[Management View]
RBC Bearings reported $455.3 million in net sales for fiscal Q2 2026, marking a 14.4% increase driven by Aerospace and Defense (A&D) and steady Industrial performance. The gross margin improved to 44.1%, with adjusted EPS rising 25.8% to $2.88. The company is focused on expanding manufacturing capacity and integrating the VACCO acquisition to enhance operational efficiencies.

[Outlook]
For Q3, RBC Bearings projects revenue between $454 million and $462 million, indicating 15.1%-17.1% YoY growth. The company plans to continue expanding capacity each quarter to meet demand and improve margins. The VACCO acquisition is expected to contribute significantly to A&D growth, with margin improvements anticipated through operational synergies.

[Financial Performance]
RBC Bearings achieved a 14.4% YoY increase in net sales, with A&D sales up 38.8%. The backlog rose to $1.6 billion, with expectations to reach $2 billion by year-end. Free cash flow was $71.7 million, with a conversion rate of 119.5%, compared to $26.8 million and 49.4% last year.

[Q&A Highlights]
Question 1: Kristine Liwag from Morgan Stanley asked about the backlog growth and its drivers, including the VACCO acquisition's contribution.
Answer: Mike Hartnett explained that $500 million of the backlog increase was due to VACCO, with the rest driven by strong A&D growth. The company is negotiating contracts expected to bring the backlog to $2 billion by year-end.

Question 2: Kristine Liwag inquired about production rates and capacity utilization in aerospace plants.
Answer: Hartnett stated that aerospace plants are operating at 100% capacity, with plans to add shifts and manpower to expand capacity each quarter, leading to margin expansion through better overhead absorption.

Question 3: Michael Ciarmoli from Truist Securities asked about Arrow OEM and distribution growth.
Answer: Robert Sullivan reported commercial OEM growth of 27.9% and distribution down 2%. He noted strong performance in industrial distribution in Q1, with sequential growth still positive.

Question 4: Steve Barger from KeyBanc Capital Markets questioned the revenue level planned for A&D capacity expansion.
Answer: Hartnett indicated that capacity expansion is being approached business by business, with significant growth expected in marine and airframe programs over the next few years.

Question 5: Scott Deuschle from Deutsche Bank asked about the impact of renegotiated Boeing and Airbus contracts on margins.
Answer: Sullivan confirmed that most benefits from renegotiations would be seen immediately in shipments starting after January 1, with negotiations being tough but satisfactory.

Question 6: Ronald Epstein from Bank of America inquired about the impact of critical minerals on operations.
Answer: Hartnett stated there was no impact from critical minerals, with previous issues related to exotic stainless steels now resolved.

Question 7: Kristine Liwag followed up on AI usage in engineering.
Answer: Hartnett shared that AI is used extensively for problem-solving, providing quick and valuable insights that enhance engineering processes.

[Sentiment Analysis]
Analysts expressed positive sentiment regarding RBC Bearings' strong performance and strategic initiatives. Management conveyed confidence in capacity expansion and margin improvement, with a focus on leveraging AI and operational synergies.

[Quarterly Comparison]
| Metric | Q2 2026 | Q2 2025 | YoY Change |
|--------|---------|---------|------------|
| Net Sales | $455.3M | $398.1M | +14.4% |
| Gross Margin | 44.1% | 43.7% | +0.4% |
| Adjusted EPS | $2.88 | $2.29 | +25.8% |
| Free Cash Flow | $71.7M | $26.8M | +167.5% |

[Risks and Concerns]
Capacity constraints in aerospace plants may limit immediate growth potential. Integration of VACCO requires careful management to realize expected synergies and margin improvements. The renegotiation of contracts with major clients like Boeing and Airbus involves complex negotiations.

[Final Takeaway]
RBC Bearings demonstrated robust growth in Q2 2026, driven by exceptional performance in Aerospace and Defense. The strategic acquisition of VACCO and ongoing capacity expansion are set to bolster future growth. Management's focus on operational efficiencies and leveraging AI in engineering processes positions the company well for continued success. Investors should monitor the integration of VACCO and the realization of contract renegotiation benefits as key factors influencing future performance.