 -- the Industrial margins have obviously been coming in at a higher level. So as Aerospace & Defense has been growing faster, it just puts a little bit of dilutive effect on the consolidated margins. But for the full year, we think we can still expand the consolidated gross margins by about 50 basis points. So that's kind of how we put it together. And in SG&A, it's just a reflection of our kind of continued investment in the organization to effectively be able to achieve the growth that we see in front of us.

Great. And I guess what is your M&A appetite going forward? And what capabilities our company profile might you be looking for if you're interested.

Well, the profile is would be mechanical products, servicing a customer base similar to -- very similar to almost by name to the customer base that we currently service. It would be a company that would be preferred to be solvent. And it would be in a geography that would be easy for us to get to repair an insolvent company.

The next question is a follow-up from the line of Scott Deuschle with Deutsche Bank.

Rob, the SG&A costs came in a bit high relative to guidance this quarter. Can you speak to what drove that? It looks like stock comp is a piece of it, but I think...

It's really primarily personnel costs that kind of flow through just the timing and certain compensation matters that kind of flow through. Stock comp specifically was up notably and just a few other administrative costs that kind of came through.

Okay. Should we expect it to trend above $80 million a quarter going forward? It looks like that's what the first quarter guide implies, but just wanted to check if I should continue to have that in the model.

Yes. I think that's probably right. It will be a little bit above 80%.

Okay. And then last question for Dr. Hartnett. Just as SpaceX ramps up production of Starship, should we expect that to drive an acceleration in your space revenue growth?

Modestly, I think. I think we're still working on some Starship programs, but I'd say right now, the outlook there for us would be modest.

The next question is from the line of Steve Barger with KeyBanc.

Mike, last quarter, you were early versus other companies talking about an industrial inflection, saying demand improved in December and January. Has that momentum really held up exiting your 4Q into 1Q?

Yes, I would say it has. I mean it's modest, but it's held up.

I would say the story through industrial earnings has been kind of a broadening out of orders across automation, semis, power, some of the same things that you talked about. I guess are you seeing more breadth in the Industrial order book?

Breadth, in terms of sectors serviced?

Yes, across more end markets. Last year, aerospace, defense, I guess things related to data center were really the drivers. Is that broadening out to some degree?

Well, when I -- when you look at the amount of money that's going into the AI and the build-out of the server farms and it's -- there's an enormous amount of build-out that's occurring right now. And since our aggregate business is aggregate business up 20%, 17% or something like that. So you can see it through our aggregate business. That's something extraordinary is happening in some place in North America and -- yes, that has breadth.

Yes. No. I think that's an interesting comment on just kind of that should be a leading indicator to a lot of other industrial end markets as that kind of flows through. Does that make sense to you?

Yes, it does. Yes.

The next question is from the line of Ross Sparenblek with William Blair.

Just one quick question for me. Did I hear you right at the ex VACCO Aerospace & Defense gross margins were 43.7%

Correct.

1So that puts VACCO around 48% gross margins in the quarter?

VACCO was about -- it was over 46% this quarter, they had some really strong unique items flow through this quarter, great mix and that kind of pushed it. So I would not expect that to be the naturalized run rate. For the full year, I believe their adjusted margins were probably more in the mid-30s, which is their normal operational level. And that's been forecast for Q1.

Okay. Well said that's a pretty exceptional trajectory if we were to assume that into '27.

Yes, yes, don't assume that.

All right. Well, nice quarter.

Thank you. At this time, I'll turn the floor back to Dr. Hartnett for closing comments.

Okay. Well, we thank everybody for their participation and interest today in RBC and look forward to speaking again in late July. Good day.

Ladies and gentlemen, this will conclude today's conference. Thank you for your participation. You may now disconnect your lines at this time, and have a wonderful day.

Good morning, and thank you for joining us for RBC Bearings Fiscal Third Quarter 2026 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 and are 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 the reconciliation between GAAP and non-GAAP financial information.

With that, I'll now turn the call over to Dr. Hartnett.

Okay. Thank you, and good morning, everyone, and thank you for joining us. As usual, I'm 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 details on the results. Third quarter net sales were $461 million or 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% and 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 is 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%, 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 evidence, we have modestly exceeded our $2 billion backlog mark that we spoke about last call. Remember, most of our R&D business is contracted and managed through daily or weekly orders or poles, 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 $0.5 billion to $1 billion in backlog. Today, the strength and outlook on the A&D sector can only be described as extremely robust. Clearly, we are 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'll start with submarines. Submarines are facing an accelerated fleet build-out. The #1 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 initiatives 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 a strong new requirements for RBC products developed -- that would have been developed over the past decade.

In the U.S.A., the refurbishment of new and -- refurbishment and new construction of aircraft systems as well as the maintenance of untold number 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 the systems that the big 3 space explorers are building as well as others. The racing to the moon and/or creating low earth satellite systems requiring sophisticated precision assemblies for targeting, thrust vectoring, fuel management, structural members, et cetera. I think you can see the picture that we're 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 and continuous market for our products, both at the OEM and the pre-replacement levels.

We are working diligently to add machinery and staff to several of our existing sites, guided by our 5-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 R&D sector -- A&D sector. We can certainly go into specific programs, outlook, products and proprietary positioning as well as the moats to any depth needed at another time. We've 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 OEM sector was up 7%. We saw strength in aggregate and cement, food and beverage and the warehousing markets during the period. Recently, we've been seeing positive trends in some of these markets in terms of order demand, which will show as revenue if 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 developments since the Dodge acquisition. Combined, a promise to bend our curve on industrial growth. Also, we are opening a service center in the Midwest to better attend the needs of our -- and tailor our product response to more customers in that region. So I hope I gave you a feel for our environment and the momentum that exists at RBC today. And I'll 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. And 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% -- 42.2% on an adjusted basis and 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've achieved within A&D driven by increased efficiencies achieved in our plants, 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 cost 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 12 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 the 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 $73.6 million and 127% last year. The higher conversion rate was due to the increased earnings and working capital management during the quarter.

As we've 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 of 2026. Looking into the fourth quarter, we are guiding revenues of $495 million to $505 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.

[Operator Instructions]

Our first question is from Kristine Liwag with Morgan Stanley.

I just wanted to follow up regarding your commentary on the industrial business. So you mentioned that you're seeing strength in aggregate and cement, food and beverage and warehousing. You've got the new products that you're introducing for fiscal year '27 and it sounds like semiconductor has been doing really well. I was wondering for these verticals, 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.

Yes, Kristine, the way we have our fourth quarter built out right now, it looks a lot like the third quarter in terms of what we're forecasting for year-over-year growth, maybe slightly conservative on the industrial side. So we're 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 certainly a bullish sign for our business.

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

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

Got you. Super helpful. And then does it -- I mean, just following up on the industrial question, with the improving outlook and also when we think about the order activity that you faced, is it fair to say that fiscal year '27 would be a higher growth year for industrial than fiscal year '26?

We're expecting that, Kristine. Yes.

Our next question is from Michael Ciarmoli with Truist Securities.

This is Alexandra Mandery on for Michael Ciarmoli with Truist Securities. We've seen that backlog growth has been strong and at all-time highs, about 230% 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 I think Rob has that.

Yes. What I can tell you is that over 90% of our backlog is really our A&D market. Most of our industrial business tends to move in and out and doesn't really get stuck in the backlog. And in terms of the duration, which I think was another part of your question, some of these contracts, specifically with Sargent or VACCO can be multiyear going well beyond the next 12 to 24 months?

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

I don't have all that detail right in front of me to share with you at this time. We just kind of look at it 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. On the fiscal 1Q '26 call, you mentioned using roughly a $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 million this quarter. They're pretty close to that $30 million run rate. There's just timing. We're 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.

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

This is Christian Zyla on for Steve Barger. Just following up on your industrial comments. It does seem like you guys started growing before we actually saw an industrial inflection or at least have been less impacted by recent weakness. But January PMI was strong a few days ago. U.S. industrial production is inflected positively. Sentiment in short-cycle manufacturing seems to be improving. So looking back, what do you think drove your outperformance? And then based on your business and your mix, do you think you can outgrow peers or continue your string of growth?

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're probably industry best in that regard. And so that helps performance when times are tough. There was a second part of your question, Steve, I forget what it was.

Yes, it was just based on like your current business mix, do you think that can continue into calendar 2026?

Yes, it should. I absolutely think it should. We're expecting a stronger industrial economy in '26. Certainly, it started -- in January, it started off well. Semicon has come back in a significant way, which was dormant for a long period of time, and it's an important sector for us. So yes, I think we're going to do better on the industrial side in calendar '26.

That's great. And then just switching gears to Aero and Defense. A couple of 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're 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.

Yes. Well, VACCO is -- you know, it's a company we learn more about every month. And one of the things that we're 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's a little bit like the bearing business.

If you have a stocking position on these staples, you're liable to get the order and you're liable to significantly improve your sales. And so we're 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's undefined, it's 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's -- there's quite a few of these people.

Our next question is from Scott Deuschle with Deutsche Bank.

Dr. Hartnett, can you clarify whether the new Airbus contract included a meaningful ship-set content increase on any of your programs?

Yes, it did. I guess this is what do you define as meaningful? I mean, we -- and just running through some of the programs, the new programs that we captured in my own mind here on the Airbus contract. So yes, I would say it's probably increased Airbus content, 20%, that sort of thing.

Okay. Can you say when that might layer into your revenue? Is there maybe a 1- to 2-year lag as you tool up for that higher content? Or can you see it sooner?

We expect to see it in this particular quarter.

Okay. That's great. And then 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?

Yes. I mean, missiles are -- they're a funny greed. I mean there's -- they're used for all sorts of things. There's the HIMARS and there's the JDAMs and those are bombs and there's the hypersonics and then there's the standard missiles that go into -- just are part of the F-16 package. And so we're pretty much across the board on all of these programs.

I can't -- it's hard to see exactly how big this missile business can be, particularly when they start building out hypersonics. But all those -- a lot of those hypersonics are going to go on the Columbias and the Virginias.

So we're definitely going to be part of that program in a meaningful way. But I don't have an answer for you with regard to how big the overall missile business can be at RBC versus commercial aircraft. I don't think it's 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, and in particular, help us understand the rate of sequential gross margin improvement in A&D, given that pricing step-up you have coming through?

Yes. I mean I think one of the best ways to look at it is we're guiding you to a gross margin that's 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, that should imply that there should be some increment to what we've seen in Aerospace and Defense. So as I said, it was about 42.2% this quarter. We should see some gradual improvement in this quarter that's getting us to that guidance. So that's how it breaks down.

I think industrials should more or less look where they have been. 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 what it did in the third quarter, I would expect.

Our next question is from Pete Skibitski with Alembic Global.

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?

Yes. Well, I think Boeing is -- I think they're pushing towards -- they're at 38 737s a month looking to go to 42, looking to go to 50 with an overall objective of getting to 60. The exact dates that those -- that occurs, I don't have them in front of me, but I do have in one of my files. But the 60 is not that far off.

And then the 787 is 6 -- as I remember, 6 going to 8 per month, and that's a significant step up for us. We have one plant that's very dependent upon the 787 shift. And so that's very helpful. And then the 777, 777X seems to be coming in to its own, but I think that's only a few ships a month in the distant future. I don't 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, you're, I don't know, 6 to 9 months ahead of their production rates. Is that where you're at right now? Or do you feel like you're -- they're maybe working off some inventory?

I think 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, we're pretty much lockstep with their production rates.

Okay. Okay. Got it. One last one for me, maybe for Rob. Rob, you guys were kind of hot this quarter on the CapEx spend. It inflected up a bit. Are you still on -- is that just timing or you saw on tapped to be about 3.5% spend for the full year and maybe continuing that level into fiscal '27?

Yes. We made some strategic investments and some capacity build-outs, but I think we'll still end up 3.5%, less than 4% for the full year.

Our next question is from Tim Thein with Raymond James.

I just had two on the industrial business. On the -- I think, Rob, you said earlier that the -- what's embedded in the fourth quarter guide is a growth rate for that business comparable to what you did of, call it, 3% in the third, if I heard that correct. I'm just curious, is that -- in terms of your -- Obviously, this is a business that's a lot harder to predict than A&D in the short term. But I'm curious what you've seen kind of in recent month trends and just in terms of order activity. Does that get you to a similar kind of outcome? Or is that -- I don't know if you just maybe just help us in terms of what you've actually seen in terms of incoming order trends relative to that number?

Yes. What's 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're forecasting.

Okay. And then just as part of -- 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 don't know if that's -- it's obviously not international, but maybe just if there's a way to kind of help us in terms of the underlying growth prospects of Dodge. Yes, that's all.

Yes I think -- sorry, I think we're still in the middle innings on that process, and we realized a tremendous amount of synergy on the cost side with Dodge, as we've all talked about in the past. I think we're in the middle innings. And then some of those new initiatives are being put in place. We've got a lot of great meetings and discussions around that new service center, some new product initiatives that we're in the process of deploying. So I think there's some bright things ahead on that business.

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

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.

Well, it's -- the question you asked is the same question the missile builders ask us is 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's modest. And it's usually -- it's just going to use our capital base that we have in place today for the most part to a more effective level. So yes, you shouldn't see any surprises on the capital side in order to tool up this business.

Our next question is from Ross Sparenblek with William Blair.

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. This is onetime 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. And it's a little bit difficult for us to predict how good, but I suspect they're going to be better than they were in the third quarter given volumes and pricing and sort of the other factors that go into the calculus to make it all work well. So yes, those margins will definitely expand.

When we put together the outlook for the fourth quarter, it implies a 7.5% organic growth rate and a 14% total growth rate versus last year's fourth quarter. The 7.5% 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're looking at an aircraft -- we use an aircraft a little bit north of 10% against the third quarter, which was 21.3%. So I think the fourth quarter outlook is very conservative, but we elected to make it conservative because really for no other reason 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's only a matter of execution. And just one thing about RBC, we always execute. So I think in the fourth quarter, I think our investors are going to be very pleased with the results.

Yes, that's pretty clear with the gross margins for VACCO in the quarter. I just -- I don't get the impression that it's 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 consolidated Aerospace and Defense gross margins sooner rather than later?

Yes. I would -- yes, I would think those margins are going to -- the A&D margins are going to chase up towards the industrial margins. I don't know if they'll reach them, but they're going to close the gap.

Okay. That's helpful. And then maybe just another one on the industrial business. It looks like your peers are kind of guiding for low single digits for 2026. Can you maybe just help us think through kind of the more cyclical, sorry?

The peers are guiding to what for '26?

Looking like low single digits kind of consolidated. And I think a lot of that's kind of cyclicality and 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?

I think our Industrial business will be sort of better than the single digits. It will be -- we're expecting sort of the high single digits is worst case. So -- but we're not coming out with full year guidance. We never do and -- but we're looking at it. We're pretty optimistic about what's involved in the year ahead.

Congrats on the quarter.

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.

Thank you. This will conclude today's conference. You may disconnect at this time.

Good morning, and thank you for joining us for RBC Bearings Fiscal Second Quarter 2026 Earnings Call. I'm Josh Carroll, 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 and 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 Bearing's 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 of the GAAP and non-GAAP financial information.

With that, I'll now turn the call over to Dr. Hartnett.

Good morning, and thank you -- so good morning, everyone, and thank you for joining us. As usual, I'm going to start today's call with a short review of our financial results with some comments, and I'll finish our outlook on the industry in fiscal 2026. Rob Sullivan will follow me with some more details on the results.

Second quarter net sales were $455.3 million, a 14.4% increase over last year, driven by continued strong performance in our Aerospace and Defense segment and steady performance from our industrial businesses. Consolidated gross margin for the quarter was 44.1% versus 43.7% for the same period last year. And adjusted EPS was $2.88 versus $2.29 last year.

Clearly, our performance exceeded our expectations for the second quarter of fiscal '26 and the company is showing good momentum moving into the second half of RBC's year. Free cash flow for the period was a strong $71.7 million. 56% of our revenues were industrial sector and 44% aerospace and defense, with the aerospace and defense sector now racing to parity, we think, next year.

Total A&D sales were up 38.8% and year-on-year. Commercial aerospace expanded 21.6%. Defense expansion was 73.3%. Organically, the performance looks like this, Commercial Aerospace increased by 21.2%, Defense increased by 22.4%. Demand across the A&D sector is impressive and momentum is strong. Backlog is up to $1.6 billion today from $940 million in March and $860 million last year at this time.

We fully expect to approach $2 billion in backlog by year's end, which will be an amazing milestone, especially when you consider that more than half of our revenues preclude backlog production. Although revenues are currently capped by production capacity, we are working hard to expand manufacturing capacities in our marine and aircraft RBC plants, adding more capacity each quarter. Clearly, this will be impactful to margins.

Primary drivers here are submarine, aircraft and engine customers. Proprietary components are quiet valves and actuators for submarines. That is the Virginia and Columbia boats as well as MRO supplies for existing fleets. Both Sargent and VACCO are the RBC contributors here. on airframe and engines as Boeing and Airbus and Embraer continue increasing build rates to unprecedented levels, production of our products, of course, must follow. As most of you know, we have substantial content in these airframes and engines where we supply precision and line bearings as well as integrated structural components across aircraft and engine spectrum.

And with Boeing's recent FAA approval to expand production rates, business is good and about to get better. It's important to understand that building rates of submarines and commercial aircraft are levels not seen in over a generation. Since the early 1980s for submarines for reasons both good and bad.

We are current -- we currently are booking some orders for deliveries into the 2030s. RBC is dead center in the middle of this effort today with considerable number of proprietary sole and single-source products, governed by multiyear contracts in the majority of cases.

Let's turn over to our industrial business now. Overall, our industrial business was up 0.7%. Industrial distribution was up 3.3% and while the OEM sector was off 4.7%. Continued weakness in the market of oil, semiconductor machinery and European machine tools continue. Our industrial OEM business is a 70-30 split with 30% being the OEM component.

We are encouraged to see the continued demand in the industrial aftermarket across many of the markets that we monitor. These include aggregates, metals, grain, food and beverage, forest products, warehousing to name a few.

I will now turn the call over to Rob Sullivan, who will give some color commentary on the financial treatments and the Q3 outlook.

Thank you, Mike. As Dr. Hartnett mentioned, this was another strong quarter for RBC Net sales grew 14.4%, driving a 15.4% increase in gross margin. Gross margins were 44.1% for the quarter or 44.9% on an adjusted basis compared to 43.7% in the same period last year.

During the quarter, we delivered strong performance across our business segments, specifically within A&D, which has been seeing strong growth, as Dr. Hartnett previously noted. A&D gross margins during the quarter were 38.7% or 42.3% on an organic basis and Industrial margins were 48.2%. Included in the aerospace results were $24.7 million of net sales from VACCO during the period, which was acquired on July 18 this quarter.

On the SG&A line, we had total costs of $77.4 million or 17% of net of sales for the quarter. This ultimately resulted in an adjusted EBITDA of $145.3 million or 31.9% for the quarter. That represents an approximate 17.7% increase in EBITDA dollars compared to last year. Interest expense for the quarter was $13.4 million, this was down 14.1% year-over-year, reflecting the impact of debt payments made over the last 12 months and lower interest rates, partially offset by the impact of borrowing $200 million on the revolver in July to assist in paying for the acquisition of VACCO.

During the second quarter, we paid off $45 million on our term loan balance. We made an additional $40 million payment on September 30, which will be reflected in next quarter's results. Diluted earnings per share were $1.90 compared to $1.65 for the same period last year. Adjusted diluted earnings per share were $2.88, representing a 25.8% increase over $2.29 for the same period last year. The tax rate in our adjusted EPS calculation was 22% compared to last year's 22.1%.

Free cash flow in the quarter came in at $71.7 million, with conversion of 119.5% and and compares to $26.8 million and 49.4% last year. The higher conversion rate was due to the increased earnings and working capital management during the quarter. As we have previously noted, our capital allocation strategy going forward will remain focused on deleveraging by using the cash that we are generating to pay off the term loan and then the revolver balance.

This week, we finalized an amendment to our credit facility, extending the revolver until 2030. We intend to pay the term loan off by November of 2026.

Looking into the third quarter, we are guiding revenues of $454 million to $462 million, representing year-over-year growth of 15.1% to 17.1%. This guidance embeds an operating environment that's been fairly similar to what we have been seeing over the past few quarters with the additional benefit of owning VACCO for a full quarter.

On an organic basis, net sales are expected to increase 7.4% to 9.5%. On the margin side, we are projecting adjusted gross margins of 44% to 44.25% for the quarter and SG&A as a percentage of sales to be between 17% and 17.25% for the period. We continue to remain well positioned to achieve our objectives and drive sustainable growth, leveraging our core strengths in engineering excellence, operational efficiency and innovative product development.

Looking ahead, our focus will remain squarely on executing on our organic growth strategy, further integrating VACCO, driving operational efficiencies and delivering strong free cash flow conversion that will create long-term value for all our stakeholders.

With that, operator, please open the call for Q&A.

[Operator Instructions]. And our first question is coming from the line of Kristine Liwag with Morgan Stanley.

Maybe following up on the backlog, you had a very strong backlog growth of 60% in the quarter. Can you provide any color regarding how much of that was just from the VACCO acquisition? And also what were the key drivers of that? -- increase? And then also, you alluded to -- actually, you actually said a $2 billion backlog by the end of your fiscal year. That's a significant step-up from where we are today. Any sort of color on what you're seeing there would be helpful.

Yes. So approximately $500 million of that increase is due to the VACCO acquisition. And then the remainder of the business is up more than 20% from this time last year. we're seeing extraordinarily strong growth in the A&D side of the business. Approximately 90% plus of our backlog is really all A&D. The industrial side has a much smaller component when you look at our backlog, and we expect that to continue through the rest of the year.

Yes, Kristine, we're currently -- we're currently negotiating contracts with -- and we're very far along. They're very mature in the negotiations, and we expect to conclude those within the month, which should kind of round the whole thing up to that $2 billion level, at least that neighborhood. Maybe it's $100 million less, maybe it's $100 million more, something like that. But it's to some extent, we've had a rollover of aircraft contracts, which all begin sort of next year. And there's still several marine contracts that we're working our way through.

And really, for the most part, have worked our way through and we're waiting for the conclusion of the signatures.

Great. Super helpful. And then I think you Dr. Hartnett last time when we talked, it seems like Boeing production rates are starting to move up to the right. And from Boeing's earnings this quarter, it seems like that's really truly materializing, can you just remind us regarding your production rates, what's the utilization of your aerospace plants? And when we think about this volume finally coming through, how should we think about incremental operating margins, especially with the changes in contract that you've had and of course, the inflation that's gone through the business in the past few years.

Well, I mean, it's -- right now, in terms of capacity utilization for the airframe business, we're pretty much at 100% everywhere. And so we're adding -- we're adding capacity. We're adding shifts. We're adding manpower and we're adding some capital to continue -- and we're going to be stepping up capacity every quarter going forward in several of the plants. Demand is strong.

There's -- so you're going to see -- obviously, when you add when you add shifts, you get better absorption of the overheads and so you get some margin expansion there. So the outlook for margin expansion overall is -- we just couldn't be more positive.

Yes, that's very exciting to hear.

The next question is from the line of Michael Ciarmoli, with Truist Securities.

Nice results. Maybe just housekeeping. I think I may have missed it, Rob. What was the aero OEM growth in the quarter in the Aero distribution growth in the quarter?

Sure. So the aero OEM on commercial or you're talking about the whole segment?

Just commercial. Sorry.

So commercial OEM grew 27.9% this quarter. And commercial distribution was basically flat. It's actually down 2%, but more or less flat.

Okay. Got it. And then just looking at industrial distribution, it looks like it was -- I think you had it up 3.3%, but down sequentially. Anything happening there? Was that any sort of seasonality, lumpy orders? I know it's usually down a little bit sequentially on a seasonal basis, but anything jump out with that industrial distribution side?

We had some really relatively strong performance in the industrial distribution business in the first quarter, some really strong orders on that end. So the fact is it's still growing. It's just probably quarter-over-quarter. That's what you're seeing there.

Okay. Okay. Got it. And then I think you guys called out the dilution from VACCO roughly $360 basis points or so. Can you give us any sense as to how we should think about the VACCO margins expanding? I know you kind of just answered Kristine's question with couldn't be more positive on the outlook for margin expansion. But how do we think about that maybe VACCO drag dissipating and getting those margins up to and in line of historic RBC margins?

Yes. So look, they're running in the mid-20s at this point on an adjusted basis, that's their normal run rate. It's going to take some time, but we think there's tremendous capacity for some operational synergy there over time to get those margins looking like the rest of the RBC business. That's what we picked up on when we were doing diligence and that's kind of the internal objectives, but these projects do take time.

Yes, Michael, I would say on that, too, that we -- as far as VACCO is concerned, we're still in the getting to know you phase and very encouraged by what we see. And lots of manufacturing synergy with Southern California plants which is needed because VACCO needs to substantially kick up production rates. And those rates will -- that manufacturing production will be done in the West Coast plants that have the floor space, and they'll need some added capacity. So we're working on that right now. So that's going to be very positive to margin absorption on the West Coast.

So -- and I think the -- right now, we're looking at some of the existing space contracts and renegotiating terms and conditions that are more aligned with RBC policies. And so we're just working through that one at a time. And that's part of the process. So -- we expect next year back to be a star player in our lineup.

The next question is from the line of Steve Barger with KeyBanc Capital Markets.

You talked about adding capacity to support all these aerospace and defense programs. And I'm sure planning for that growth is a moving target, but what revenue level did you direct the team to plan for?

For that group?

For -- let's start with A&D and then maybe talk about the whole company.

Why don't we just e-mail you our 5-year business plan, Steve.

Well, you're talking about needing to substantially ramp production across multiple programs. I'm just wondering, do you think that you need to be able to support $1.2 billion, $1.5 billion. I'm just talking A&D now? Or is this going to be a $3 billion capacity plan or is this going to be a situation where you're just continually kind of tacking it on and chasing that capacity as those programs evolve.

Well, I think that's a good question. There's -- we're doing it sort of business by business, and I haven't rolled it all up into what the final number is going to be. And a lot of that depends upon how quickly we can add the capacity and get the throughput.

But if you look at one of our businesses on the marine side of Sargent, I think 2 years ago, we're in the mid-30s in terms of annual revenue out of that marine program. And we need to be well over 100 as quickly as we can get there. And so it's a matter of how quickly can we get there. So that's kind of what's going on in Tucson.

And when we look at VACCO, we're still trying to figure out with the mature steady-state production rate needs to be in order to keep the MRO business and the shipbuilders Happy with the hardware output. So we have -- we have differences of opinion on what that number is right now. So I can't really be more specific about it, but it's much bigger than where they are. So yes, we're going to see substantial improvement in both airframe air engine and marine over the next couple of years, just almost no way to avoid it if they keep building airplanes and they keep building submarines. They're just -- there's no way to avoid it.

No, I guess that's the key takeaway here is that RBC has the potential to have a pretty significantly pure top line based on the slate of opportunities you see in front of you.

Correct. That's how we see it.

And when you look at those programs and opportunities out there, do you have enough engineering staff to support underwater, ground-based aircraft space. Like is that a capacity constraint as well on the engineering side?

Well, you never have enough engineers and you certainly never have enough good engineers. I don't think it's a capacity constraint. I think the design engineering work in the testing engineering work for the most part is done. And so there's probably incremental staff increases needed. Although when we acquired VACCO, we got a quite a few very, very capable engineering team. So that's going to be helpful.

I think on the -- on the production side, we have our MET program, where we hire college engineering graduates every year and put them into our plants. Into a 2-year training program. And we've been doing this for years. And I think the last time I looked at the numbers, the number of people that were in the 2-year training program was probably 100 folks.

So I mean, we've been solving engineering talent into the company for years. So we have a very deep bench of expertise and -- we're actually looking at that yesterday, and who's in the 10- to 15-year group with us and because that's the emerging management of the company. And it's -- it's quite salty.

That's good to hear. I don't remember ever hearing an AI-related question on one of your earnings calls, so I'm happy to be first. Are you leaning into AI from the engineering side or anywhere else in the organization to try and help optimize manufacturing or engineering or anything else?

I think AI is something that you almost can't avoid using, right? It's just you get too many good answers quickly. When you go to chat or you go to [ Groner ] 1 of the suppliers? And I personally -- I mean I asked my 5 questions every day.

I never subscribed at GPT, but they do give me 5 questions every day, and I use them up every day. And I think there's many, many of us that subscribe and use it productively. So yes, it's having an impact to measure -- how to measure exactly what that impact is right now. We don't have a good grip on that. But the other day, we were talking about designing a component that was failing in our tests. And so I personally asked AI, what kind of tribological coupling did beryllium copper make on steel -- and how would I improve that coupling through design.

In 30 seconds, I got a report that would have taken me a week to get from one of my engineering teams that was excellent. And we actually debated using some of those recommendations within the hour. So that's how -- that's the impact it's having here.

That's interesting detail.

Our next question is from the line of Scott Deuschle with Deutsche Bank.

Rob, when you restrike the Boeing and Airbus contracts, do we see the full benefit of that hit in the calendar first quarter? Or do you have to honor some pre-existing backlog ordered at lower prices is that it takes a few quarters for that benefit to show up in gross margins?

We should see most, if not all, of that right away on the shipments that started after January 1.

Okay. And in terms of what you all have been targeting to get out of those renegotiations, are you generally tracking to what you hoped for in terms of your ask? Or is there any just general update as it relates to the status of those negotiations you can offer?

Well, you never get what you asked. I mean, it's the airframe people are very tough negotiators. So let's just put it this way. We negotiated with them for 2 solid years. And that negotiation was scheduled every week for 2 solid years.

Got it. Okay. And go ahead --

And we were reasonably -- I think neither side was completely happy with the results. but we weren't disappointed.

Okay. And then just following up on the prior question on Caterpillar reported results earlier this week. They have an Investor Day next week. A big topic of conversation is the demand on the smaller and midsized power generators. I don't think on a large combined cycle generators, you have much content, correct me if I'm wrong. But on these smaller and midsized reciprocating engines, is that an all an area that RBC plays in?

No, we're not in that area at all.

Okay. And then last question for you, Dr. Hartnett. There's now a publicly traded company out there that's generating 30% EBITDA margins in the fasteners business. And the industry appears to have some supply constraints. And I believe you'll have some capabilities here. You got through Sargent and sharpens, so I'm just curious, like, is that an area of strategic interest for you as you think about organic investment in the business just given the margin potential others in the industry are demonstrating?

We've looked at fasteners many times. And yes, we have a business that sort of overlaps that market. And it's -- we don't see it as productive a market in terms of proprietary protection and in what our current capitalization tool to produce is -- let's put it this way. There's more interesting markets that we pursued.

The next questions are from the line of Pete Skibitski with Alembic Global.

Nice quarter. In defense, just with this government shutdown, we're about a month into your third quarter. Just wondering if you guys are seeing any headwinds on order flow from the shutdown.

None.

Subs are pretty protected. Okay. And then just on the 777X delay, shipped to the right Mike, I know you guys have a lot of content there. any meaningful impact to your prior plan over the next few quarters from that delay?

No, it hasn't been part of our plan at all just because the uncertainty of when that ship is going to be produced. So you just -- if it's produced sooner, it's -- we'd call that plan insurance.

Yes Okay. Last one for me, just on Mike, your bullish comments earlier about gross margin expansion. Are you still within the framework of the kind of your typical 50 to 100 basis point annual goal, or are you moving kind of beyond that organically and/or with the VACCO opportunity there? What's the right way to think about that?

Well, we ended last year at about 44.4% for the full year. Our first 2 quarters this year, $454 million, $449 million Obviously, VACCO as a little bit lower than the rest. So that will impact the second half of the year to a certain degree. But organically, we're right in line with that level of expansion. And even with VACCO, I think we're still going to be able to expand our margins year-over-year. So I think we're very pleased with where we are.

Our next question comes from the line of Ron Epstein with Bank of America.

Has there been any impact from critical minerals, parts on what you guys do? And if there is, how are you mitigating it?

No, we see no impact at all. I think we're -- our products don't use it. We saw more of an impact from the from the availability of the more exotic stainless steels, which that problem seems to have corrected itself. But that was a problem. 12 months ago, that was a bigger problem.

Got you. All right. Good to know. And then if I could follow up on that AI question. I found your answer fascinating, being an engineer myself, you get that answer from rock or whatever. What do you have to do to review it to actually trust I mean like -- and then when you get to a point where you can trust it, does this have an implication on the number of engineers that you're going to need? Or is -- how do you get confident that the AI is giving you something that's useful.

Well, I think -- I think when we -- if we use that, the answer that I got for that tribological coupling, it came out with suggestions that if we were thinking about it, we would come up with those answers. But it really, it's sort of gave us a reminder that said, "Hey, you could do it this way, you could do it that way. There's 3 or 4 different ways to improve it. And did you think of these? " And those were all sort of known and comfortable solutions for us.

So -- so it's sort of it's centered us a little bit and stimulated our stimulated our thinking on the subject. So that was -- I think it's a place you start. It's sort of like when you're researching a company, you pull out a value line, and that's always the place you start -- and then from that, you say, that's an interesting company. Maybe I should dig a little further. So that's how we're using AI right now.

Yes. Interesting. Interesting. I mean, -- can you imagine a world where it's doing more than that for you? Or is it just -- they just see kind of how it goes?

Yes. Well, it's funny because when we have our operations meetings, we'll have 30 people in the room and will be asked -- sometimes they get into how do we solve this problem? How do we solve that problem? And everybody is going to AI and coming up with suggestions and so it sort of feeds on it on itself. So you have 3 or 4 engineers that are using their phone to figure out how to solve a problem, all of a sudden, you've got suggestions on the table that you wouldn't have had. You wouldn't have thought about it that quickly.

And so the old days of driving up to the university to go through the library. I mean, that's over.

The next question is a follow-up from the line of Kristine Liwag with Morgan Stanley.

I mean, I guess with that comment, Dr. Hertnett, it sounds like you should pay for Chat and just stop doing the free stuff for now.

Well, I guess I tipped you off on how we manage expenses at RBC. Right.

Well, great. So with that, I mean, look, I think there's some pretty interesting themes going around in this with AI. And then you've got this full theme of embodied AI. And so I wanted to ask you a more -- I don't know, a different question. We haven't really discussed before.

Like have you guys -- how do you think about humanoid you're starting to see some pretty interesting machines out there, but right bearings are to machines as elbows and joint arthumans. How do you think of that world? Do you think that's a commoditized bearing? Or do you think that you have a role in something like that?

Well, I think if you've been through some of our plants, and there's a a healthy amount of robotics that are sort of co-robots with working beside a person who's doing work, right? So as that technology proves itself, we will adopt it. There's no question about it. And so I think ultimately, there'll be humanoid in the RBC plants doing what. I'm not sure. But it will be -- it will show up as a capital requisition at one of our ops meetings in the not-too-distant future, and that's how it will begin.

Right now, we use -- we're making use of liberally of robotic and noncontact measurement technologies.

I see super helpful. So you see yourself more as a user. But I guess my question is more as a supplier to that industry, similar to as your supplier for a lot of those robotic systems. Is this a potential business opportunity for you? -- as a supplier if that industry matures. Because I could imagine if you are using it for those kinds of industrial use cases, then quality and making sure the humanoid doesn't break down is going to be similar to the value that you add for for other industrial applications where you're a small dollar amount, a critical portion for functionality.

Yes. I think today, we supply bearings for robotics that are in some pretty sophisticated applications where there's either high temperature or vacuum or a little bit of both producing computer chips. And the way this always starts is somebody that's designing a robot doesn't have any production volume, and we'll go to one of our distributors and buy 1 of our bearings and use it in their prototype. And once it proves out, and they start getting into production, they'll continue to use that distributor until production gets to a certain rate and then they'll they'll trace back to the manufacturer or we'll find out about it from our distributor that this is an OEM that's using considerable amount of volume. And that's how all of these -- every one of these markets is developed.

And do you see this as an exciting market?

I really haven't thought that much about it. I think Elon Musk thinks it's an exciting market because we think cars are less of an exciting market, right? So he's going to turn Tesla into a humanoid robot machine. And I guess that works.

Great. Maybe we will spend the time talking more about that, but thank you for your thoughts today.

At this time, we've reached the end of our question-and-answer session. I'll turn the floor back to management for closing remarks.

Okay. Well, I think that ends our conference call for today. think I'd like to thank everybody for their participation. And I guess our job now is to go back to work and make the third quarter happen. So thanks again.

Thank you. This will conclude today's conference. You may disconnect your lines at this time. We thank you for your participation, and have a wonderful day.

Good morning, and thank you for joining us for RBC Bearings Fiscal First Quarter 2026 Earnings Call. I'm Josh Carroll with the Investor Relations team. And 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 and are 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 the reconciliation between GAAP and non-GAAP financial information.

With that, I'll now turn the call over to Dr. Hartnett.

Thank you, Josh, and good morning, and we have some really -- we had a great quarter, and we have some really good news to go through with you today. So thank you all for joining us.

So I'm going to start today's call, as usual, with a short review of our financial results, and I'll finish our outlook on the industry and fiscal '26. Rob Sullivan will follow me with more details on the numbers.

So our first quarter sales were $436 million, a 7.3% increase over last year, driven by continued strong performance in our Aerospace and Defense segment and solid performance from our industrial businesses. Consolidated gross margin for the quarter was 44.8% versus 45.3% for the same period last year and adjusted diluted EPS was $2.84 versus $2.54 per share. Clearly, we're very pleased to see these strong margins and kick off our first quarter in fiscal '26.

Free cash flow was another highlight of the period of $104.3 million, setting a new record for RBC, and adjusted EPS was $2.84 per share. Total A&D sales were up 10.4% year-over-year with 9.6% growth on the commercial aerospace side and 11.9% in defense.

On the industrial side, the segment grew 5.5% year-over-year with the distribution and aftermarket up 10%. In A&D, we continue to see broad strength across the portfolio. The aircraft aftermarket expanded 22.6% and the defense aftermarket contributed well also, yielding a total of 10.4% for the segment in the quarter. We cheer the progress Boeing is making on aircraft production and continue to pray for their continued success.

Moving to Industrial. We achieved a 5.5% growth this quarter. Most of our industrial markets contributed to this performance, aggregate, metals and mining, food and beverage, forest products, warehousing, grain and grain to name a few. Oil and gas as well as semiconductor remain weak. For RBC, the industrial economy felt strong and the recent 3% U.S. GDP expansion confirmed our impression during the period. Certainly, the tax treatment for capacity investment in the Big Beautiful Bill recently signed portends well for these sectors in the future quarters, and we expect this to be a very positive influence on demand for our products for the balance of this year and into next.

Overall, our backlog for the first time exceeded $1 billion during the period with $100 million of that being industrial products. Our relentless drive for organic growth through product innovation and market development creates new opportunities that are identified and sorted monthly at our ops meetings. This is often where high potential productive short- and long-term options are identified and prioritized. These can be for markets as diverse as aero engine, space, guided weapons, marine, warehousing, airframe, bridge building to name a few examples. This has become an increasingly important feature of our business plan, adding to meaningful revenues year in and year out.

A little on defense. Demand for our products remains at unprecedented levels. We expect to see this sector of our business expand in the high single to low double digits for many quarters into the future. We are adding to our capacities where needed to satisfy the expanding requirements of our customers. Our marine business is a primary driver in this regard, but there are many other subordinate drivers in this expansion, such as airframe, aero engine and aero aftermarket.

Clearly, this -- the recent acquisition of VACCO adds fuel to this fire. A little on VACCO. VACCO's marine business, which has historically represented half of their revenues, demand for their products like ours is very high, again, driven by the build-out of the U.S. submarine fleet. Their business like ours must expand to meet the needs of the Navy. The synergy between RBC and VACCO is strong, adding critical mass in the areas of engineering, manufacturing, contract management and supply chain.

We are only weeks into our ownership of this new business, and I will wait until our next conference call to further elaborate on our plans and potential. I am highly optimistic about our future together with this unusually synergistic business.

As we begin Q2 and fiscal '26, the year is shaping up to be a very strong one for RBC. We are well positioned in our markets. We see unprecedented demand in several important areas of the market for our products. We hold a strong balance sheet and have created a well-defined business plan in most of our core businesses with a strong buttoned-down 5-year outlook that's executable.

I will now turn the call over to Rob Sullivan.

Thank you, Mike. As Dr. Hartnett indicated, this was another strong quarter for RBC. Net sales growth of 7.3% drove gross profit growth of 6.1%, with gross margins of 44.8% for the quarter and 45.4% on an adjusted basis versus 45.3% for the same period last year.

Our performance during the quarter was driven by a strong performance across our business segments with industrial gross margins leading the way. Industrial gross margins during the quarter were 46% and Aerospace and Defense margins were 42.3%.

On an adjusted basis, industrial gross margins were 47.1% for the quarter. On the SG&A line, we had total costs of $73.9 million or 16.9% of sales for the quarter. Included in that number were additional personnel and fringe costs as well as continued investment in IT-related costs during the quarter. This ultimately resulted in adjusted EBITDA of $141.5 million or 32.5% for the quarter. That reflects a 5.6% increase in EBITDA dollars year-over-year.

Interest expense in the quarter was $12.2 million. This was down 29.1% year-over-year, reflecting the impact of the debt payments made in fiscal 2025, further enhanced by reduced interest rates this quarter as compared to this time last year.

During the quarter, we only paid off approximately $6 million of debt as we held cash in anticipation of the VACCO deal closing. The tax rate in our adjusted EPS calculation was 22.5%, consistent with last year's 22.4%. Altogether, this led to adjusted diluted EPS of $2.84, representing growth of 11.8% year-over-year, an impressive result given the choppiness in commercial aerospace production schedules and the macroeconomic softness in the industrial economy.

Free cash flow in the quarter came in at $104.3 million with conversion of 152% and compares to $88.4 million and 144% last year. The higher conversion rate was due to the increased earnings and working capital management during the quarter. In July, we drew down $200 million of our revolver to help finance the VACCO acquisition, with the remaining $75 million payment coming from cash on hand.

Looking ahead, our capital allocation strategy will remain focused on delevering by using the cash that we are generating to pay off that $200 million we drew by the end of the fiscal year. Looking into the second quarter, we're guiding revenues of $445 million to $455 million, representing year-over-year growth of 11.8% to 14.4%. That guidance embeds an operating environment that's been fairly similar to what we have been seeing over the last few quarters with an additional benefit of owning VACCO for a little more than two months.

On the margin side, we are projecting gross margins of 44% to 44.25% for the quarter and SG&A as a percentage of sales to be between 17% and 17.25% for the quarter. Embedded in all of this is an assumption that VACCO will add approximately $15 million to $20 million of revenue to our quarterly results in Q2 with gross margins between 25% and 30%, very similar to Sargent when we closed on that acquisition.

Keep in mind, this deal closed in the second half of July, and therefore, this does not reflect a full quarter's worth of sales activity. To wrap it up, this was another strong quarter for RBC, which underscores the momentum we have built and the strength of our strategic execution.

As Dr. Hartnett notes, we're well positioned to achieve our objectives and drive growth, driven by our core capabilities in engineering and operational excellence and innovative product development.

Our focus will continue to remain on executing on our organic growth, integrating VACCO, enhancing operational efficiencies and delivering robust free cash flow conversion to create long-term value for all of our stakeholders.

With that, operator, please open the call for Q&A.

[Operator Instructions]

Our first question today is coming from Kristine Liwag from Morgan Stanley.

So Mike, in your prepared remarks, you kind of talked about a 5-year outlook there. So I was wondering what parts of that could you share with us? How are you thinking about the next 5 years? And what are the key components that you're measuring?

Well, -- we're going from major business to major business, and we're lining up our historical sales by account and what the outlook for that -- those accounts are. As you know, if it's Boeing or Airbus or Embraer or Pratt or GE or one of the other big drivers of the aerospace industry, they're all customers of ours and their business outlook is pretty well defined and within limits, and so we use that and knowing our content and knowing what the expansion of our content would be over that term based upon some of the things that we're working on now and expect to convert.

We boil that all into revenues by account and margins by account, and expand it over a course of 5 years, and we do that for basically all of our businesses. But obviously, the big ones get the most attention, and so that leads us to the point of planning on do we have the right capacity to satisfy the business demands for these customers, and so with that, we kind of look at what our capitalization is in each one of those business units, and what's -- where it needs expansion, improvement and where likely the mix is going to be the strongest and maybe our production ability to support that mix is weak.

So it gives us sort of a time line to build out our thoughts on how to expand those businesses, and we have several businesses that have very, very positive outlooks over the next 5 years, given where they're positioned in their markets, and I don't know if I answered all your questions, but that's our process.

I mean it sounds like a pretty positive one. So with the capacity that you have in place and you had built out a lot of capacity kind of going into COVID in preparation for these new programs. Does this mean that you have to spend more money on CapEx? And how should we think about the margin if the build rates play out as the OEMs have described or are planning for, what does that ultimately mean for potential margin expansion and revenue growth for your aerospace business?

Well, certainly, for the Aerospace business, it's very positive, and actually, right now, we're actually airfreighting manufacturing equipment from Europe into some of the plants to expand the capacity on an accelerated business because business is a little bit stronger in certain areas than we had anticipated.

So I think in terms of how much CapEx we'll employ over that period of time, I think we're like between -- our depreciation is like 3% to 4% of our revenues, and I think we're going to kind of stay in that range. We have some real estate that will probably end up liquidating and consolidating a couple of businesses over time, which sort of will net us back to that 3% to 4% kind of range.

Great. And if I could follow up on the Big Beautiful Bill comment that you mentioned. I mean, you guys are core to U.S. infrastructure build. When you think about the opportunity set that's outlined in that bill, can you just -- with the portfolio today, can you give us a reminder of where you are in the cycle? Are you going to be earlier cycle on those builds, mid? And how quickly ultimately for your business, could you see orders materialize? And is that what kind of drove that $100 million backlog for industrial that you called out earlier?

Yes. Well, I think a lot of our industrial customers are small. Not all of them are small, but a lot of them are small, and so I think the tax treatment in that bill, allowing them to expense their industrial equipment and minimize their tax bill in any given year is catnip, and so we would expect to see a lot of expansion on those -- of demand from those smaller customers, and so that's probably how it's going to affect our industrial business the most.

I'm not sure on the aircraft and aerospace and defense side. Everybody is a pretty large customer, and they probably don't pay taxes now anyway. So I'm not sure how impactful that bill will be, but we're expecting it to be more favorable on the industrial side than the aerospace side.

Our next question today is coming from Michael Ciarmoli from Truist Securities.

Nice results as always. Rob, can you maybe help us with just more of the modeling details for VACCO? I mean, should we be -- I think we had the full year run rate revenue for March. Should we be thinking they're getting similar growth tailwinds from other naval exposed companies, so maybe $10 million to $11 million monthly revenue contribution to work with our models? And does all of this revenue go into the A&D segment, specifically in defense? And I guess just thinking about margins, it seems like if we use that midpoint of what you gave, maybe it's 150 basis points of dilution this year, but anything else you can share with us?

It's early days, right? We've really had them under our tent for about 2 weeks now. So I think we'll have a lot more to share on where it's all going to go for the broader year by next quarter. I kind of laid out what I thought the impact is going to be for this coming quarter.

But I think, generally speaking, where our margins are running, if you look at our -- despite any dilutive impact, if you look at our gross margins for Q2 in the range that we provided, it's still exhibiting year-over-year expansion from where we were at this time last year. So it's not overall as meaningfully impactful as a result, and just about any acquisition we were going to put under our tent would have some measure of impact in the short term, but that's our playbook, right? And that's what we've done with Sargent. That's what we've done with Dodge. So that's kind of how we're looking at this thing. So I think they're running at a $30 million a quarter run rate on sales over the last 12 months, and that's kind of the barometer that we were using and so more to come certainly in the future.

Okay. Okay. That's helpful. Yes, I was saying 150 basis points dilution. I was actually looking at my '26 exit rate. Yes, you should still get year-over-year expansion. Are we putting all these revenues in the A&D sector? Or is anything going into industrial, just so we can have models calibrated.

Yes, it's A&D.

Okay. Okay. Helpful. And then maybe separately, Mike, what are you seeing in commercial aerospace? We've seen some different trends, maybe some destocking on the airframe side. Engine continues to be strong. I think your year-over-year growth, I think if I've got it right, in the OE side, maybe showed some deceleration with a big pickup in aftermarket, but anything else you can talk to build rates, color, order trends?

Well, I mean, I think the build rates are pretty public news, right? And so our content per build rate is pretty well defined. We do expect to in a measured way, expand our content on some of these ships over the next 6 to 12 months, and I think that's probably the biggest positive we're seeing right now, and currently, we're negotiating contracts with all of these OEMs on expanding and our statement of work and the term of the statement of work over the next 5 years, so -- and the discussions are very positive, so I think it's looking good for us.

Next question is coming from Steve Barger from KeyBanc Capital Markets.

Mike, you talked about some of the impacts from the One Big Beautiful Bill on smaller customers, but we've been hearing a few industrial companies talk a little more positively about the back half and even 2026 before seeing that benefit. So to the extent you can pull stimulus apart from general demand, does it feel like we've turned the corner into a sustainable industrial expansion?

It certainly felt that way in the first quarter. I mean our industrial distribution business in the first quarter was up 10%. That's pretty good for an industrial distribution business to be up 10% in the quarter. So our metrics are telling us that, yes, things have -- things are getting stronger.

My own metric is the number of tractor trailers on the highways that are between me and my exit seem to be exponentially larger this year than they were last year, and everybody that comes to work complains about the traffic now. So to me, that's a very good sign that the economy is really being stimulated.

Yes. Makes sense. Great to see you hit the $1 billion backlog milestone. You said most of that is aero and defense. What's the duration of that backlog? Is that multiple years?

It is multiple years, and we're -- we think we have an honestly good chance of doubling that over the next 12 months.

Just from all the defense programs primarily? Or does that include commercial? What would drive that?

Mainly defense.

Got it. Okay, and when you talk about doubling that over the next 12 months, would that push the backlog to end of decade? Or how would we think about the monetization schedule of that?

Well, a lot of the center of mass on that is our build-outs of equipment between now and 2030, 2031, 2032. So that's sort of how these contracts are coming together.

Got it. And last one for me. We know you and your team make detailed plans just like how you talked about the 5-year process. I know it's really early in owning VACCO, but just can you talk about first steps of integration? Can you take a shot at margin progression in coming quarters and years and how you see that playing out just based on your experience from other deals?

Yes. Well, on Sargent -- VACCO is kind of Sargent's little brother, for half of their revenues, particularly the marine half, and it's RBC's aerospace little brother for the other half for the space half. So we have it well covered.

When we did Sargent, we expanded over time their margins by about 1,000 basis points, right? I'm not sure exactly what the historical time frame was that we did that, but it was probably between -- we acquired Sargent in 2015, and the wheels came off of the -- with the pandemic early 2020. So it's probably in that period of time that we expanded it.

I don't think VACCO is going to take that long, and I think they're going to see a similar ramp, and we're thinking 18 to 24 months just would be a good bogey. Nothing is hard. Nothing is unknown. As Rumsfeld says, it's all known knowns to us, and it's a matter of sort of execution, and we have -- we literally have teams of people on the West Coast there every day sort of sorting through and creating a road map.

And VACCO is in an area -- geographic area, where we have over -- an employment base of over 1,000 people in 7 or 8 plants and very highly synergistic to what they do and how they do it and what skill sets they have and what they have for supply chain and what we have for supply chain. They're very, very similar businesses. So I think it's going to be much easier to get our -- to accelerate the improvement of that business than it was for Sargent, and maybe not as easy as Dodge.

That's great detail, looking forward to seeing how that progresses.

Next question is coming from Scott Deuschle from Deutsche Bank.

Dr. Hartnett, does the upgrade of the GTF engine to the GTF Advantage create an opportunity for RBC to potentially increase its share position on the program? Meaning just the changes in the engineering of the engine and the upgrades for certain parts create some openings for you all to come in and increase your content?

Yes, yes, yes and yes, we are going to increase...

Any more specifics or...

I hesitate to talk more about it, but it's -- we're going to increase our content substantially on that engine.

Okay. And do you have a sense for when that begins to ramp up for you all? Do you see it a little bit in the second half of this year and more 2026 in terms of when we see those gains?

I think it's going to start slowly in calendar '26 and ramp through 2030.

Okay. And then Dr. Hartnett, it sounds like we'll hear more on VACCO in the future, but can you maybe just spend a few moments with respect to the revenue synergy strategy with VACCO, particularly as it relates to space?

Yes. I mean, well, sure. I think the space business is probably the hardest part for us to sort through. RBC has a pretty good business in space with a completely different customer base than VACCO has with completely different products than VACCO has.

VACCO has really a nice core space business and then some business in space that needs to be rethought, and so we're sort of working our way through that. Net-net, some of the VACCO customers are -- have always been target customers for RBC on the space side. So we're going to have good introductions there.

We'll be able to ride VACCO's coattails into those customers. On the other hand, VACCO can ride RBC's coattails into customers in the space business that they don't have. So I think that's what we see as the benefit right now, and I think VACCO's engineering strength in what they do and what they produce for products is, if not unique, very limited design engineering test skills available at that level in the country, and so they really have some very unique talents and tools, which we hope to be able to employ with -- going forward for -- in RBC's space business benefit.

That's great. And last question, if I can. Just on the aerospace and defense ramp, do you foresee any supply chain constraints on your end over the next few years, particularly as it relates to your ability to obtain sufficient volumes of specialty alloys? Or do you already have firm delivery commitment growth lined up with suppliers of those alloys?

Well, -- that's kind of -- I think on the supply chain side, non-alloy, I think we're fine. Where VACCO is on the supply chain side is something that we're trying to sort through, but we have so much production capacity ourselves in L.A., that I don't think it's going to be a big issue.

So we're very vertically integrated from the -- once we receive the material. Now receiving the material, that's another issue. There are some materials that are not a problem, and that are semi-exotic, they're stainless steels, and we use them in pretty good quantities, and they're a little bit on the commodity side in terms of the ability to procure these, so that's all fine.

On some of the more exotics, we've been tested for years on how to secure and procure some of these exotic materials and have actually bought extensive inventories of the exotics to protect our production base. Those at one point in time were impossible to get and that seems to have improved that -- and it's more normalized.

But nevertheless, it's still -- you can't get some of this stuff for 60 weeks. So your planning cycle needs to be way out there in order to make sure that your customer deliveries don't get affected by somebody that can't get your material. So that's a little bit of a challenge, but it's on an 80-20 basis, it's definitely in the 20 category, not the 80 category.

Next question is coming from Peter Skibitski from Alembic Global.

Nice quarter. Mike, I want to circle back to industrial one more time. Just PMIs have stayed below 50, but revenues really kind of accelerated here in the last couple of quarters. You mentioned GDP and the tax changes. We're a month here into the second quarter. Do you have some degree of confidence that industrial is now kind of a mid-single-digit grower versus maybe more tepid growth, the way we're thinking about it 6 months ago?

I think it's sector dependent. You look at certain sectors, and it's off, but our major sectors are -- have performed very well and up year-to-year, and so I guess if I'm in Texas, I'm not feeling great about life in the oil patch. On the other hand, if I'm doing grain or aggregate in various parts of the country, I'm doing fine.

Forest products seems to be doing great. Food and beverage seems to be doing great. So the consumable side of the world is okay. The larger OEM side of the world is definitely slow. We haven't seen the turn at the larger OEMs, but on the consumable side, it's definitely turned.

Okay. So maybe we shouldn't get too carried away with our assumptions there yet?

Well, I think the impact of this bill is yet to be seen. It's only weeks old, right? And I think that's going to have a real positive effect. Will farmers buy more combines because they can expense them in a given year? Some might. It might help people like Deere.

Yes. Okay. Fair enough. And just last one for me. In the first quarter and maybe quarter-to-date in the second quarter, have you seen any impacts at all, positive or negative from tariffs?

Tariffs -- first of all, we're very U.S.A. oriented and U.S.A. organized, and so our production and sales is mainly influenced by what happens in the country, but we are impacted by tariffs, and to the extent that we needed to, we've sort of neutralized the impact of our tariff exposure to our P&L with price adjustments or adjustments in our contracts, supply agreements, and we have some customers who say, okay, we understand there's a tariff, that's on us.

We're the importer of record and just pass it through. So we're happy to do that. Others are more argumentative about it, and so we try to work with them as cooperatively as possible, and how that's going to turn out remains to be seen, and others, we've just adjusted the price.

Next question is coming from Jordan Lyonnais from Bank of America.

On Aero, just given that it looks like production is stabilizing, how should we think about contract renewals that you guys have coming up and pricing power going forward?

I mean I think we've developed a really strong reputation with our customers, and it was really done through execution, and that starts with quality, starts with our on-time delivery, and so we're thrilled with what the news has demonstrated or illustrated in terms of the production rates and the stabilization in some of the large OEMs.

But I think it's more just the reputation that we've earned through our performance over the years that gives us the ability to successfully develop the long-term agreements that we've been able to do in the past and the ones we're looking forward to in the future in '26.

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Dr. Hartnett for any further or closing comments.

Okay. Well, I think that concludes our conference call for the day, and I appreciate everybody's questions and participation and look forward to talking to you again, I guess it's mid-fall, so good day.

Thank you. That does conclude today's teleconference. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.