Executive Summary

Q3 FY2025 delivered solid top-line growth and material margin expansion: net sales $394.4M (+5.5% y/y), gross margin 44.3% (+205 bps y/y), GAAP diluted EPS $1.82 (+30.9% y/y), and adjusted diluted EPS $2.34 (+26.5% y/y). Adjusted EBITDA rose to $122.6M (31.1% margin). Backlog increased to $896.5M from $864.0M in Q2.
Aerospace/Defense led growth (+10.7% y/y) while Industrial returned to growth (+2.7% y/y); segment margins were strong with A&D over ~40–40.5% and Industrial ~46.5% per management.
Q4 FY2025 guidance indicates continued momentum: revenue $434–$444M (+4.9% to +7.3% y/y), gross margin 44.0–44.5%, SG&A 16.0–16.5% of sales; a step-up vs Q3’s guidance midpoints.
Cash generation remained robust (free cash flow conversion 127% vs 152% last year), enabling $100M of debt repayment in the quarter and reducing trailing net leverage to ~1.8x; preferred stock conversion removes ~$23M annual cash dividends. Key catalysts: sustained A&D demand, margin trajectory, deleveraging, and tariff backdrop.

What Went Well and What Went Wrong

What Went Well

Aerospace/Defense growth was resilient (+10.7% y/y) despite commercial aerospace OEM strike; management mitigated disruption and highlighted strong defense and space demand (space ~40% y/y).
Margin expansion continued: gross margin 44.3% (+205 bps y/y), adjusted EBITDA margin 31.1% (+180 bps y/y), driven by favorable mix, increased A&D capacity absorption, Dodge synergies, and plant efficiencies.
Balance sheet improved: $100M debt repaid in Q3, trailing net leverage down to 1.8x; preferred conversion eliminates ~$23M annual cash outflow. “We used our cash to continue to de-leverage…net leverage finishing the quarter at 1.8x.”

What Went Wrong

Industrial OEM softness persisted, particularly in oil & gas due to customer over-ordering; management expects inventory normalization over ~9 months.
SG&A rose to 17.8% of sales (from 17.1% y/y) reflecting investments in personnel, IT, and back-office support.
Effective tax rate increased to 22.5% (from 18.1% y/y), modestly pressuring after-tax results.

Financial Results

Metric	Q3 FY2024	Q1 FY2025	Q2 FY2025	Q3 FY2025
Revenue ($USD Millions)	$373.9	$406.3	$397.9	$394.4
Gross Margin ($USD Millions)	$158.0	$184.0	$173.8	$174.9
Gross Margin %	42.3%	45.3%	43.7%	44.3%
Operating Income ($USD Millions)	$75.2	$97.5	$86.1	$85.6
Adjusted EBITDA ($USD Millions)	$109.5	$134.0	$123.4	$122.6
Adjusted EBITDA Margin %	—	33.0%	31.0%	31.1%
Net Income Attributable to Common ($USD Millions)	$40.8	$55.7	$48.5	$56.9
Diluted EPS (GAAP)	$1.39	$1.90	$1.65	$1.82
Adjusted Diluted EPS	$1.85	$2.54	$2.29	$2.34

Segment breakdown (Net External Sales):

Segment	Q3 FY2024	Q1 FY2025	Q2 FY2025	Q3 FY2025
Aerospace & Defense ($USD Millions)	$129.2	$149.1	$143.2	$143.2
Industrial ($USD Millions)	$244.7	$257.2	$254.7	$251.2

KPIs and balance sheet/cash metrics:

KPI	Q3 FY2024	Q1 FY2025	Q2 FY2025	Q3 FY2025
Backlog ($USD Millions)	$770.7 (Dec 30, 2023)	$825.8 (Jun 29, 2024)	$864.0 (Sep 28, 2024)	$896.5 (Dec 28, 2024)
SG&A % of Sales	17.1%	16.6%	17.5%	17.8%
Free Cash Flow Conversion %	152% (prior year reference)	144%	~100% (six months context)	127%
Interest Expense, Net ($USD Millions)	$19.3	$17.2	$15.6	$14.2
Effective Tax Rate %	18.1%	23.1%	21.9%	22.5%
Trailing Net Leverage (x)	—	~2.1x	~2.0x (management commentary)	~1.8x

Non-GAAP reconciliation drivers in Q3 included M&A-related amortization ($16.4M), stock compensation ($7.2M), amortization of deferred finance fees ($0.7M), legal settlement (-$4.0M), and tax impacts (-$4.3M).

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Revenue ($USD Millions)	Q3 FY2025	$390.0–$400.0	—	New (previously issued for Q3)
Gross Margin %	Q3 FY2025	42.5%–43.5%	—	New (previously issued for Q3)
SG&A % of Sales	Q3 FY2025	17.0%–17.5%	—	New (previously issued for Q3)
Revenue ($USD Millions)	Q4 FY2025	—	$434.0–$444.0	New
Gross Margin %	Q4 FY2025	—	44.0%–44.5%	New (higher than Q3 guidance midpoint)
SG&A % of Sales	Q4 FY2025	—	16.0%–16.5%	New (lower than Q3 guidance range)

Note: Q4 FY2025 guidance was first provided with Q3 results; Q3 guidance was provided with Q2 results. The mix of higher guided gross margin and lower SG&A % into Q4 supports continued margin resilience.

Earnings Call Themes & Trends

Topic	Previous Mentions (Q1 & Q2 FY2025)	Current Period (Q3 FY2025)	Trend
Aerospace/Defense demand & capacity	Defense growth strong (marine, munitions), long-term programs; Boeing rate uncertainty; contracts through 2030; A&D up 12.5% y/y in Q2.	A&D up 10.7% y/y; defense demand “extraordinary”; adding capacity; space ~40% y/y.	Stable-to-Improving
Commercial Aerospace/Boeing cadence	Planning around 737 rates; lumpy schedules; strike/hurricane impacts quantified; Q3 guidance conservative.	Mitigated strike; visibility tied to Boeing/airbus; potential acceleration in FY2026 with “wonderful comps.”	Improving post-headwinds
Industrial end-markets	Oil & gas inventory correction; semiconductor softness; aftermarket distribution steady; expectation of back-half improvement.	Industrial returned to growth (+2.7% y/y); headwinds linger in OEM oil & gas; aftermarket cited strong pockets.	Gradual Recovery
Margins & synergies	Record 45.3% gross margin in Q1; Dodge synergies, plant efficiencies; guided Q2/Q3 margins down on seasonality but up y/y.	44.3% gross margin; adj. EBITDA 31.1%; segment margins strong (A&D ~40–40.5%, Industrial ~46.5%).	Sustained Strength
Tariffs & macro	Pricing reset expected on contract renewals (PPI up ~30–35%); cautious on macro soft spots.	Mexico tariffs manageable (contract clauses); potential China tariffs seen as net positive for bearings; 90% sales in U.S.	Potential Tailwind
Cash flow & leverage	FCF conversion strong; plan to repay $275–$300M debt in FY25; leverage trending <2x.	FCF conversion 127%; $100M Q3 debt reduction; leverage ~1.8x; preferred dividend eliminated.	Improving
M&A posture	Active pipeline; PE competition; priority on organic execution; management quality critical.	Well-prepared at 1.8x leverage; focus on capturing organic growth; selective on deals.	Selective/Patient

Management Commentary

“Gross margin for the quarter came in at $175 million or 44.3% of sales, a 205 basis point increase year-over-year…drivers…increased absorption of our aerospace and defense capacity, ongoing synergies with Dodge.”
“Adjusted diluted EPS of $2.34…growth of 26.5% year-over-year…an impressive result given…choppiness in Commercial Aerospace…macro softness in the industrial economy.”
“Demand [in Defense] is extraordinary…adding capacity means hiring and training staff, expanding supply chain, and we are currently building plants.”
“Industrial margins were exceptional…Aerospace margins…over 40 to 40.5. Industrial margins were 46.5.”
“Our Mexico plants…any tariff…will be easily absorbed…If [China] does 50%…it’s going to follow the same path as the steel industry…I'm praying for a strong tariff.”
“We repaid $100 million of debt during the quarter…trailing net leverage…1.8 turns…preferred dividend now gone…recapture $23 million in annual expense.”

Q&A Highlights

Oil & Gas: Inventory correction at select customers drove OEM weakness; normalization expected over ~9 months. Ex oil & gas, OEM down ~2.5%.
Tariffs: Mexico exposure manageable via contract clauses; 10% China tariff immaterial; stronger tariffs could tighten supply and support pricing; 90% of sales in U.S.
Defense capacity: Building a >100k sq. ft leased facility in Tucson; capex within normal budgets; aim to double production rate to meet naval objectives.
A&D visibility: Management views ~15% commercial aerospace growth as a “floor” with potential acceleration in FY2026; contracts with Boeing through 2030.
Segment margins: A&D ~40–40.5%; Industrial ~46.5%; Dodge synergies expected to persist for “next 10 years.”

Estimates Context

S&P Global/Capital IQ consensus EPS and revenue estimates were unavailable at the time of query due to API request limits. As a result, versus-consensus comparisons could not be performed. We will update once access is restored.
Company guidance for Q4 FY2025 implies sustained margin strength (GM 44.0–44.5%) and lower SG&A intensity (16.0–16.5%), which would typically support upward estimate revisions on operating leverage if volume executes as guided.

Key Takeaways for Investors

A&D leadership and backlog support: 10.7% y/y A&D growth with strong defense and space demand; contracts extend through 2030; sets up for favorable comps into FY2026.
Margin durability: 44.3% gross margin and 31.1% adjusted EBITDA margin driven by mix, capacity absorption, and Dodge synergies; Q4 guide points to sustained margin profile.
Industrial recovery path: Aftermarket strength offsetting OEM oil & gas softness; semiconductor demand beginning to trickle back; expect gradual normalization.
Balance sheet optionality: $100M Q3 debt paydown and 1.8x net leverage create capacity for selective M&A while preferred dividend elimination adds ~$23M annual FCF.
Tariff backdrop potentially favorable: Limited Mexico risk, low direct China exposure; stronger tariffs could tighten bearings supply-demand, a net positive.
Q4 guidance constructive: Revenue $434–$444M (+5–7% y/y), GM 44.0–44.5%, SG&A 16.0–16.5%; implies continued operating leverage if volumes materialize.
Near-term trading implications: Focus on Boeing/Airbus production cadence, defense order flow, and Industrial OEM normalization; sustained margin beats and deleveraging are likely stock-supportive narratives.

RBC Bearings INC (RBC)·Q3 2025 Earnings Summary