Ralliant Corp Aktie

My name is Brandon Knutson. I'm on the multi-industrial research team here at Morgan Stanley. And this afternoon, I have the pleasure speaking with Tami Newcombe, President and CEO of Ralliant; and Nathan McCurren, Vice President of Investor Relations. And Tami is going to kick it off with some opening remarks for us.

Thanks for having us. Welcome, everyone. Thanks for being here. We did post the presentation after market close today. We'll spend a few minutes introducing Ralliant. We are a relatively new public company. This is our fifth quarter that we're in today. So if you haven't heard of us, I'll catch you up pretty quick on what we do. We are a premier player in precision technologies. That means we make highly precise test and measurement instruments, industrial sensors and safety systems for the defense and space industry. Our businesses design, develop, manufacture, sell and service this precision technologies. Our customers are engineers and scientists and innovators around the globe that are working in a number of different end markets, end markets where we're seeing terrific growth opportunities today.

In the utility space, we work with the grid operators to ensure our sensors and monitoring systems help them keep the lights on. In our industrial space in the data center for liquid and air cooling, our industrial sensors are being used for pressure, flow and temperature. In the defense space, we are a critical supplier in a number of the programs that are going through significant replenishment or surge demand. And then in our test and measurement space, the energy here around data center and AI is exciting. We're enabling those engineers with the instruments they need for those electronics. And as that moves to the edge, and you see the AI edge and electronics show up in our wearables, our humanoid, robotics, medical devices, all of that electronics innovation, is where our test and measurement instruments play a very, very critical role.

As Brandon said, we were a new company and it was September of 2024 that the spin was announced. At that time, we put forth a strategy where we could drive additional growth in the business. There's really 3 pillars to our growth strategy. The first thing around aligning more of the portfolio to high-growth vectors. The second is creating recurring value for our customers in what we call stronghold positions. These are often niche applications where we have technical expertise or long-standing relationships and we're embedded in an OEMs product. And then third is our Ralliant business system, and that's how we execute our strategy. That's the operating rigor that you will see in these businesses, how we deliver the fantastic free cash flow that we do.

On the high-growth sectors, 2 places that we play across the portfolio, that's electrification and defense. In electrification, it's from the grid, as I mentioned, into the data center and the AI edge. In defense, it's both legacy programs, where we are embedded as well as defense modernization. Our capital allocation strategy has been very disciplined, and we started with giving oxygen to these businesses at spin. By that, I mean investing in organic growth. This year, it's been around capacity expansion, where we're seeing strong demand. We've also fueled some areas of supply chain to ensure that we can continue to deliver.

And I'll probably stop there and kind of bring it home to questions that you have for us.

Great. Well, thank you for that intro. You're now, as you said, almost a year into your life as an independent company. What are some things that you can do as a stand-alone company today that you couldn't do under your previous parent?

I think the word is focused. We're a business of products and services, very similar go-to-market across the portfolio, very focused on precision and precisions from an engineering standpoint and also manufacturing precision products. So I think the focus in the company allows us to invest where we have the biggest growth opportunities.

Great. And then how much of the recent performance would you say is really a function of you seeing a return on those investments versus a real inflection in the cycle?

Well, we're certainly going to take advantage of a good market, but we're also very focused on making our own luck. And when I talk about making our own luck, that's about moves we've made to expand manufacturing capacity, investments that we're making in our innovation road maps. And then we do have some places where we're increasing our commercial focus and putting salespeople on the ground to fuel increased demand.

Great. And you talked about the Ralliant business system. I want to highlight a little bit in there. What are the AI implementations you're using in order to facilitate the productivity, cost savings that you've outlined already? And how are you seeing those returns on that AI enablement internally?

A couple of places. As the Ralliant business system, which was born back in Danaher, we were able to refine that to be very focused on our manufacturing, our innovation in a products company. We also have modernized it, and with that, we've infused AI. A lot of the problem solving is about data collection to get to root cause, so there's a real opportunity there for AI. We've also focused on a couple of platforms. One platform is for our software developers. And I call it a platform because it gives us the ability to monitor costs, to be able to have a marketplace. So if somebody were to change jobs, we wouldn't lose some of the AI development that we're doing and to have good governance and cyber control.

And we've done that both on the software development side as a platform as well as on the commercial side. Sort of early on, on metrics. We're looking more at adoption, utilization and sort of optimization of costs, so that we're using the right model for the right solution. And then on the commercial side, it's about how we scale as we grow by enabling our sales teams without having to continuously add people.

And in terms of where you can improve the business, how the opportunity set look now a year into it versus 6 months ago when you initially kind of gave a level setting of expectations for cost savings for the next few years?

Well, I think there's 2 pieces there. If you go back to our preparation for Investor Day, it's almost 18 months ago that we were preparing for our Investor Day. And as we thought about setting expectations for growth at that point in time, we did an analysis looking backwards. We look from 2019 to 2024. And we said through that 5-year period, we'd had a growth CAGR of just over 3%. So we came out talking about 3% to 5% being our new 3 cycle growth rate. 18 months later, as I sit here today, we've got parts of the business that are growing high single to double digit. I believe that mid-single, even without tuck-in M&A is possible.

And some of our shorter cycle business that our test and measurement and some of our industrial sensing businesses, we had strong Q2. We raised at the end of Q2, we raised our annual guidance for the year. And our guide at the midpoint right now for this year is double-digit revenue growth about 200 bps of adjusted EBITDA margin expansion and growing our EPS over 30%. So we're seeing growth and firing on multiple cylinders across the portfolio.

And as you mentioned, you gave the long-term growth outlook, somewhat backward looking at 3% to 5%. As you see how the business has performed, your exposure to AI, defense, grid modernization, repurposing things like EA Elektro to battery power gen test for data centers. Does 3% to 5% feel like the right range? Or is it stale at this point?

Yes I think the -- in our defense business, we've talked about that being a double-digit type grower. I think utility businesses, high single digit, will be double digit in the second half year because we were slower in the first half. But the 5% through the cycle is the number we've been talking about now with still to be seen on our short-cycle business. In the presentation that we most recently -- we just posted here within the past hour, we talked about the momentum that we saw in Q2. We've continued to see in July and August of this quarter. So the short-cycle business and Test and Measurement and Industrials continues to perform.

Great. Shifting over to another kind of big secular theme with AI and data center. You've seen, could AI create a structurally high replacement or upgrade cycle for oscilloscopes and other test equipment as bandwidth signal complexity advances more rapidly?

Yes. The test and measurement business is driven by innovation. And so when there's innovation happening in electronics like there is in the data center going from 400-volt to 800 volts and a lot of the equipment, the electronics equipment going into that data center needs to be upgraded or expanded, those are good opportunities for test and measurement equipment. And again, where we see -- we talk about the explosion of electronics, it's really outside the data center and all the companies that are building electronics that will take advantage of AI as it shows up to each and every one of us in our lives.

And for TEKTRONIX, specifically, the products there sit very early in the electronics R&D cycle. Where are you seeing AI-related demand show up for those products?

The test and measurement equipment, about 50% of our opportunity is in R&D. That's the place that really pushes the edge of those instruments. We have our own in-house semiconductor team. They build the chips, the ASICs that go in that equipment. And that's a place where customers are willing to spend extra dollars to ensure they make the best equipment there. So I would say in the R&D space, anything related to electronics is going to drive growth for T&M.

Okay. And then shifting to AI infrastructure, how large is the direct and indirect revenue exposure there for you?

Yes. The -- there's a few places where we sit in the data center that would be more in our sensors that actually show up in the data center in cooling, whether it's air cooling or liquid cooling. Most of our other opportunity is for the echo of the AI data center, which is in the labs that are generating the electronics. In the power grid, the expansion needed in the power grid, both for storage systems and for critical infrastructure to increase our ability to power the AI infrastructure.

I'd just add, Brandon, we've shared that about 10% to 20% of revenue has direct exposure to data centers, AI infrastructure. Some of it is a little bit difficult to measure of whether a chip is going into a server in a data center, a different application. So certainly a bigger impact than that on the second derivative impact of all the investment that's happening there right now.

Great. Another strong end market for you all has been defense. Your backlog remains above $1 billion, double-digit revenue growth. How far does that backlog give you visibility?

Yes. So the reporting -- we report the defense and space as one of our end markets. And that will be about 15% to 17% of our revenue this year. And that would take us through this year through '27 and into the beginning of 2028. At the same time, there's a lot of activity right now with our customers, the defense contractors and thinking through what does this replenishment cycle in surge demand. Many of the programs that we're on, we're talking about 2x to 4x increases in productivity between now and 2035. And that's come to us in quoting a number of different scenarios, different volumes, different time periods, and we're still waiting to understand what the contracts will look like that will become part of our backlog there. But that is not part of the $1 billion backlog today.

Okay. And you have a line of sight now the capacity needs through 2030 on the defense side. You're expecting to do expansion past 2028 and beyond, you're good through '28. What level of revenue growth with this capacity expansion beyond '28 are you growing the business for -- growing capacity for?

Yes. So we -- within our footprint today between increasing capacity and that comes in both sell output as well as expanded shifts. We're comfortable through the demands in 2027. So we have announced we're moving this business into another facility, which we own in outside of Cleveland, Ohio. And that capacity is to come on late '27 and into '28, and then possibly a fourth facility after that. And that is to take us through now through 2035 at the double-digit rates that we're thinking about.

Okay. And then on the demand side, it's clear what's driving demand for defense, but we know that margins are somewhat lower than company margin on the defense side as well. So -- how should investors think about the trade-off between faster growth and segment margin mix?

Yes. So our defense and space end market is in the Sensors & Safety Systems segment. We're talking about adjusted EBITDA margins there in the mid- to high 20s. And this will be a headwind to where we are today. You have to understand the context around that. These customers fund their new product development. So R&D is very low for us. They also fund a lot of the standup of the production lines as well as equipping the people to come on to the lines, so we have guardrails on margin profile there. And it becomes a mix issue as we look forward that we'll have a higher mix of some of these programs with lower margins.

Having said that, we still are very comfortable with the range that we gave of the mid-20s to high 20s and adjusted EBITDA margins. We're just making sure that people didn't get ahead of us and think that they were going to go beyond the high 20s.

Right. And is there any opportunity for RBS or volume leverage to offset some of this margin mix headwind?

Yes. And as we have done in the past, we will always continue to do that. And I think as the -- as we get orders in backlog and understand timing of some of this, that will be an opportunity for us.

And what are the levers within RBS to try to improve the margins for this?

Productivity. I mean if you think of our RBS tool set, it's all about getting efficiency and productivity out of the manufacturing facility.

Great. And then sticking with Sensors & Safety on the utility side, 14% of revenue expected to show growth in the double digits in the back half of the year, had delays in the beginning of this year, but how durable is that double-digit growth beyond the catch-up we're expected to see in the second half of this year?

Yes. So the first half of this year demand orders continued to be strong, called out Q2 being historically our strongest quarter ever in demand. So we are continuing to see strong demand. Some of the shipments shifted from first half to second half. So that was the double digit in the second half. And we stay -- I mean, this business was born 50 years ago, pioneering, how we monitor critical assets in the grid. We stay very close with those OEMs. Those OEMs we work with multiple years in advance to actually design sensors for that equipment. So the signals that they're giving us are strong for several years to come. If you know that industry transformers are backlogged 18 to 24 months. So there's good demand there.

Great. And the grid is going to require a lot of investment to accommodate data centers, renewables, electrification, where does Ralliant, the strongest competitive position within the grid modernization spend?

Yes. I would say everything you said as far as expansion, there's also a tremendous opportunity for upgrades in the grid, Much of our grid is over 25 years old. And our opportunity is both in the generation side and the transmission side. We don't play as much in distribution. But the sweet spots transmission with opportunity also in generation.

And what's the mix between replacement of aging equipment versus new infrastructure?

I don't -- we don't break out -- I don't even think we would know the replacement. We think about retrofits, which is a business that has been building over the last 2 to 3 years, maybe 10%, 15% of the business today is retrofits where a transformer going through a retrofit they'll add sensors to it. And with aged infrastructure, you can imagine people are more interested in monitoring that aged infrastructure now to know if they get an investment or they get a shipment of a critical asset where they want to put it.

And are you seeing across utilities, given the increasing cost of outages and things like we're saying fires and how that impacts the liabilities that utility is facing. Are you seeing a higher willingness to spend on predictive monitoring and other solutions that you provide?

Yes. The aged equipment, some of the penalties driving not only the monitoring, which is something we've traditionally historically done very well, but also is moving up in providing more insights and more predictive analysis to the grid operators or the new customer for us is the hyperscalers. We announced or shared on one of the earnings calls that one of the hyperscalers has selected us as part of the -- as a critical supplier to as they build data center, they're staying really close to deciding who is in their design footprint.

That makes a lot of sense. Shifting to test and measurement. So organic growth reached mid-teens in Q2, and following a return to growth in Q1. So a very strong start to the year, book-to-bill above 1.2. Where are we in the test and measurement recovery cycle today?

We're clearly -- we're clearly in year 1. We saw strong growth both in Q1 and Q2. And we've seen in the past, we've seen these cycles run anywhere from 2 to 4 years. And you look around, I ask myself is there going to be more electronics in the world or less electronics in the world? It looks like there's a lot of opportunity here for electronics, which is good for test and measurement.

And you cautioned that historically after a strong first year recovery in test and measurement, you see it moderate typically to mid-single digits in year 2. What would need to happen for this cycle to provide a stronger or longer kind of duration of that higher growth than history?

Yes. Let me -- so first of all, thank you for asking this question on moderation. Every cycle has had a different profile. And we have seen double-digit years followed by moderation, I commented low single, mid-single. We did see coming out of COVID. We also saw a cycle where we saw high single-digit, double-digit growth for 3 solid years. So every cycle is a little bit different. And I think all of us can see the opportunity that we have across electrification. Test and measurement is also used in defense and a lot of the modernization in defense, communications that are used in defense is another good another good growth vector for test and measurement. So I think all of those things, how many different ways can we win in test and measurement is what we're trying to play into.

I also mentioned China has been strong for us in the first half, stronger in orders than in revenue. So should be good or will be good in the second half, and a lot of that's driven by a focus on energy and also on AI.

And within test and measurement, you typically have 90 to 120 days of visibility, so not super long visibility. But what leading indicators give you the greatest confidence around the duration of the test and measurement of cycle?

Yes, a couple -- we look at the market indices, one of them being the semiconductor industry association, the SIA is a pretty good -- within a quarter, usually a pretty good predictor of test and measurement overall. We look at the peer group. We look at our customers and we look at the growth that we're seeing in data center and some of the technology providers. But internally, we have a strong sales organization. So we have funnels we look at. We have reach that comes through distributors. We can inventory and point-of-sale or sell-through from them. All of this combined gives us pretty good visibility for 90 to 120 days.

Got it. And then within the segment, Diversified Electronics has been particularly strong. How much of that is traditional electronic cycle versus incremental AI, energy or mobility-related investment?

Yes. I would say it's certainly hard to separate. There's not an electronic product or company out there that isn't thinking about how do we infuse our electronics with AI. So I would say there's an element of innovation, both in existing products. I just upgraded my iPhone last night. I couldn't find the alarm clock this morning, by the way, if anybody else have that problem. But there's also, I think, new products that are going to come out, I mean you think about some of the predictions on humanoids, some of the predictions on robots, we're going to have in the industrial environment. We're all going to be wearing electronics on ourselves. Medical technologies, just life-changing type medical technologies that will be out there for people. I think there's a lot of innovation happening in electronics and a lot of it is driven by AI.

That makes sense. I mean you mentioned China, I want to pivot there. You had strong growth in Q2 with elevated activity around AI data centers and energy infrastructure. How sustainable do you see that demand trend being?

Specifically, test and measurement?

This is just a broad China question.

Broad China's question. So 2 places. In test and measurement, there's definitely an investment cycle going on in energy and the AI data center and is it structural? Is it episodic? I think still time will tell in that space. Also in China, we have, again, back to making our own luck -- we have invested in a local-for-local capability there for our industrial sensor businesses, where we actually transport designs, they can redesign, reengineer the supply chain, manufacture and deliver localized products, and that is benefiting us right now in that space.

And how do export controls affect the type of test and measurement products you're able to sell in China?

Yes. So it's been pretty stable the last several years. You'd have to go back to pre-COVID to win some of the rules changed about who U.S. companies could sell to, but that's been quite stable for the last several years.

And then does the development of a domestic Chinese electronics ecosystem create a long-term opportunity for electronics? Or does that ultimately raise the competitive risk?

Well, I always think competitors make us better. And so we certainly keep an eye out. Much of the China competition has come in places where customers we cannot work with based on our headquarters and U.S. role. And some of that competition then does go to Europe and does come to the United States. I'd say where we play in test and measurement, it's a very high end of complex test systems. We have advantages around our ASICs that we build and the performance that we have. So where the competition -- or the competition comes from is really at the low end of the portfolio.

Got it. I want to shift gears to semiconductors. You saw a strong growth 7% in Q2 despite a difficult comparison year-over-year. What are you seeing in terms of underlying demand there?

Yes. Underlying demand is strong in semiconductor. Our reported numbers are light due to a year-over-year compare with a large project that will run about one more quarter. I think underlying it was high teens.

Yes. Yes, we said like mid- to high-teens growth broadly within semiconductor, excluding that, which will be more reflected in Q4 once we fully wrap that.

Right. And that should be a fair starting point when thinking about what '27 demand looks like?

For semiconductor?

For semi, yes, the tough comp...

Yes. We haven't made any predictions for 2027 in our business. We're kind of getting in the 120-day window here by the end of this quarter, we'll be able to give some visibility into 2027.

Yes. But there's nothing that we've called out that would be a lumpy comp for next year as we're going into the year. So it's really more just a what's the underlying demand. And right now, there's nothing that we're seeing that's indicating that, that's slowing down.

Got it. And then which parts of the semiconductor are most relevant to Ralliant, whether it's wafer fab, advanced packaging, test, R&D.

R&D. Yes. Yes. We sit in -- you think of the who's who of the top 20 semiconductor players would be sitting in their R&D labs, helping them with characterization of their next generation of semiconductor chips. And when they ship those chips to somebody building something with those chips, we would follow those to those technology companies that are building systems or subsystems and be tested all along the way.

Great. And these last few minutes I want to shift to capital allocation and M&A. You've returned over $160 million to shareholders year-to-date in buybacks and you target 50% of free cash flow over time. What do you look for to determine whether you lean a little bit above or below that number?

Yes. We specifically said over time to give us the flexibility with our first priority being around organic investment. I talked about some of the investments that we're making in manufacturing capacity. And then the other is tuck-ins. And we have a good funnel of tuck-ins, but we -- timing is always interesting on small tuck-ins as to when they're the right value for us, as well as the timing works with the other party.

And on tuck-ins, where are you seeing the most attractive technology portfolio gaps?

Yes. I think for tuck-ins for us, we want to align to higher growth. That was kind of thesis for the spin. So we want higher growth. We also want places where we can get good synergies. I think about small technology companies that don't have a global sales organization that we could tuck in to one of our businesses and really help them scale something that they have started, that's probably like right up the middle of the fairway.

And then generally for M&A, you target double-digit ROIC by year 3. Is that something that is basically a gating factor that keeps Ralliant focused on smaller tuck-ins versus larger strategic M&A?

Well, I think -- I mean, the nature of our free cash flow. And if you think about somewhere around 50% going to buybacks and dividends. What we have left with is going to lend itself to smaller type tuck-in deals than large strategics. I also think as we -- we're 4 quarters public right now, we want to a little bit walk before we run and prove out that we can do a few tuck-ins here before we take on anything bigger.

And then assuming there was a large strategic opportunity out there and you're willing to step into it a moment, step away from buybacks. How high would leverage would you let that go above the kind of 2% -- 1.5% to 2% range in order to make that deal happen.

Yes,it's not a ceiling or a floor. It's really a guideline and we would look at anything that came to us and is it the right thing for our shareholders.

And then looking beyond 2026, current guidance, we had talked about needs to see its guiding for test and measurement to moderate a little bit next year. What would need to happen for growth to remain above the historical growth?

Yes. We haven't guided anything for 2027. I think what we're seeing in the business today is really healthy growth rates across multiple parts of the portfolio. We're seeing strong growth and opportunity in the defense space. The utility space is a multiyear secular trend. And then our short-cycle businesses around industrials and test and measurement, industrials really grew stronger in Q2 than we had expected. That was the over -- we came in over our guide in Q2, and we raised our guide for the year was due to the industrial. And we've continued to see strength in our short cycle business. And that was the comment that I made on July and August continuing the momentum of Q2.

Okay. And if we sit here a year from now, what would tell you that the spin has genuinely changed the earning power of the business rather than simply spinning off right around the bottom of the cycle and catching the upswing?

I think that we've made our own luck that we have prepared ourselves to capture growth from '27 and beyond. Some of that's the investment in our supply chains and our manufacturing but also in the platforms I talked about for AI and innovation and fueling our innovation road maps, I should have mentioned a big week for our Test and Measurement segment. I think there were 3 new product announcements that came out this week. Every one of them builds upon the launches that we made last year in Q4 when we talked about platform announcements, and we've continued to extend those platforms and add to those platforms with some of the announcements this week. So fueling that innovation in both segments, but that's a great proof point of what's possible.

And what is the opportunity in Ralliant that you're most excited about that you think investors now fully appreciate?

I think the first thing that gets me excited is that we have multiple growth opportunities. We're not -- we're multi-threaded. We're firing on multiple cylinders. I think that's the most exciting part. From an upside standpoint, I'd say that the opportunity in defense right now and some of the alignment that we have on the critical programs that are talking about 2x to 4x production over the next several years. That's probably the single 1 upside that I see that is pretty lumpy, but an opportunity for us.

Excellent. Well, Tami, thank you for your time today, and thank you for coming to the conference. That's all our time today.

Thank you. Nice job.

Hello. My name is Donna, and I will be your conference facilitator this morning. At this time, I would like to welcome everybody to Ralliant Corporation's Second Quarter 2026 Earnings Results Conference Call. [Operator Instructions] I would like to turn the call over to Mr. Nathan McCurren, Vice President of Investor Relations. Mr. McCurren, you may begin your conference.

Thank you, Donna. Good morning, everyone, and thank you for joining Ralliant's Second Quarter 2026 Earnings Call. I'm Nathan McCurren, Vice President of Investor Relations. Today, we'll walk through our results, highlight key operational progress and provide our outlook for the third quarter and full year 2026.

I'm joined today by Tamara Newcombe, our President and Chief Executive Officer; and Neill Reynolds, our Chief Financial Officer. Our earnings release issued this morning and today's presentation can be accessed on the Investors section of our website, alliont.com. Please note that we'll be discussing certain non-GAAP financial measures on today's call. A reconciliation of these measures to U.S. GAAP can be found in the appendix to our presentation.

During today's call and otherwise stated, we're comparing our second quarter 2026 results to the same period in 2025. During the call, we will make forward-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties and actual results might differ materially from any forward-looking statements we make today.

Information regarding these risks and uncertainties is available in our annual report on Form 10-K for the year ended December 31, 2025, and filed with the SEC on every 26, 2026, and in our Form 10-Q filed with the SEC on May 12, 2026, and be filed after market today.

With that, I'd like to turn the call over to Tami.

Welcome, everyone, and thank you for joining us for our Q2 2026 earnings call. One year into our journey as an independent company, we're demonstrating that our strategy is working, and I'm incredibly proud of what our team has accomplished. Our progress is translating into growth, margin expansion and strong cash generation.

Today, I'll start with results of the quarter and strategic execution. Neill will then walk through the financial results before we open up the call for your questions. Let's start on Slide 4 with the business and outlook update. First, our Q2 results exceeded the high end of our guidance ranges, and we are raising our full year 2026 outlook as both segments delivered double-digit revenue growth and significant adjusted EBITDA margin expansion.

Second, we're continuing to capitalize on favorable secular trends in electrification and defense. Our disciplined execution drove Q2 orders growth resulting in a book-to-bill above 1.1 in both segments and defense backlog remaining over $1 billion. Third, our RBS-led enterprise productivity program is gaining traction. We are moving from foundation building to execution and results, reinforcing our confidence in delivering $10 million to $12 million of in-year savings and $50 million to $60 million of annualized run rate savings by 2028.

Fourth, we continue to generate strong free cash flow, enabling us to execute our capital allocation priorities. We're investing in manufacturing capacity to support growing demand and returned $161 million to shareholders in the first half of 2026 and including the completion of our $100 million accelerated JERA repurchase program in Q2.

Next, I'll summarize our Q2 financial results on Slide 5. In the second quarter, revenue was $568 million, up 13% year-over-year on both a reported and organic basis. Both segments delivered double-digit organic revenue growth with sensors and safety systems up 11% and test and measurements up 16%. Adjusted EBITDA margin of 19.8% and adjusted EPS of $0.68 and were both above the high end of our guidance ranges, replacing strong operating leverage on higher volume, disciplined execution and early benefits from productivity actions already underway. We generated $99 million of free cash flow in the quarter, contributing to a trailing 12-month free cash flow conversion of 114%.

Now turning to Slide 6. Our profitable growth strategy is intentionally balanced and designed to perform through the cycle. Our winning growth factors align with market tailwinds in electrification and defense were long-standing customer positions and differentiated capabilities position us for elevated growth. Complementing this, our stronghold positions are anchored in a broad customer base with more modest growth profiles where Precision Technologies delivered durable demand, attractive margins and recurring revenue.

Enabling our strategy is the AI infused Ralliant business system or RBS, which brings discipline, consistency and enterprise scale to how we operate and execute. The outcome is sustained growth and long-term value creation for our shareholders.

Turning to Slide 7. I'll share how we are capitalizing on winning growth factors. Electrification is a compelling growth opportunity where we are well positioned to win. From keeping the lights on to enabling the next generation of intelligent products, we are aligned with the technologies powering an increasingly AI-enabled world. We help utilities operate a more reliable grid through predictive monitoring of critical infrastructure, while our precision test and measurement instruments enable the electronics breakthroughs behind tomorrow's innovations.

As AI accelerates demand for power, compute, connectivity and intelligent devices, our solutions are becoming increasingly important. Defense is another compelled growth opportunity where we are well positioned to win. Our safety critical systems are embedded in many of today's legacy missile and munition programs. While our precision test and measurement instruments enable the advanced electronics behind next-generation communications, compute, storage and space applications.

As defense modernization accelerates we build on our positions in trusted legacy platforms by also supporting the technology shaping the future of natural security such as autonomous or unmanned air vehicles. Across both secular trends, we support customers from early-stage innovation through full-scale production and deployment, giving us a unique position at the intersection of infrastructure, electronics and innovation.

Turning to Slides 8 and 9. My regional and end market commentary will begin with the percentage of year-to-date total company revenue shown on the right side of the page. Followed by the year-over-year organic revenue growth for Q2. North America represents 54% of revenue and delivered 13% growth, driven by continued momentum in Test and Measurement, utilities and defense.

Looking forward, we expect elevated demand in North America from ongoing investments in the electric grid, legacy defense programs and technology innovation driven by AI. Western Europe represents 13% of revenue and delivered 16% growth as we executed well against pockets of opportunity in defense, industrial manufacturing and advanced research.

Still, the macro environment in Europe remains selective with lower growth expected going forward. China represents 16% of revenue and delivered 7% growth with increasing investments in AI data center and energy infrastructure. We saw an acceleration of activity in the first half we expect that to translate into increasing revenue growth in the second half of the year. The rest of world region represents 17% of revenue and delivered 14% growth, driven by test and measurement, industrial customers.

Transitioning to our end markets. I'll start with the Sensors & Safety Systems segment. Together, the industrial manufacturing and other end markets represent approximately 30% of revenue and both delivered double-digit growth in the quarter with a broadening recovery across most geographies and particular strength and applications within the AI data center.

For example, our precision sensors are embedded within data center liquid cooling systems where customers are accelerating production volume. This is where RBS provides a competitive advantage. Most recently, the team doubled production throughput on humidity and temperature sensors, leveraging the same resources, achieving a 65% cycle time reduction.

Defense & Space represents 17% of revenue and delivered 14% growth. Our defense backlog remains over $1 billion with continued multiyear demand on legacy missile programs where we are a trusted supplier. Over the past quarter, our defense customers have progressed from framework agreements to undefinitized contract actions or UCS under the Department of Wars acquisition transformation strategy.

This represents the first full-scale transition toward contract execution and provides increased confidence in elevated multiyear demand. as a key supplier to the Pentagon's priority munitions programs, including FAD, PAC-3 and Hawk, we are scaling production across product lines at roughly 2 to 5x historic levels and making targeted investments in manufacturing capacity to support reliable execution.

Utilities represents 14% of revenue and delivered 4% growth. Q2 was another record quarter for orders and revenue, although revenue growth was below expectations due to shipment timing, primarily related to delays into the Middle East. Shipment delays were approximately a 4 percentage point headwind to growth in the quarter. In the second half, we expect the utilities growth of low double digits as first half orders significantly outpaced revenue and we are further progressing our capacity expansion initiatives.

Test and measurement growth broadened across all end markets. Diversified electronics represents 21% of revenue and delivered 23% growth as customers increased innovation for electronics in energy storage systems, electric vehicles medical devices, consumer electronics and emerging AI-enabled edge devices. The convergence of higher compute requirements, greater energy efficiency needs and longer battery life expectations is driving a new wave of innovation across these applications.

Energy Storage Systems exemplify the innovation driving growth in diversified electronics. Customers are rapidly increasing system power levels and developing new ways to connect energy storage to the grid and critical infrastructure, including data center backup, Tektronix DC power supplies and customized power racks, help validate these next-generation architectures. In Q2, we secured a production win with a leading energy storage provider creating an opportunity to scale alongside the customer's future capacity expansion.

Communication represents 11% of revenue and delivered 9% growth reflecting continued technology innovation in advanced communications for AI infrastructure, aerospace and defense and research laboratories. In the quarter, we had a customer win where engineers are using our test and measurement instruments to measure electrical signals with pinpoint accuracy to validate that optical laser chips are working precisely. This supports the buildout of optical infrastructure, which is a technology that underpins data-hungry AI cloud computing and high-speed connectivity.

Semiconductor represents 7% of revenue and delivered 5% growth our high precision instruments are at the forefront of enabling engineers to develop and validate the next generation of semiconductors that enable communication networks, intelligent devices and advanced electronic systems. During the quarter, we saw broad-based acceleration in semiconductor technologies enable new product innovation across industrial, energy, data center and defense markets.

Across our test and measurement end markets, customer demand remains robust, and our pipeline continues to support confidence in elevated activity levels through the second half. While the business remains inherently short cycle and visibility beyond 90 days is limited, we are encouraged by current demand trends and we're actively managing supply availability and capacity to support customer requirements.

Next, on Slide 10. We leverage RBS across the enterprise for both growth and productivity. As I shared earlier, the RBS-led enterprise productivity program is on track to achieve $10 million to $12 million of in-year savings and $50 million to $60 million of annualized run rate savings by 2028. In Defense & Space, our multiyear RBS-led productivity initiatives have doubled production out within our existing manufacturing footprint.

To further increase production going forward, [indiscernible] EMC was awarded $27 million by the Department of War and has expanded into one of our existing manufacturing sites in Ohio. In Utilities, we continue to see robust demand supported by multiyear grid modernization and resiliency initiatives. In July, we broke ground on expanding our precision sensor facility in upstate New York to support the historic orders growth.

Next, Neill will review our financial results and provide additional perspective on our guidance.

Thank you, Tami. Good morning, everyone. Please turn to Slide 12. Q2 results were above our guidance ranges across all metrics, driven by increasing customer demand and strong execution. Q2 revenue of $568 million was up 13% on a reported and organic basis as revenue growth accelerated across our end markets engines. Both segments delivered double-digit organic growth year-over-year, led by continued execution against our greater than $1 billion of defense and space backlog, acceleration in industrial manufacturing and other end markets and continuation of broad-based customer wins across test and measurement.

As I shift to adjusted EBITDA and EPS, I will be speaking to our comparisons against normalized adjusted metrics for 2025. As a reminder, we have normalized the first 3 quarters of 2025 results to reflect our fully ramped post-spin costs, which provides a more like-for-like comparison for 2026 results. Adjusted EBITDA margin in the second quarter was 19.8%.

On a normalized basis, this represents a 390 basis point improvement from the prior year, driven by operating leverage on revenue growth and productivity savings realized from the enterprise productivity program actions. Margin expansion was partially offset by costs associated with standing up our enterprise productivity office and higher variable compensation on improved operating results.

Adjusted EPS of $0.68 increased 58%, driven by revenue growth, adjusted EBITDA margin expansion and the benefit of share repurchases. We Free cash flow was $99 million in the quarter, driven by higher fall-through on increased EBITDA and supported by disciplined working capital management. Trailing 12-month free cash flow conversion was 114% in above our target of greater than 95%.

I'll go through segment performance, starting with Sensors and Safety Systems on Slide 13. The Q2 revenue of $347 million increased 12% on a reported basis and 11% organically driven by double-digit revenue growth across defense and space, industrial manufacturing and our other end market.

Adjusted EBITDA margin for Sensors & Safety Systems was 29.4%, a 350 basis point improvement on a normalized basis, driven by operating leverage on higher revenue favorable mix from elevated industrial manufacturing and other contribution and better-than-expected defense margins based on favorable program mix in the quarter.

Highlights of our test and measurement results are on Slide 14. The Test & Measurement delivered a strong quarter with revenue of $221 million, up 15% on a reported basis and 16% organically. This was driven by strong orders and revenue growth across all 3 end markets. as we saw a broadening of customer investment across test and measurement.

I'll note that in the semiconductor end market, we continue to have year-over-year headwind from lapping a large customer project in 2025, but given project timing, this was less pronounced in Q2 than in the prior 2 quarters or what we will lease in Q3. Test & Measurement adjusted EBITDA margin was 14.7%, and an improvement of 750 basis points on a normalized basis due to strong operating leverage on higher revenue and the ramping of productivity savings.

On Slide 15, I give a brief update on our enterprise productivity program. As previously announced, we expect $50 million to $60 million of annualized run rate savings by 2028, and inclusive of the $20 million we've already actioned. In Q2, we began to realize these savings with $3 million of savings in the quarter, and we are on track to deliver $10 million to $12 million of in-year savings in 2026.

Combined with a strong baseline incremental margin, we expect the enterprise productivity program to contribute to approximately 50% incremental adjusted EBITDA margins through 2028. This level of incremental margins assumes an organic revenue growth framework of approximately 5% in 2027 and 2028. This framework would lead us to deliver the midpoint of our through-cycle adjusted EBITDA margin target range of low to mid-20s by 2028. However, we are not providing guidance for 2027 or 2028, at this time.

Turning to our balance sheet and cash flow on Slide 16. We ended the quarter with $271 million in cash and cash equivalents and $1.15 billion of debt. With $99 million of free cash flow in the quarter, our cash generation is funding our capital allocation priorities and at the same time has enabled us to maintain net leverage of approximately 1.9x within our long-term target range.

We returned $161 million of capital to shareholders through the first half of 2026. Mostly driven by $150 million of share repurchases, inclusive of our completed $100 million accelerated share repurchase program. This resulted in the repurchase of 2.8 million shares at an average price of $54.74 per share.

Shifting to Slide 17 to cover our expectations for the third quarter and the full year. In Q3, we expect revenue of $570 million to $590 million. Adjusted EBITDA margin is expected to be between 20.5% and 21.5% with year-over-year normalized margin expansion driven by operating leverage on higher revenue and savings from our enterprise productivity program. Adjusted EPS is expected to be between $0.72 and $0.78 and driven by revenue growth, margin expansion and a reduction in share count.

We expect Q3 weighted average diluted shares outstanding of approximately $112 million. Based on our Q2 performance and increased confidence in continued customer demand in our short-cycle businesses in the second half, we are raising our full year 2026 guidance. We now expect full year revenue of $2.25 billion to $2.3 billion, adjusted EBITDA margins of 20% to 21% and adjusted EPS of $2.76 to $2.90. This is inclusive of a small benefit from tariff refunds received through Q2 and will be recognized in cost of sales.

From a corporate perspective, we now expect corporate and other expenses in the second half to be approximately $20 million to $23 million per quarter, an increase of about $5 million to $6 million per quarter from our prior estimates. This is driven by implementation costs associated with the enterprise productivity program, a rebalancing of support function activities identified with the EPP program that results in net savings, but shifts some costs from the segments into corporate. Lastly, higher variable compensation due to an increase in expected performance in the year.

Finally, I want to provide an update on our capital allocation priorities on Slide 18. Our top priority remains organic reinvestment. We are enabling organic growth by leveraging RBS Everywhere and augmenting it with AI-driven productivity. Second is returning capital to shareholders. As mentioned earlier, year-to-date, we have returned $161 million to shareholders for a combination of share repurchases, including our completed ASR and dividends. We continue to target share repurchases of approximately 50% of free cash flow over time.

We've already repurchased approximately 50% of anticipated 2026 free cash flow and will evaluate opportunistically against other uses of capital for the remainder of this year. Our last priority is focused tuck-in acquisitions. We currently have a robust pipeline of attractive tuck-in acquisition targets. We will continue to target double-digit ROIC by year 3 for these acquisitions. We are committed to balancing these capital allocation priorities against our target cash balances our long-term net leverage target of 1.5 to 2x adjusted EBITDA.

With that, I'll turn it back to Tami to wrap before opening it up for questions.

One year into our journey as an immune company my confidence in what we can achieve has never been stronger. I'll close with a few key takeaways. First, our profitable growth strategy is working. We continue to capitalize on attractive secular growth opportunities, and the Ralliant Business System is how we drive disciplined execution across the enterprise.

Second, we're making meaningful progress on margin expansion through the combination of strong incremental margins and the execution of our enterprise productivity program. Third, we remain confident in Ralliant's long-term value creation potential.

Strong free cash flow generation is enabling us to execute our capital allocation priorities, including reinvestment in the business, returning capital to shareholders and pursuing a robust pipeline of attractive tuck-in acquisitions. Finally, I want to thank our 7,000 team members from around the world their commitment, dedication and relentless focus on customers of what makes these results possible.

With that, I'll open up the line for Q&A.

[Operator Instructions] Our first question is from Chris Snyder with Morgan Stanley.

I wanted to ask about test and measurement and specifically, the diversified electronics. So we've seen a really nice acceleration there year-to-date after declines a year ago. And I know you guys don't have a lot of visibility in the backlog. I think I said maybe only 90 days.

But I wanted to ask about how you think about the duration of this cycle, whether in the context of a typical upcycle for diversified electronics. But then also thinking about all of the secular tailwinds that are coming through for that business. You highlighted a number of them, I think energy storage systems, we're seeing AI come through. So just whether it's conversations with investors, what you see in the future, how do you feel about the duration of strength there?

Chris, thanks for raising that question. And I'd start with what we know today, and we'll specifically talk about test and measurement, it's about 40% of the overall business. You had started with diversified electronics. That's about 20%, where we've seen really strong growth the last 2 quarters.

But in that -- in the space, the second quarter headline last quarter was returned to growth. This is the second quarter of really strong growth in T&L, inherently, it is a 90- to 120-day short-cycle business. But we like the book-to-bill. We talked about 1.1 across both segments. In T&M, that's up over 1.2 right now. So we do see some strength there. I spoke about the elevated demand in China.

A lot of activity there in the first half, which is going to translate into some higher revenue in the second half. And that's an area we're still assessing is a build-out tied to AI and energy, more episodic or advent driven? Or is that something that's going to drive some structural growth along the way?

Overall, we see strong first year kind of coming out of the downturn in T&M is having a strong first year. I expect that to moderate in the second year. If you look at history, probably more mid-single digits coming out of a really strong first year.

I appreciate that. And then maybe if I could follow up on PacSci. I mean so I think everybody appreciates there's a lot of demand in the world for the products that PacSci sells. But I wanted to ask about capacity and just the ability for you guys to ramp there. So can you just maybe talk a little bit about some of the actions that you guys have taken to improve that supply chain and production capacity?

And then I believe you guys maybe -- I think when you guys talk to mid-singles in the out years, I think it assumes to be like low doubles for PacSci is kind of my understanding. But if we do get a surge programs come through, is there ability to flex that up to something higher and meet that demand should it come through?

Thanks, Chris. The demand, we talked about remaining over $1 billion of backlog in the defense business, and that's following a strong quarter that we had where we saw double-digit growth in Q2. A couple of things that we're doing to continue to increase capacity. And this is an extension of what we've been doing over the last several years. We've doubled the throughput in our existing footprint.

Now we've had the opportunity to create a center of excellence around electronics in our Ohio site. That's a place that we've begun investing and getting some help also from the government as we are a critical supplier in many of the top priority munitions programs. And that will take us eventually to a fourth site. But the team's got good line of sight here out through 2030 and our capacity needs.

I think the second part of your question is double digit, could that be higher. We are actively working with our customers in the defense space on the programs. There's a variety of scenarios as far as volume. And a variety of scenarios on time frame.

Of course, our customers are trying to line up their supply chains. And when they have firm commitments there, we'll start to see orders, which will represent in our backlog to you.

Our next question is from Alexander Virgo with Evercore ISI.

I wondered if you could just dig a little bit into your utilities comments and the semis comments. So I guess the first question is just to understand -- make sure I understand the clarifying point of the 4 percentage points of impact from the Middle East. That was in the Utility segment, right? So the underlying growth is more like in if that's correct. And therefore, how would you expect that to trend through the second half?

Are you able to catch up on some of that? I appreciate that right now, it's probably quite tough, but thinking about how that plays through in the rest of the year. And then on semicon I just wanted to make sure, given the point regarding lapping the contract last year, the 8% to 12% guide in Q3 would imply quite a limited is impact. And you obviously have 5 in Q2, 5% growth in semicon in Q2. So just again, wondering how that plays through in the very near term.

Alex, I'll start with utilities. And utilities represents a 14% or so of total company revenues. And the demand has continued to be strong, recognized Q2 is our largest orders and our largest revenue quarter historically. We grew from Q1 to Q2, we grew revenue about 11% quarter-over-quarter. Still, I called out the 4% year-over-year was below our expectations. And it was a handful of customers in Middle East that asked us to adjust timing on shipments for them, which we have done. That's the 4-point headwind that I called out.

We expect both from shipments that we're catching up on in the second half as well as some of the capacity that we're bringing online. At that site, we've brought on additional ship. We've also expanded some sells for additional capacity and expect that to move to double-digit revenue growth as we get into the second half. So that is your utilities question, you had a separate question around semi.

And as a reminder, the semi end market for us is about 7% of overall company revenues. We did see 5% growth in this quarter, and the headwinds on the large deal we talked about in the was a little favorable for us this quarter, not as much. That will come back in the third quarter.

I guess -- sorry, Tami, that's kind of what I was getting at. So the 5% in Q2 is an underlying number, but we're going to have to factor in headwinds in Q3, so that number will be lower. Is that the right way of that comment?

Yes, we have not given a specific number for semiconductor. We have talked in the past that it's about a $10 million in each quarter in our semi end market. it was less this quarter. It will be below that this quarter in Q2, what we saw and more than that in Q3 a little direction.

Yes. And outside of that project, we've had some very solid growth numbers in Semi, as you'd expect. And we will see that, I think, a bit of a headwind in Q3 and it will unlap itself in Q4. So Q4 should be clean.

Our next question is from Joe Giordano with TD Cowen.

I wanted to I wanted to push on type of measurement a little bit, too. I understand the desire to keep us all in check to some extent. But like when I look at this on positive last quarter, it grew very nicely in and modeling like kind of somewhat meaningful deal in the second half and into next year feels very conservative.

Like how long do these -- when things just start to inflect how long until you typically see a growth number in the business like that historically?

Joe, maybe I'll start with what we're seeing today in the demand environment. And I'll start with the change from Q1 to Q2. So we increased our full year outlook at midpoint $60 million, $20 million of that was what we saw in Q2. And the point of the raise is really around our industrial end markets. We've just seen robust demand there. It was broad-based across all regions and double digit in both of the other and industrial end markets.

So those are strong grid in defense, we think those -- we've got pretty long sight on those sellar trends in the high singles and probably low double digit for defense. T&M, this is the first year of recovery. And what's embedded in the full year guide is double-digit on test and measurement this year, and if I started to allude to this in the first question, in a second year, that moderates to the low single, mid-single type range. That's what we've seen historically. We also have not been historically industrials be in the double digits.

So I don't know the duration of that. as I said, we look at about 90 to 120 days. We're going to assess that, keep our eyes on it in the second half. And probably the last one, I spoke about this, but it goes in the what we're keeping track of. It's what's happening in China around T&L. Is that going to be something that continues?

Or is that going to be episodic for us here as they our funding investments in AI data center and energy. So those are the things we're keeping our eye on as we move into the Q3 and Q4.

Yes. Joe, let me just add to that a little bit. So if you take a step back for the '26 guide, I mean we've talked about 9% to 11% kind of organic growth. So it is double digit at the midpoint. And Test & Measurement, these are either at or above the high end of that with sensors and safety systems being just down kind of towards the lower end of that. So I think both segments growing strongly. And that is a strong kind of recovery year for Test & Measurement coming off a tough year or so in terms of the cycle.

And the second thing I would add is last time we talked, we talked about having seasonality in the business. And we had guided 49% of revenue in the first half of the year and 51% in the second half of the year. When you look at this guidance range and what we projected here, that would be about 48% in the first half of revenue and 52% of revenue in the second half which is pretty consistent with what we see seasonally normally.

So I think when you start to frame up the pieces here, a lot of strength in tested measurement, I think at the higher end or above the high end of this range as well as kind of framing that up with the normal seasonality that we see. I think that's a good solid place to be in right now.

And can you just give us a little bit more detail on the defense solution at sensors? I know you said it was favorable mix this quarter on what programs were active. But how should we think about that for the rest of the year and into next year?

Yes. The defense business is large programs. And our shipment timing is based on customer need. And we had a quarter here where it turns out the program that ended up shipping for those customers. The margins were better than we had expected, still expect the same degradation that we've talked about in the defense end market due to high volume programs that we're seeing in the future are our lower-margin programs.

Yes. And I think if you take a step back and look at the overall Sensors & Safety Systems segment, we were at the high 20s, over 29% this quarter. based on that favorable mix. The other thing I'd add is the industrial benefit that we're seeing in terms of the pickup in industrial both have very strong margins for us as we start to look forward.

So if you think about the segment, we will see some degradation in the margins related to defense, I think, over time, although we've had a couple of, I think, better quarters here. I think, however, with the better performance we're seeing in Industrial, we do expect the Sensors & Safety Systems segment to stay kind of at that high 20s level for the remainder of the year.

However, over time, given that those defense margins that we will see over time, we do expect to see that kind of revert back to kind of that mid- to high 20s over the longer period. But for the remainder of the year, high 20s is a reasonable place to be at.

Our next question is from Kevin Wilson with Truist Securities.

Wanted to ask on capital allocation, just how we're thinking about maybe opportunities for in M&A understanding is your third of 3 priorities there. Neill, I think you mentioned a robust pipeline of opportunities, which I think is new language on that front. So maybe just one of the areas we're looking at there and just how we're thinking about that leg of the capital allocation strategy going forward.

Yes, thank you for the question. Yes. So from a capital allocation perspective, Look, we want to be disciplined in this as we are in terms of how we operate the business. And we talked about 3 things: organic growth, returning -- investing in organic growth, returning cash to shareholders. We obviously completed the ASR this quarter. So we've given over $160 million back to shareholders or plan to this year between the share buybacks and the dividends. So that leaves us with #3, which is our kind of tuck-in acquisition strategy, as you asked about.

So Look, we talked about 50% of free cash flow within a year, going back to investors. I think we're more or less in a with what we've already done. So now we'll kind of focus our attention to that third one. Look, I think staying within the leverage is important that 1.5 to 2 turns leverage is important. We'll continue to manage within that. As we go through that list for tuck-in acquisitions, you can think of these as smaller deals that we're looking at. Things that would -- I like to think of it as supplementing or supporting our organic strategy.

So things that really help us from either a technology perspective or a gap we may have somewhere that can fill those things in. but they also help give us a chance at very high returns. So we want to see kind of a 3-year ROIC at double-digit range. So that's really what we're focused on now. And I think team has done a nice job of identifying the target list that we're working through.

And then I wonder if you could maybe flesh out the corporate costs. I appreciate some costs shifting from the segments to that corporate and other line. you're now assuming $20 million to $23 million a quarter. I think that was closer to $13 million a quarter earlier. Some of that's ETP costs, variable comp. So maybe if you could just size the pieces there. And I guess, will that -- should we expect that to normalize a bit in 2027 after most of the ETP cost actions are taken?

Yes. Good question. So yes, this is moving around a little bit. I think also as we're kind of getting our legs under us with the productivity program. So a couple of things here. So one is we did see a corporate cost of about $1 million in the quarter. that consists of standing up the EPP program office as you mentioned. We've also centralized costs where we move costs from the segments into corporate.

And the reason we did that is because we think that provides us a more kind of focused kind of execution mechanism for how we drive the productivity program across the company. So it's not just the EPP standup costs or the enterprise city program standup costs. It's also a little bit of shift, right pocket, left pocket, so to speak, another overall increase in costs. And as you mentioned, some higher variable costs related to the better performance this year from a variable comp perspective.

So I think overall, we look to be in this 20 to 23 zone with those things in there. And look, I think some of this look out over time, we'll come back to us. We also think that will drive significant savings and support the program over time. So we'll continue to manage this and then manage it within the margin framework that we provided and continue to do that going forward.

Our next question is from Ian Zaffino with Oppenheimer & Company.

I want to maybe drill down on T&M a little bit more in the diversified electronics, what drove that growth, right? Because if I'm looking at Western Europe, when looking at China, they didn't grow to the extent that the whole segment grew. And so just kind of trying to understand what drove that strong growth?

Ian, the -- thanks for the question. Diversified Electronics is 21% or so of overall revenue. And from a test and measurement standpoint, think of that as like broad-based electronics. The other 2 end markets, comms is predominantly our aerospace and defense. Semiconductor is pretty well defined as to who those large semiconductor players are globally Diversified Electronics is every place felt that electronics are being innovated around, and we sit right in those labs.

I mean, Tektronix is the pioneer in the close and the [indiscernible] is the core foundational instruments in the electronics lab for the engineers, whether they're doing energy storage systems electronics for any type of mobility, including cars, medical devices and a lot of AI edge devices that are full of electronics. So you'll see when that is broad-based, like it's been in the last 2 quarters, it's a good sign for electronics innovation and the test and measurement equipment that enables those engineers to do that innovation.

Okay. And then on margins in T&M, is there a path back to 20% here anytime soon? Or how do you think about maybe getting back to where you were previously?

As we put the framework together for our margins back in Investor Day about a year ago, the Test & Measurement segment, we've always thought of through the cycle in the mid-teens to the low 20s. That's still our expectation on this business. And I think what you're seeing here as we've come through four quarters now is continuous improvement there will be helped by some of the actions that we took in the first quarter.

And then the -- we've got an enterprise productivity program here to drive our structural cost across the enterprise down.

Our next question is from Scott Graham with Seaport Research Partners.

Congratulations on quarter and I really have just two. Well, I have a lot more, but I'll only ask two. Tektronix, there was a big movement of foot with new products in the second half of last year, I think, 9 covering several platforms. I was just wondering it looks like you have traction on that already, whereas I thought that was maybe more of a 12- to 18-month thing. Can you talk about how those new products at tech are faring in the market?

Absolutely, Scott. Nice to hear from you. Thanks for the color on the quarter. The team will appreciate that. Tektronix continues to increase the velocity of new products. In Q4 last year, there were 2 major platforms announced. One of the platforms, I mentioned the [indiscernible]. It was the high-performance state-of-the-art industry-leading aciloscope that is used in a lot of the R&D that's going on today, for energy, for AI data center, anything around electronics.

The team continues because of the platform, they will continue to bring out modules and software updates as we move through this year. But that really is a place new products and new innovation go hand in hand. And yes, they have started to get good traction on the 7 Series, the probes and also the platform for their power supplies. So very positive on velocity at Tektronix.

And then also, I know that part of this initiative was your indication back from a year ago at the Investor Day of moving Tektronix from more of a just a research standpoint more into manufacturing. And just wondering kind of the same question, how is that going and acceptance and how many of these products, these 9 are half of them focused on manufacturing? Maybe just some color there.

Yes. I would tie back to the platform approach. So the MP 5000 platform is 1 that can be taken from research into the validation phase into production. So that's one place where new products are showing up. As one of my stories and the opening was around the testing of optical transceivers. And that's another place where their key fleet portfolio plays really well in the validation and production side of the workflow. So they continue they continue to expand out of R&D into other parts of the workflow.

This will conclude our question-and-answer session. I would like to turn the call over to Ms. Newcombe for closing comments.

Thank you, everyone. Thanks for joining us today. We appreciate your interest in Ralliant, and I hope you have a fantastic day.

Thank you. This will conclude today's conference. You may disconnect at this time, and thank you for your participation.

[Audio Gap] Industrials here at TD. As you all know, Extel is open and live, and we appreciate your support. If you think we've earned it, we will be cross-referencing lunch does not get delivered unless you guys' vote. So, just keep that in the back of your head. Excited to have Ralliant here with us. We have Neill and Nathan. If anyone has questions as we go, feel free to raise your hand. I'll stop. I assume that won't happen. So, we'll just go.

Guys, thanks a lot for being here. I appreciate the time. Let's just get right into it. Pretty uneventful first 2 quarters, right, out of the gate. So, we've had 2 very different quarters in terms of the reaction, in terms of what was said. Maybe let's compare now what you're seeing to when you reported 4Q -- and what have been like the biggest changes?

Yes. Thanks. And thanks, Joe, for having us here. Terrific to be here and talk to everyone today. Yes, so I think we have seen kind of an inflection in the business versus where we were. And one thing I think about is that we're only 3 quarters old now as a public company. So clearly, we're seeing some changes as we start to manage through this. I think we can talk about these changes in what's happened since spin, even as the world has changed a lot since then, and our exposure to areas in hardware and inflection in Test and Measurement and Defense have clearly been a positive for us as we spun out. As you go back to kind of Q4 where we stood, I think even going back to kind of that December quarter, book-to-bills in the business were kind of closer to 1:1 even in Test and Measurement.

And I think as we saw things change in power electronics where we're very strong and started to pick up in Q1 in Test and Measurement, that's been a positive for us. We talked about book-to-bill going between 1.1 and 1.2 in the quarter. And a lot of that was in kind of the mid- to later part of the quarter as we started to see that inflection. So, I think that's been the biggest thing.

But overall, I think it's been relatively broad-based within the business. We see both Test and Measurement stronger. We see defense. We've talked about $1 billion of backlog now in our defense business. So, I think overall, it is very solid. But clearly, the inflection in Test & Measurement has been probably the biggest driver since if you go back and look at where we were 90 days ago.

How much of that snuck up on you versus like -- look, I know guidance is one thing that you're speaking externally, but like we saw a lot of competitors starting to see stuff happen and talk about orders growing. And at the time when you reported 4Q, you said book-to-bill around, but did it feel like this might be something that was coming, but maybe we're not ready to talk about it yet.

Look, I think when you go back to that time frame, and we talked about it last quarter, we were seeing the sales funnel start to build. So, that would naturally start to translate into better ordering activity, but we hadn't seen those funnels translating to actual orders. So, while there were positive signs out there, I would say, as you got into 1Q, I wouldn't say they were strong enough yet to say, hey, we can really count on that to be a kind of guide and say that's where we're starting to see that turn.

But clearly, what you saw is that those sales funnels continued, and I think they built even stronger throughout the quarter. And then those funnels started translating into real orders. The ordering activity picked up in Q1. And I think that's what gave us the confidence then to say, let's take the guidance up and let's think about a stronger growth rate, not just for Q1 and Q2, but for the year.

Yes. So, we're almost in June now. I'm not going to try to pin you down for new guides. But like have those trends -- those are probably pretty durable. Has that kind of stayed through the quarter at this point?

Look, I think demand remains healthy. I think it's been healthy in Q1. I think that healthy demand kind of continues. We feel good about what we kind of guided going into the quarter. And I think what we see is still supportive of that.

If I told you -- now let's talk top line. Like if I told you, you end up doing better than your guide for the year, like what would have been the likely driver of that? Which market?

Look, I think that we talked about a couple of things in terms of the growth rate for the year. I think we talked about 5% to 8% for the year, which is actually would mark a little bit of a lower growth rate in the second half. Obviously, with geopolitical events and things like that, we're a little bit cautious in the second half just to see how things -- there are going to be supply issues or other things that come out of that. So, we've been a little bit cautious about that. But if you break down the business, we talked about higher growth at the high end of our kind of guidance for Test and Measurement. We talked about Sensors and Safety Systems, still nice growth, maybe towards the lower end of that range, though, but good growth for the year.

But the other piece of that, that I don't think we talked a lot about is from an industrial perspective. Everyone's seen the PMI pickup. It's been a couple of cold years, so to speak, from an industrial perspective. We did return to growth in Sensors and Safety Systems in the industrial portion of the business. So, look, if that continued to pick up, that could be a tailwind for us as you get into the second half of the year.

But again, we don't want to get ahead of ourselves. We'd like to see some more experience in that over the next quarter plus. And if that continues, then that could be an opportunity for us. But we're going to continue to remain prudent until we start to see stickiness in terms of that type of activity.

Yes. That's fair. I think I might push you on -- it seems unlikely that like a Test and Measurement or defense or grid would like reverse in near term. But like I understand the prudence of the second half kind of view here.

One thing I'd jump in really quick, Joe, is we get asked, are you seeing evidence of prebuy or inventory building or some of these other pieces? And the answer is no, we haven't. And we've been asking our sales leaders and our distributors, are we seeing evidence of that? And the answer so far is no. But there's a big portion of the business, about 70% of the business is short of cycle. And so, we only have about 90 to 120 days of visibility. And so I think that's where there's some prudence that's built in as we look out more than a quarter out that we're still cautious until we actually see the orders continue to come in.

So, just if you look back over the last 2, maybe I ask both of you this, like what lessons kind of came out of that from a communication standpoint? Just -- I mean some of these moves are violent, some of the largest I've seen. So, how would you maybe have done that differently if you had a second go at it.

Yes, that's a really good question, Joe, I'm sure that's on other people's mind. So, I think, first of all, let me just say this, if you think about Ralliant, what we pride ourselves on is being a company that's based on our business system, the Ralliant Business System, and we think about driving continuous improvement every day. This is very important to us and our culture, and that's in everything, including our communication.

So, as we think about how do we think about that going forward? I think one thing to think about is just being very direct in terms of the communication around how we think about the guidance, how do we think about things over multiple periods. So, even if you look at what's out there right now, we talked about -- if you look -- even look at Street numbers outgoing forward, we talked about 2027 time frame. We gave a framework. As Nathan said, we don't have that much visibility. I think defense has a nice backlog, but the rest of the business doesn't.

We talked about a framework in 2027 plus of being kind of that 5% or so growth rate as a framework to help guide where the margin improvements may come from. But I think it would be unlikely that we would guide above that until we got better visibility kind of going forward. So, those are the type of things we just want to be forward leaning and make sure that we are clear and transparent on going forward.

And is it fair to say if you say something like that at this point about 2027, given that you don't want to overextend yourself, you'd have to see some sort of like negative change to think that in the underlying markets to kind of go below that.

Yes. And I think -- and that's a little bit of a learning, I think, as we're a new company and looking at the cycles in terms of seasonality and other elements of the business. Like I said, we have a nice backlog, $1 billion in defense. Most of the business, as Nathan had said, is probably 90 to 100 days of visibility. We do see good growth in defense. We do see good visibility, although maybe not the backlog in utilities, but we have good visibility to ordering with our customers.

So, we do see some nice growth rates there and probably something that's got some legs in it. But because of the visibility, we have to be, I'd say, prudent around what we have from a backlog perspective in order to give longer term.

That's fair. All right. So, let's talk about Test & Measurement a little bit. I think the common belief, at least with investors, is that under prior ownership, this business had been a little bit starved for capital. How do you respond to that, first of all? Like do you agree with that. And what's your assessment of the business?

Look, I think that when you think about how the business was invested in previously, it was invested probably for a lower growth rate. You can -- we talked about 3% organic coming out of the Investor Day when we spun. So, I think about that's probably how the business was invested. And I don't think that was under or over. I think there was just an intentional investment at those levels. I think as you look forward, I think it's really all about focus.

Now how do I think about that? I think about it as like competitiveness, like driving competitiveness in the business. So, if you take Test and Measurement, for example, this is a business where we have high exposure to power electronics. We're expanding out beyond that now. I think you think about AI and workflows and semiconductor workflows and other areas, data centers and whatnot. There are opportunities for us, but it's about driving competitiveness in the products. We talked about some of the product releases. I think there was the MP5000 modular system that we put out recently that can be used in a lot of applications. So, releasing products, making sure they're very competitive, but also ensuring we're increasing the velocity in R&D in these businesses like Test and Measurement become very, very competitive. So, I think going forward, it's really just a focus -- and I'd also say that from an investment perspective, we think about having capital compete within the business.

Tami and I have, I think, very good visibility to incremental investments in the business. We'll balance margins with investment, and we've got pretty clean visibility and a framework in how we think about those things going forward. So, I would say, look, it was invested for what it was before, and I think we just have a different focus, but really balancing margins and capital allocation as we think about doing that going forward.

One --just one tactical point, Joe, is that we've tried to help people better understand the level of investment that goes into each side of the business because it's quite different that on the Test and Measurement side, R&D investments, mid-teens, high teens in some years, percent of revenue that goes into the Test and Measurement side. And then whereas on the Sensor and Safety Systems segment, it's more in line with industrial peers, so more low single-digit percent of revenue that goes into R&D. So, the Test and Measurement business has actually had more investment than what -- if people are looking at the total company R&D level, Test & Measurement is actually skewed higher in terms of where that investment is coming.

So, what has been the R&D focus at Test and Measurement now? And how do you kind of weigh to your point on margins? You're doing a lot of research-oriented work, like you almost have to guess correctly on the products that you need as to what your customers may want in the future. So, like how are you weighing -- we need to make a bigger investment in order to position ourselves? And how do you mitigate that risk?

Well, first of all, obviously, I think Nathan is exactly right, though. I think there is a reasonable amount of investment that goes in from an R&D perspective into the business. So, I think the question -- and competitively, you could benchmark that as well as being kind of a reasonable level of investment. There can be some incremental investments on top of that for things like you're talking about, Joe, where you think about is there an application or something where we really feel strongly that we need to go drive incremental investment in. So, I think we manage that really well. But I'll go back to what I said originally. I think it's about competitiveness -- and we really have to think about in each of those both segments. But you talk about Test and Measurement, what are those end applications where we have to compete. And I think step one for us is being greater power electronics. This is something that the Test and Measurement business has been very good at over the years. And then we think about expanding out beyond that. And we talked about that a little bit, I think, on the earnings call, you think about electrification, you think about that at the edge, AI applications, other workflow applications, validation systems, making sure that we have like the full capability as we start to compete, but balancing that with efficiency in R&D, like leveraging tools that exist today and bringing that into the system so we can be even more efficient by bringing out products even faster.

So, I think that's a little bit of the focus change, too, that I think that we're driving is really pushing on our competitiveness on one hand and then improving our R&D velocity on the other side. So, those are the areas I think we're really focused on.

How do you benchmark yourself in that framework against your biggest competitors? I know you have an edge in power electronics. Where do you think you have a gap? How do you -- what's involved in trying to fill that gap?

I think it's -- look, I think if you look at the segment in Test and Measurement, I think we have -- like I said, I think our precision instruments that we bring to the market today are very, very competitive. I think we're very strong in these areas. If you think about that both in power electronics and battery testing, I think about -- we talk about communications as a segment for the business, but a lot of that is -- I think the significant majority of that is military government type applications for next-generation research.

We also sell directly to semiconductor customers. As you start to see that power electronics transition happens. But I think we can build on that going forward. You think about -- like I mentioned before, you think about AI workflows and new AI type of testing applications that are leveraged in these areas or expanding beyond that into workflows or validation where we can certainly play a role and expand beyond kind of our core base, which we've been good at for many, many years.

And what happens if EV investment feels like an inevitability to me globally. But like as that starts to pick up again, you have EA in there, like what can that look like if some of these larger markets that have been paused start to come back?

I think if you look at like, for instance, battery testing, I think that's what's going on and certainly with us is as EV hasn't panned out exactly like everyone kind of anticipated going into that kind of last cycle, -- we've kind of pivoted towards other opportunities in power electronics and battery specifically. And where that leaves us with EA is like this is a very good business for us. I think it's got very nice growth rates. It has a very nice margin.

I think they've been able to make the pivot over to other areas like batteries in data centers or battery power systems and things like that outside of EVs. And clearly, look, over time, if EVs come back, then that's an opportunity for us. But I think the business has gone through the transition, and we're starting to see nice growth in the battery testing area right now.

So, as we start to get into more normal volumes here and probably a pretty decent runway here for growth, how do we think about the multiyear margin opportunity at that business?

I think if you look at the overall business and that specifically, I think there is good margin opportunity. I think that the -- that particularly is running at very solid margins today. I think even above the segment average for those products. So, I think it's in good shape, maybe not what we expected overall, maybe when it was underwritten originally. But as a business, I think it's performing very, very nicely.

And like I said, I think the team has gone through a great transition. As you step back and just think about the margins overall, obviously, we announced enterprise productivity program at the company level, and I think all of those things will affect margins in various places. So, I think there'll be some tailwinds from that as well.

What can you do broadly for T&M to smooth the cyclicality? Just even in a normal year, you're having huge declines in 1Q from fourth quarter, and it's just volume driven. But is there anything you could do to make that a little smoother ride?

I think it goes back to exactly what we said. I think there's -- naturally, I think that business or market is going to have some level of cyclicality or seasonality in the business. But how do we think about it going forward? I think it goes back to competitiveness. How can we create great products with high level of velocity of getting them out into the marketplace and investing in those things.

And I think the other piece of that is you just kind of talked about it in terms of the battery testing business that we have. If that can drive a different cycle, expand out into different areas like workflows or validations that validation that makes sense for us. And those are areas that I think if we compete better, then you kind of have a better baseline and kind of a better bottom to the business through cycle. So, I think focusing on that competitiveness for us is absolutely #1.

Let's shift over to defense. You recently got an investment announcement from DoD to increase capacity at PacSci. Where are you running on that business now? Is it like are you full out on capacity right now?

Well, I mean, one thing I think one is, yes, we have -- we talked about the $1 billion plus of backlog. We did get an award recently, which we're thrilled about. But think about that as capacity growth for kind of 2028 and beyond, like facilities expansion over time, which we -- I think that we'll need. If you look at where the business is today with a significant amount of backlog, clearly, the execution is a big part of this. But this is where we go back to like the business system.

So, you look at RBS. We have legacy teams who are very good practitioners of the business system, driving Kaizen and lean within the facilities that we have. So, a lot of the growth that you're seeing today, I think if you look back at defense, we've grown double digit for kind of a number of years now. I think we posted 20% growth here in Q1. And a lot of that's off the back of execution within the facilities we had and leveraging RBS.

Now we're investing in the business as well for that. You think about industrial engineering resources to drive more lean process in the business and drive performance. Think about diversifying our supply base, we have a strategic sourcing team that we've put in place to think about diversification there and readiness for build in terms of how we bring on capacity. So, I think in the meantime, it's a lot of self-help on driving performance, but you've seen that's what we've been doing the last several years. That's been off of the back of the team that's very, very good and very, very focused on driving lean process and driving capacity expansion until we start bringing on additional capacity through some of those awards that you talked about.

How should we think about a $1 billion backlog for a business that's, I don't know, give or take, $350 million or something, $400-ish now? Like should we think about that as being delivered over 2 years? Is that right?

Yes, 2 to 3 years, I think of getting delivered. Now I don't think that's the end of the ordering that's for sure. But I think the backlog, you can think about that over the next couple of years.

And you have the capacity as currently sets [indiscernible].

We -- I think it's still an execution story. So, I think we have to go and execute within what we've got and continue to build out and leverage the investments that we've been making to make that happen. And then as you get out beyond '27 into '28 plus, then you have to start thinking about different facilities that will bring online to support that capacity. I think there's a limitation eventually, I think, physically as to what we can go execute on. But it's obviously a very exciting time for the business to be able to support that level of capacity expansion and growth.

And I think it's going to be important for both of you guys on the messaging on this, like -- so it is margin dilutive. How do we think about what this does if we have this type of growth here over the next couple of years? Like how much of this is cost plus? How much is just so we're all kind of aligned on this.

Yes, really good question. So, I think if you look at the defense business, well, let's focus on the -- we talked about low to mid-20s margin over time with the inclusion of the productivity program. Breaking that down, we see Sensors and Safety Systems more in that kind of mid- to high 20s EBITDA kind of zone over time. The defense products run at the, I'd say, more towards the company average, which is like we guided this year about 20% -- so -- and then within those products, you're going to see more and more of the defense business go to TINA compliance, which basically means there's guardrails around the margins that we would achieve in that business over time. So, what you'd expect then is that not only will it be a bit of a mixed headwind because it's lower overall, but you'll see some transition within the business as well.

Now that being said, those are still very good margins, I think, competitively and at a high growth rate. You're seeing -- you'll see, I think, still very, very solid margins in the business. So, what does that mean going forward? I think it's what we have baked into that mid- to high 20s is a double-digit growth rate for defense. Obviously, if it went higher than that, you'd see a little bit of a drag, but at a higher growth rate. Which I think will still be good dollars for us as we think about that going forward.

But right now, what we've baked in is kind of a double-digit growth rate, some degradation of the margins, but that's baked into the incrementals that we communicated. But we want to be clear about that. I think as we're bringing on capacity right now and executing that, there's going to be some variation as some of these programs flip over to compliance from a margin perspective. There's going to be some change in the absorption rate in factories that are bringing on a lot of capacity. So, I would expect some variability probably in the profitability moving forward, somewhat of a drag, but at a higher growth rate as you think about these over multiple years.

Is it fair to think like the fastest parts of defense may be more like a mid-teen-ish EBITDA multiple margin?

You can think about closer to the company level and maybe going a little bit below that.

And one thing -- a proof point of this is we talked about incremental margin framework for the next few years, and we said 2026, think baseline incremental margin, 35% to 40% add in our productivity program gets you to 45% to 50% total company, whereas '27 and '28, we said baseline incremental margin more 30% to 35%. So, about 5 points lower than what we're expecting in '26 is because '26, we're expecting higher growth from Test and Measurement and that Test and Measurement growth moderating a little bit in '27 and '28, whereas more contribution or I would say, continuous contribution from the defense business. And so just highlighting that there's a pretty broad spectrum of incremental margins between Test and Measurement and the Defense business. So, where that growth comes from really matters in terms of the margin trickle down that it has.

So, that was an interesting framework that when you put that out. How -- like when you come up with that, like how bottoms up is that? Like are you really -- are you building that out of, okay, here's our expected growth of these -- this piece of defense and what are we going to make -- because it's easy to kind of say 35 to 40 and then shift it down 500 bps, but like how granular was that analysis?

I think a pretty solid buildup from the team. And we're also -- it's not just like, I think, the bottoms-up buildup, but you have to look at the various corner cases that can happen. And I think that what that's led us to is say, look, these are the guardrails around what we think are a reasonable framework. But we also want to include with that really transparent communication around some of the variability that can happen around it is depending on what the various scenarios are. And I think what Nathan talked about was exactly right. I think as you look at 2026, you see a buildup of, okay, you're probably looking at 45% or so, I think, fall-through if you look at the 20% or so midpoint EBITDA margins we talked about this year. The mix of that will change. I think the natural fall-through going forward has not changed. I think it's about 30% to 35%. That includes some mix degradation, including some investment back into the business. Naturally, I think we'd want to be a little bit higher than that, but we've judged it back a bit because of those headwinds we think are in there.

And then separately, we add on the productivity program, which gets us closer to that 50% fall-through. So, we've leveraged -- we've looked at a lot of different corner cases, but I think what's really important is to ensure that we have that transparent communication around what makes up those pieces because obviously, things can change as time goes on.

So, if we think about Qualitrol and grid, what's the backlog visibility look like there right now?

As you look at utilities, you mentioned Qualitrol, I think from an orders perspective, I think in Q1, we had a record orders quarter. The growth rate wasn't as high as you'd normally expect. I think that's timing on shipments is kind of what we talked about. But as you start to look forward, I think the visibility is strong. I think we kind of play in 2 components there. One, you kind of think about smart sensors on transformers that ship. There's a long backlog of these. So, we think that it provides good visibility. It's not a backlog business per se just because the ordering pattern is closer to when the actual transformers ship.

But about half of that -- those products are more or less half, you can think about as like project-based. So, if someone is doing a refurbishment of a power plant or transmission area, you would think about we would do project work with them as well. So, I would say good visibility to both what's shipping for new projects, but also in terms of some of the solutions project work that we're doing with people.

It just seems like that's a business that should be growing above trend for like several years here. What's standing in the way of that? Is there capacity constraints here?

I think it's -- I think the growth rate would say that we have -- similarly, we have to drive capacity expansion and execution in terms of doing that. But it's the same playbook. I think we leverage RBS. I think the team is very good at this in terms of executing. I think in Q1, we will likely built some backlog there. I don't normally do that, but we did see some backlog built in the business. The growth rate we've taken up from -- we talked, I think at Investor Day, mid-single plus kind of digit growth in utilities, and now we're thinking it's high single-digit.

Even with the lower growth rate in the first half this year, I think as you get into the back half of the year and get into next year, we'd anticipate some of those -- that capacity works we're executing on in alignment with the strong demand that we're seeing to pick up. And that's all kind of built into what we talked about and seeing that kind of 5%-ish growth rate as you get into 2027.

Good problem, but you have multiple businesses running really hard right now. So, what do you need to do from like a supply chain standpoint to make sure you have what you need? And how are you balancing paying extra to get stuff versus maintaining margins and keeping up with demand?

Yes. Look, I think this is something that falls right into the RBS kind of playbook and something that it's really nice to see and work with teams that have that level of focus on operational execution. I've said it so many times as I came into this business, we have just really, really, really strong operating discipline, leveraging the RBS. And I think this is an area in supply chain that we talk about and think about just about every day. And when you start to think about supply chain security, that's all part of that, diversifying our supply base, looking at in-country for-country type supply, managing through these things.

You also saw our inventory was a little bit higher in Q1, and we're just going to go out and ensure that we have raw material supply for the buildouts that we want to do. Now I think this is also -- as you look forward, that can be challenging, right? It's always in that one area that you get surprised by, and we're trying to limit the amount of risk that we have and ensuring that we've got the right capability from a supply base perspective. bring on the reasonable amounts of inventory to support potential growth, not just in the second half of this year, but into 2027 and ensure we're positioned to do that. And that's what we're focusing on, and that's what we're prioritizing.

You mentioned RBS a couple of times. I'm interested in both of your tasks just because you're both coming from the outside. So, Danaher Business System becomes Fortive Business System becomes Ralliant Business System. What is the ability to like to challenge this thing? Like when you have new people coming in, like is this the ideal framework?

Could we do this differently? Could we do this better? Like to me, from an outsider who is never baked in any of those companies, sometimes it almost gets annoying the conversation around these things because it's just a thing that's existed forever, and we keep saying in different letters around it. But like how much does this really get challenged and optimized for this iteration of this company?

I think that's a great question because I think what a lot of people probably think is that we're taking RBS and we're more focused on kind of hardware businesses. You can kind of go back to its legacy, right? This is where it was built and it was kind of meant for, which is great. But that's not actually how it's like approached internally. I think there is a lot of challenges on it. I think that we've just done a refresh of all the RBS tools. We have new leadership who's thinking about how do we implement and combine AI with our RBS tool sets. So, we're always thinking forward in terms of implementation of new programs and projects. So, I think the discipline that's associated with it, I'm super impressed by. I think it's actually great to be working with teams with that level of operating rigor. But I think that's also been challenged by some of the teams that Tami has brought in around how do we modernize it with new tools but also embedding AI into that. There's been a lot of workshop and a lot of workshops, and a lot of work put into modernizing those tools for what we're looking at today.

So, we've got a couple of minutes left. Maybe we just touch on capital allocation quickly. You talked about $100 million accelerated repurchase program. You have $500 million out there, I think, is the total. How should we think about how opportunistic do you want to be versus how consistent do you want to be on those programs? And how do you weigh that versus M&A?

Yes. Look, I think our capital allocation priorities have not changed. So, I think, number one, it's organic investments and thinking about how do we improve our growth rates and profitable growth through organic. We talked about that. We have a I think, a very disciplined capital allocation program for organic investments about how we think about capital competing across the portfolio for incremental investments to ensure we get the best return for shareholders as we think about those investments. And that doesn't change as you move down to returning capital to shareholders, number two, and then looking at M&A number three. Now you talked about the shareholder piece. I think it was important that we said, look, that's number two. We have to be clear and direct on what we're going to go do there.

So, I think the accelerated share repurchase program we put in place gets us to about, I think, roughly 50% of free cash flow for the year. So, we want to kind of be clear with that. That also leaves what do you do with the other 50%. So, I do think that at the right return where we've got great ROIC, where we believe we can execute tuck-in acquisitions, that's something we would think about doing and toggling between those 2 things.

As it relates to the share repurchase, I wouldn't think of this as programmatic going forward. I think we would -- I think of that as a target over time of approximately 50%, and then we'll balance that with tuck-in M&A. So, I don't think it's different than what we've said, but being a new company, we want to be clear with that as we kind of get out of the gate here with our capital allocation program.

Fair to think of some modest baseline, though, right?

Yes. I think that's a good way to frame it going forward, yes.

Okay. I just got 40 seconds left. So, any questions from the audience, we can take it. If not, I think we'll probably just leave it there.

Thank you guys. Thanks, Joe.

Thanks. I appreciate it.

Thank you.

Hi. Good afternoon. I'm Chigusa Katoku, a multi-industry analyst at JPMorgan. Very excited to have with me here today, Ralliant, Tammy Newcombe, President and Chief Executive Officer; and Nathan McCurren, Vice President of Investor Relations.

I think we'll kick it off with some remarks from Tammy.

Excellent. Thank you for having us today. I'll just start a little bit. We're a new public company, 3 quarters into our life. So I'll give you a little bit about Ralliant and who we are. We're a precision technologies company. We specialize in instruments, Sensors & Safety Systems. I say where it matters most. And that is often in environments where accuracy, reliability of those measurements and also safety really matter.

Our customers are engineers and innovators who work in end markets like Utilities, Defense, Test & Measurement or industrial technologies. If I think about what we've been doing for the last couple of quarters, really been focused on executing our profitable growth strategy. And our profitable growth strategy has three pillars: one pillar is around higher growth vectors and driving higher growth. The next pillar is around stronghold positions. Our stronghold positions are low single-digit type growth markets where we are differentiated and have competitive moats with a very large installed base, which gives us a recurring opportunity with our customers on maintenance and repair.

Third part of our strategy is the Ralliant business system. And this is how we execute with rigor. This is our continuous improvement mindset of getting better every single day.

I'll go back to or higher growth vectors. So there's a lot of exciting things happening in our end markets that touch electrification and defense. And if you start in electrification, the first layer of electrification is the power grid. And with the excitement around AI and electrification around the globe, that first layer of a power grid that is reliable, that keeps the lights on, that is intelligent is where we have a play. And our precision sensors attach to the most critical assets in that power grid and ensure that the operators of those power grids get the intelligence that they need to keep those systems up and running.

The next piece in electrification is around the data center and how AI is driving that data center. Inside that data center, any of the electronics in there would be our Test & Measurement equipment would be used by those engineers and innovators that are building that equipment. Also in the data center, there is cooling and thermal issues where our industrial sensors for temperature, for flow and pressure are being used in different cooling systems. And then at the edge, where AI is showing up in robots and humanoids and different electronic devices, that innovation also requires more Test & Measurement equipment. So that's the electrification piece of our higher growth and how we play.

On the other side of secular trends is the defense space. And in Defense, we play in the production side and that's the programs that have been around 10, 20 years, mostly in missiles and munitions, where we are a key critical supplier to many of the programs that are going through a big replenishment cycle. And then in defense modernization, where you'll find in the R&D labs, our Test & Measurement equipment, as the defense community is working on next-generation communication protocols.

And then the last piece of defense, I think it's still to be determined. What does the new budget look like the $1.7 trillion in defense spend that's being talked about, not approved yet, but that is the surge or frameworks that we've been talking about that could take our $1 billion backlog that we have today in Defense & Space and make it even bigger. So that's a little bit on who Ralliant is and how we're executing on our profitable growth strategy.

It's a great overview. Thank you, Tammy. Just to follow up on the defense. I think you announced PacSci award this morning. Can you just talk a little bit about how that ties into our overall defense strategy?

Yes. There was an announcement made this morning by the Department of War that our business that is in the Defense & Space end market is called PacSci EMC. They've been awarded $27 million to help with some of the build-out of the capital equipment required to keep up with the demand in the standard motor business that we have. And this is in addition to what I talked about last week in our earnings where we are making organic investments in additional sites and additional equipment thinking out to 2028 and beyond that we will need some physical capacity.

Up until now, we have doubled the business by using productivity initiatives in our factories. We've added shifts. We've leaned out cells through the Ralliant business system and we've built out a strategic sourcing team to ensure that the supply chain keeps up with what we need to do in the factories. But it was an exciting award from Department of War. I think it's -- it's a testament to the critical nature of our business to some of the key programs.

That's great. So you highlighted over $1 billion of backlog in Defense & Space, and it sounds like there's upside to it. You expect double-digit growth in 2026 and beyond. I think at the Investor Day, you highlighted like a long-term growth rate of 5% to 7% in Defense & Space and maybe 2% to 4% in Communications, where there's a big defense business there, too. But is this still the right framework? Or do you think there's upside here?

Yes. Let's talk a little bit about what's changed since we were at Investor Day. And one thing post Investor Day, I think it was a couple of months later, we started to see this replenishment coming through in our backlog in Defense & Space. And what we can see today in backlog gives us confidence to say that this business is a double-digit grower, maybe double-digit plus grower, not only in year, but in some of the out years here. And the business that you -- let's stop there with Defense & Space end market. The other end market that is a little higher than we talked about at Investor Day is in the utility space. Both of those are in Sensors & Safety Systems.

Yes. And then you mentioned a little bit about the capacity or the supply chain constraints in the defense business. But where are the key kind of constraints there, like around what products? And then on the margin side for defense, as the defense business grows faster, I think the margins are lower than the company average. Are there any actions you can take to mitigate the mix headwinds?

Yes. So for the defense space, the the growth rate, as I talked about, would be double digit. Given the government is helping us with some of the capital expense, they do put some guardrails on the profit areas. It's called TINA compliance is the government language that they use. So we have guided -- our Sensors & Safety Systems is about 60% of the overall business.

And in that business, we talked about adjusted EBITDA margins from the mid-20s to the high 20s. And we're already at the high 20s. And our guidance for people is don't think above that because we're going to have some pressure on the margins here as we grow that business.

Makes sense. And then following up on the Utilities side, I think this quarter was a little softer due to the shipment lumpiness, but how much visibility do you have here? And what kind of are your expectations for growth for this year? And I think you touched on it a little bit earlier, but it's 5% to 7% still the right long-term growth rate for this end market?

Yes. So the Utilities end market is also part of the Sensors & Safety Systems segment, again, 60% of the overall business. And in Utilities, this past quarter, our revenue growth was plus 1% on a quarter when our orders hit a record. So the orders for -- and a historical record, not just an annual record, but historically, the highest orders quarter that we've had. So robust demand, we're still experiencing in utility space. And this is another market post Investor Day.

Investor Day, we talked about 5% to 7%. I see that as more of a high single-digit grower this year and into the future. If you know this space, you know that critical assets for the grid are very difficult to to get right now, there's a long lead time on them. We work both with the new placements of critical assets, and we also have a play in retrofits for that space.

Yes, that's very helpful. So I guess the defense growth framework and the utility growth framework is both better than what you expected at the Investor Day. So what does that kind of mean for the overall Ralliant organic growth?

Yes, what you saw -- what you saw is as we came out of Q1 and our Test & Measurement business that's the 40% segment in our portfolio. That business performed about as expected from a revenue standpoint. But we saw the orders come in hotter than we expected, 1.2 or so book-to-bill. So that, combined with the backlog visibility, Test & Measurement, orders being stronger combined with the backlog that we have visibility to in Defense & Space gave us the confidence to first, give you a guide for Q2. We have good visibility in the next 90 to 120 days as well as raise, we raised all metrics for the year. So move the growth rate up to 5% to 8% on the year.

Yes, that's very helpful. So I guess the defense growth framework and the utility growth framework is both better than what you expected at the Investor Day. So what does that kind of mean for the overall Ralliant organic growth?

Yes. The business across the portfolio is about 70% short-cycle business. The other 30% is in services and what we call reoccurring business around maintenance and repair. And the short-cycle business, you get about 90 to 120 days of visibility, and that gave us the guide for Q2. As we thought about the second half, there's still a lot of uncertainty out there in the macro. We have seen some spots where we've seen some supply chain issues. I think we've navigated all of them quite well right now. But I mentioned transformers. They've got a backlog right now and shipments are out 1 to 2 years in that space. So I think just we're a little cautionary on the second half. We'd opened the year thinking 48% of our business in the first half. I think we're 49%, 51%, so about 1 point shifted there, first half, second half.

Just two more questions on Sensors & Safety before moving on to T&M. On industrial manufacturing, I think this vertical grew 4% this quarter. And we're seeing overall directionally positive trends from others, but I think the strength in lengths kind of remains a question mark. So I was curious what's your outlook for industrial manufacturing this year and your thoughts on whether you think the trends are of gradual recovery or there's an inflection driven by onshoring trends?

Yes, I'll put together our end market called industrial manufacturing with other. And those are critical environments, all, I guess, somewhat industrial in nature. That's about 30% of the Sensors & Safety Systems segment. And an area which historically maybe 0% to 2% type growth over a period of time. And we're definitely seeing above that right now.

I think that if you look back on the last 2 years, 3 years, it's been really tough go in that space. There's been a lot of pent-up demand that we've seen come forward in some markets, Americas doing very well, China pretty good, and Europe still suppressed when it comes to industrials. But I think this will moderate. I think this will come back over time. I don't know how many quarters we'll have at this higher growth rate when I think it will normalize in the out years more back to what we had seen.

That's helpful. And going back a little bit on Utilities, I'm guessing margins are quite attractive here, I'm guessing, in the 30%-plus range. But where are the key capacity or supply chain constraints in the Utilities business that might limit growth?

Yes. For us in Utilities, it's our customers being able to go fast enough. We have about 30% of the business that's a project business. The rest of the business is tied to customers either retrofitting critical assets or getting critical assets out into the field. And they're the bottleneck right now more than we are. We are prepared today for volumes that would go out to 2027, late '27. And then we're adding some capacity that would come online in '28 and beyond in that space. But we we see lots of opportunity here, and we just work with our customers on the timing of shipments.

That's helpful. Shifting to T&M. You talked about how it's the short cycle limited visibility here. But this segment grew strongly this quarter, and you now expect it to be up high single digit for the year versus last quarter, I think you were talking below the midpoint of the 2% to 6% guidance range. But can you just talk about what changed over the last 3 months? What are kind of the indicators that you track internally? And what are they saying maybe today versus 90 days ago?

Yes. We spent in Q2 -- and at that time, we believe that Q1 would be the lowest point in the quarter for demand. And that turned out to be right. Every quarter, we sequentially improved the business there. And as we came into this year, we thought -- we looked back and we said, hey, Q4 to Q1, typically, maybe 3% to 8% type step down in revenue. And we did see that.

We saw a 3% to 4% step down in revenue. What surprised us was the order strength. And we're seeing strong orders across where our specialty is, which is around power electronics, for the power grid, for the data center, for edge electronics as well as in the defense space and defense modernization.

So all very strong. Americas, again, the strongest and actually, China finishing a little better than we expected with the investments there in AI and energy. You asked about what are our early indicators. The best indicators are orders. We said that last quarter. We said all of these early indicators are great, but we need to see our funnels convert to orders. That's what we saw happen. We continue to monitor funnels. We model channel inventory. We model channel sell-through and point of sale. Those are all the best indicators for this business.

That's great. Maybe can you talk about market share trends in Test & Measurement? So I think Ralliant has strong capabilities in R&D, and you're expanding into validation and production with new products like the MP5000 platform. But how is your traction here? And then high level, if you can talk about the key drivers of your Test & Measurement business and how it differs versus some of the other players in the T&M space.

Yes. When you look across the Test & Measurement tools are used in advanced research, development, validation, production and then the services part. We predominantly play in advanced research and development. That's probably 40% to 45% of where we play. And then validation, production and services are all 10%, 15% of revenue, getting to the 100% for the whole workflow piece.

When you think about share, our highest share is going to be in that R&D space and where we're particularly good is around power electronics. You add the noise floor in the oscilloscopes, which is brought to life through ASICs we build in-house with the Keithley portfolio, which I think of as like the atomic clock of precise measurements for current and voltage, with the recent acquisition of ElectroAutomatica, that power portfolio is extremely strong. Couple that with some new products we announced last year in the high end of the oscilloscope family, the 7 Series and the strength that we have in defense and some of the communication protocols that are used in that space. I think the best measure of market share is growth rate. So durable growth through the cycle, continual growth. It comes with innovation, and it comes with taking share. But at the end of the day, that's the best metric.

That's helpful. Maybe shifting to -- just quickly touching on book-to-bill. I think it was 1.1x for the overall company and Test & Measurement, I think you said it was about 1.2, 1.3. How kind of do you expect this to trend for the year, if you have any thoughts there?

Yes. I think we're off to a strong start with a 1.2 book-to-bill, and this is something that we monitor on a monthly basis. The business, again, is a short-cycle business, 90 to 120 days. So we can see through Q2 and into halfway through Q3. And every indication is that the business environment is going to be similar as we go forward. So that's probably the key indicator for us on the future of the business.

Sounds good. Now I'm going to shift to the margins, the enterprise productivity program. You talked about this quarter, $50 million to $60 million of cost savings targeted by 2028. But can you flesh out the drivers for us? How much is driven by COGS versus SG&A?

Do you want to take this one?

Yes. Yes, I can jump in. So we've shared there's two main buckets, cost of sales and G&A specifically. And it's about 30-70, the split between those. So cost of sales is about 30% of the savings and then G&A about 70% of the savings. And of the $50 million to $60 million, we've already taken action on $20 million of that. And we've said that we expect that $20 million of annualized savings that we've already taken action on to drive about $10 million to $12 million of in-year savings in 2026. And then we're taking action really over the next 18 months on the remainder of that. And so expect to complete by the end of 2027, driving to the full run rate of $50 million to $60 million of annualized savings by into 2028.

Sounds good. What are kind of the lower-hanging fruit that you can get in 2026 in terms of the buckets versus the cost savings that will take more time and how will you kind of govern or verify the real savings versus maybe like the cost avoidance?

Yes, I'll talk about that. So the actions that we have taken in 2025 and early 2026, the first was around dissynergies in the business as we carved out some of the services business that stayed with our parent company. And second was some restructuring that we did early this year.

I'd say of that $20 million, it was predominantly in the Test & Measurement segment. And as we move forward, one of the reasons we put an umbrella program over all the initiatives going on is because we wanted to be sure we had good project management, governance and real targets for the team. A couple of actions we took, we consolidated the IT department, the legal department and the HR department. They're all working on programs using AI, reducing or optimizing their workflows, but we wanted to capture that and make sure we knew how it was hitting the P&L. So the enterprise productivity program is really the governance and oversight. The way the work is getting done is all through our Ralliant Business System, leveraging AI.

And one thing, -- just that I'd highlight is this is really possible like why is now the right time? This is us taking the organization and saying what's the right custom fit for Ralliant. So 2025 was really focused on get the spin completed, do that successfully. And now it's really saying now that we've gotten that behind us, it's how do we really organize the company in a way with six operating companies that all look similar to each other, have a similar business model and saying how can we find some areas that we take centrally or have synergies across those companies to bring together and drive productivity.

That's helpful. And the AI-infused RBS system is really interesting. I think you referenced previously AI foundry and AI enhanced workflows. Can you talk about what are the top use cases that you're deploying and how kind of you quantify the impact?

Yes, I'll give you a couple. I'll start in manufacturing as this is one hot off the press from our CEO, Kaizen, 2 weeks ago. We had already digitized one of our factories and had access to all of the data that comes out of the factory, which traditionally had been done on what's called [ Active ] board and manually entered and manually updated. This had moved all to digital. And now what we're doing, leveraging that data to be able to do more predictive. So can we predict -- one thing that's difficult to predict is repair work.

And if we've got good insights across the business on Monday, Tuesday, Wednesday, Thursday or different months where we tend to get more repair work, we can plan for that ahead of time. Instead of that hitting us and reacting, we can see it coming through our trending and data analysis and make sure we have the right people, we have the right supply and everything comes together to be able to take care of that. So in our manufacturing lines, we're leveraging AI to make us more productive as we go forward.

Second example I would give you is in the commercial space. How do we get our exciting and wonderful portfolio into the hands of more engineers, more innovators, more system integrators. And our persona tends to like looking things up for themselves. and they're pretty savvy. So we have put capability into our websites to allow for -- take a picture of what you're trying to replace that sensor in the field that you're looking for. And if it's not our sensor, we'll cross reference you to something that we can supply. We've put all of our technical and knowledge out there so that people can search it and learn how to best use our products for their applications and workflow. And the best thing about this is when you put AI and digital together, it works 24/7, 365 any place around the globe. So we have pretty small and mighty commercial teams, and this allows them to feel bigger to our customers.

And you've been investing in AI, I think, ever since you were part of Fortive. Yes. So it's been a few years.

Yes.

And then maybe on the margins again. I think you laid out a 50% increment margin target through 2028. How much is this dependent on volumes? And how much growth investments are you embedding?

Yes. We have -- so we have looked at what we think the forecast would be over the coming years, of course. And the incrementals are similar to what we said at Investor Day from a base business. And what we added to that is our cost program. That's how you get to the 50%. And I'm separating those two things because as we get into the midpoint of our low 20s to mid-20s adjusted EBITDA margins, we will be continuing to invest in the business and some of the organic parts of the business. Just important to us right now that we demonstrate our profitability and we demonstrate returning cash to shareholders.

And how should we think about the incrementals at T&M as volumes continue to recover versus Sensors & Safety where margins are already in the high 20s?

Yes. It's -- the Test & Measurement incrementals are strong as we get back to growth and get to a bigger volume level. And then in the Sensors & Safety Systems, you've got two things going on. You've got -- you do have high margins today, but we have to keep in mind that as the defense business grows, we will have a lower or, I guess, a headwind there on our adjusted EBITDA, still in that mid-20s to high 20s, but with that volume will come some headwind.

On that point, defense is dilutive to the overall company margin. But how big is the margin differential Defense versus the other Sensors & Safety versus T&M?

So a couple of things. Test & Measurement has a significant amount of operating leverage. There's a pretty big fixed cost base in that business. And so you see in periods of growth that can deliver very meaningful incremental margins. So we can see upwards of 50%, 60% plus type incremental EBITDA margins on that business.

Whereas Defense, we've said, is more in line with overall company margins closer to 20% type margins. And so this is where there is a pretty big difference in terms of where the growth is coming from, there can be a decent mix impact. The thing we'd point out is we've taken into account in talking about 50% incremental margins over the next few years is that, that includes double-digit growth within defense. So we're already taking that into account that we expect some mix headwinds on the incremental margins. And despite that, and even including some organic growth along the way, expect to be able to drop down 50% incremental EBITDA margins.

Got it. And then going back to maybe the AI data center exposure, if you can can flesh out for us again, the exposure to AI data center? And what percent of sales, if you could quantify, are exposed to these verticals and what are the growth rates you're seeing here?

Yes. I think there's two answers to that question. One is directly tied to the AI data center, which across our entire portfolio is probably 10% to 15% higher in Test & Measurement, maybe 20% in Test & Measurement. I give you an approximate because I think AI is sort of lifting all boats across the portfolio. We had an example last week of an industrial tool manufacturer that's using one of our pressure sensors in a device that's specifically made for cutting cables for data centers. So I think there's an ecosystem out here in a wider tail to how things are being lifted by what's happening in the AI data center, attributing to the power grid, attributing to electronics at the edge and even industrials that are being used for some of the capital build-out.

Yes. It seems like there's good direct and indirect exposure to that theme. Maybe touching on capital allocation. I think you're now targeting repurchases around 50% of free cash flow and announced $100 million ASR in the second quarter. But how do you weigh this share repurchase versus funding incremental growth CapEx or tuck-in M&A?

So we have a strong bias for the value of this company. And we believe that we're doing all the right things to grow that valuation. And with that, we think this is the right time to be buying our stock. We also -- as we thought forward to being a new company, we wanted to lay out -- or we wanted to put a stake in the ground that we're going to -- we're not just going to say we're going to do this. We're actually going to do this in Q2.

Therefore, we instituted a program, a share repurchase program for $100 million, as you stated. This is on top of the $50 million that we executed in Q1, which means this year, our free cash flow, about 50% of it is going to buyback and dividend. This is what we have said over time, we will continue to do. We have been very specific in saying over time, that means it's not every quarter. We may span a year and it will be lighter in some years. But right now, we believe it's a good use of our dollars. And we will continue even in the incrementals we talked about, that leaves us some room for organic investment, and we continue to cultivate M&A. And tuck-in M&A for us will be something that fits into the portfolio that we have. And we are estimating double-digit returns on capital in a 3-year type or less period.

On that point, what is missing in your portfolio that you could look to add? And on the flip side? Are there any areas of the portfolio that are noncore and you could look to prune?

Yes, I'll start -- I'll work backwards. Before we spun in the time before we spun, we did prune a couple of parts of the portfolio that we got out of two different areas. And we actually consolidated some businesses. It's something we're constantly evaluating and constantly looking at like what's core and what's not and what do we want to do with that business. We have options to invest, to divest or just stop doing something, shut something down, and we make those trade-offs all the time.

Okay. And then on the CapEx, you touched on it a little bit earlier, too, you indicated that CapEx is moving towards 2% to 3% of revenue, and I think investments are focused in Defense and Utilities business. But what are maybe two or three of the high-return projects these end markets that you're targeting the CapEx investments to you? And when should they show up in revenue and margins?

Yes. So exactly right. The traditional CapEx for this business has been around 2%. We talked about that moving 2% to 3% in this year and maybe some of the near-term years that we invest in production capacity for both the Defense & Space and the Utilities. That's business that would come online late '27 and into 2028, but an opportunity to continue to grow those businesses.

And that's one thing I'd add is this is really a continuation of growth. We've been seeing in Utilities and Defense about high single-digit growth for the past 5 years or so that hasn't shown up as much at the segment level because there's been some headwind on the industrial manufacturing side, which Tammy mentioned was about 30% of total revenue. So half of that segment is industrial, manufacturing and other. So it's really saying how do we keep that growth going, the high single-digit Utilities growth, double-digit defense growth. It's starting to invest to be able to continue that growth and accelerate that going forward.

Makes sense. I'd like to turn it over to the audience to see if there are any questions.

Could you reference your historical margins in Test & Measurement? I think you were at 23% in 2023 and around 21% in 2024. So just wondering if there's anything unusual from a pricing perspective or supply chain that caused those.

The only -- I don't think that's going to be apples to apples or oranges to oranges because that wouldn't have the public company costs. So at the core of our corporate expense, we have segment costs and then corporate costs. So there would be -- I don't know if we have done that.

Yes. I would say there's -- it's about 1.5 points that you take off of that for what the segment is now receiving as an allocation of the post-spin cost. So I would say to make it apples-to-apples, take about two to two off of that.

Yes, because there was allocated cost at the segment back at the time, but we are smaller now. So it's a little bit higher.

But anything unusual in making that adjustment...

Not that I can think of.

No, I'd say that's in line with the -- saying that the target for that segment is mid-teens to low 20s. And so the low 20s would be kind of indicative of a year like '22, '23, which was 2 years where we've seen 3 years -- we've seen the last 2 years of 3 years of pretty significant growth.

Okay. With that, I think we're up on time. Thank you so much for coming today and for your time. Thank you Tammy and Nathan.

Hello. My name is Donna, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Ralliant Corporation's First Quarter 2026 Earnings Results Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Nathan McCurren, Vice President of Investor Relations. Mr. McCurren, you may begin your conference.

Thank you, Donna. Good morning, everyone, and thank you for joining Ralliant's First Quarter 2026 Earnings Call. I'm Nathan McCurren, Vice President of Investor Relations. Today, we'll walk through our results, highlight key operational progress and provide our outlook for the second quarter and full year 2026. I'm joined today by Tammy Newcombe, our President and Chief Executive Officer; and Neill Reynolds, our Chief Financial Officer. Our earnings release issued this morning and today's presentation can be accessed on the Investors section of our website at ralliant.com.

Please note that we'll be discussing certain non-GAAP financials on today's call. A reconciliation of these items to U.S. GAAP can be found in the appendix to our presentation. During today's call, unless otherwise stated, we are comparing our first quarter 2026 results to the same period in 2025. During the call, we will make forward-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements we make today.

Information regarding these risks and uncertainties is available in our annual report on Form 10-K for the year ended December 31, 2025, filed with the SEC on February 26, 2026, and updated in our Form 10-Q to be filed after market today.

With that, I'd like to turn the call over to Tammy.

Good morning, everyone, and thank you for joining us for our Q1 2026 earnings call. We started 2026 with a solid first quarter performance, reflecting the delivery of our strategy, supported by disciplined execution across the teams. For today's call, I'll begin with an overview of our financial performance, followed by an update on the progression of our profitable growth strategy. Then I'll invite Neill to walk through additional details and leave time for your questions at the end.

Let's start on Slide 4 with the business and outlook update. First, our Q1 results were above the high end of our guidance. and we are raising the full year 2026 outlook as we expect test and measurement growth to remain elevated, and our defense backlog has now surpassed $1 billion. Second, we are capitalizing on higher growth secular demand across electrification and defense with a clear focus on executing our profitable growth strategy. Third, we initiated an enterprise productivity program expected to deliver $50 million to $60 million of run rate annualized savings by 2028.

Last, we are increasing capital returns to shareholders. We began to execute share repurchases during the first quarter, and we are now targeting share repurchases of approximately 50% of free cash flow going forward. Our Board has increased our share repurchase authorization to $500 million, and we plan to execute a $100 million accelerated share repurchase program in Q2.

Our Q1 financial results are on Slide 5. In the first quarter, revenue was $535 million, up 11% year-over-year with a book-to-bill above 1.1x. The results were balanced across the segments, with both achieving 9% organic revenue growth. This performance reflects the disciplined execution of our teams and a portfolio that is increasingly aligned to higher growth markets driven by electrification and defense. Sensors & Safety Systems had robust demand across all end markets. Test and Measurement returned to growth following 3 consecutive quarters of sequential improvement. Adjusted EBITDA margin of 18.6% and adjusted EPS of $0.57 were both above the high end of our guidance ranges, reflecting strong operating leverage on higher volume and early benefits from productivity actions already underway.

Our trailing 12-month free cash flow conversion was 105%. Next, I'll provide regional and end market trends on Slide 6 and 7. America is our largest region with over 55% of revenue and where we see broad-based momentum with 16% organic revenue growth supported by ongoing investment in defense programs plus AI is accelerating our customers' innovation cycles from data center infrastructure to advanced electronics and the global power grid. Western Europe and the rest of world together represent approximately 30% of our revenue, and both were slightly down organically as pockets of recovery were overshadowed by ongoing macroeconomic and geopolitical uncertainty.

China is approximately 15% of our revenue and grew 5% organically this quarter due to government-funded projects tied to AI and energy-related infrastructure investments. Within our end markets, Defense & Space delivered more than 20% organic growth. Multiyear backlog now exceeds $1 billion, spanning more than 40 programs across legacy and new products supporting ocean, land and air safety systems. Utilities posted record orders this quarter reinforcing the strength and durability of demand in this end market. While revenue growth was softer due to shipment timing, the order strength enhances our visibility going forward.

Our industrial manufacturing and other end markets showed early signs of short-cycle recovery across most geographies as customers are increasing investments in automation, semiconductor equipment, life sciences, HVAC and data center cooling. Test and Measurement delivered a meaningful step-up this quarter, building on the sequential momentum established in 2025. Improved customer sentiment drove orders resulting in mid- to low teens organic growth across diversified electronics and communications. Despite broad-based strength across most semiconductor customers, overall revenue decline due to the completion of a large customer project last year.

Now turning to Slide 8. Our profitable growth strategy is intentionally balanced and designed to perform through the cycle. Our winning growth vectors align with market tailwinds and electrification and defense were long-standing customer positions and differentiated capabilities position us for elevated growth. Complementing this, our stronghold positions are anchored in a broad customer base with more modest growth profiles where Precision Technologies delivered durable demand, attractive margins and reoccurring revenue. Enabling our strategy is the AI used Ralliant Business System, or RBS which brings discipline, consistency and enterprise scale to how we operate and execute.

Turning to Slide 9. We are capitalizing on long-term investment cycle electrification and defense where our test and measurement insights, precision sensors and safety-critical systems play an essential role. The power grid is a strategic imperative, rising AI workloads and increasing global energy consumption are driving the need for a grid that is more reliable and intelligent. We play a critical role in the global power grid. Our precision sensors and predictive analytics monitor and protect essential assets such as transformers, turbines and gas insulated substations, helping utilities prevent outages and extend asset life.

In addition, we support new energy infrastructure through test and measurement solutions used to validate grid scale energy storage and advanced power systems for both legacy and emerging applications like nuclear fusion. Power and thermal challenges extend into the data center. Our Test and Measurement instruments support the validation of advanced semiconductors and electronic systems, while our industrial sensors provide thermal, pressure and fluid measurements that enable reliable cooling and continuous operations. As AI becomes physical, power design and battery performance are key constraints. This is where our precision power test and measurement solutions are essential for R&D engineers developing the next generation of AI-enabled electronics.

In Defense, we are benefiting from multiyear replenishment demand and modernization. In legacy defense programs, we're a trusted supplier of mission-critical ground, flight and launch safety systems where precision and reliability are nonnegotiable. In parallel, defense modernization is increasing activity across R&D labs where our test and measurement solutions enable the development and validation of advanced communications and power storage systems. Across the portfolio, we participate in the product realization life cycle from early concept and validation to field deployment and long-term operations. Test and measurement provides early visibility into the customer R&D while sensors and safety systems support a large installed base from production through ongoing field monitoring.

Next, on Slide 10. We leverage RBS Everywhere as both an enterprise growth enabler and to drive productivity improvements. We continue funding the highest return opportunities in advanced manufacturing, commercial and innovation to enable higher organic growth. In Defense & Space, we are a key supplier to the majority of the Pentagon's priority munitions programs. Several including FAD, PAC-3 and Tomahawk, are scaling production at roughly 2 to 5x historic levels, and we are making targeted investments to expand manufacturing capacity and support reliable execution.

In Utilities, we continue to see robust demand, supported by multiyear grid modernization and resiliency initiatives. Later this year, we plan to expand our precision sensor facility in Upstate New York to support further growth.

Now on Slide 11. We are committed to expanding adjusted EBITDA margins and to help drive this, we have initiated an enterprise productivity program. The program management team reports directly to me with a multiyear target to deliver $50 million to $60 million of run rate annualized savings by 2028. Post spin, we are simplifying our organization and how work gets done. RBS is how we make workflows visible to identify productivity improvements and even more importantly, ensure sustainment. To date, the team has acted on approximately $20 million of run rate annualized savings.

The drivers of the savings are identified in cost of sales and G&A. For cost of sales, the focus is enterprise strategic sourcing and a new group purchasing office to identify and act on synergies across materials, maintenance and facilities. Within G&A, we've identified ways to increase productivity through simplification, AI-enhanced workflows and leveraging lower cost locations to optimize labor. Recently, more than 500 employees participated in our first company-wide CEO [ Kaizen ], focused on over 40 growth and productivity charters. This deep-rooted culture of continuous improvement aligns well with our new enterprise productivity program. Flag wells is a reminder of our value creation framework we laid out at our Investor Day last June.

Together, revenue growth, margin expansion, strong free cash flow and disciplined capital allocation position us well to deliver long-term value for our customers, employees and shareholders.

Next, I'll invite Neill to review our financial results, go deeper on our productivity program and provide an update on our guidance.

Thank you, Tammy. Good morning, everyone. Please turn to Slide 14. Q1 results were above our guidance ranges across all metrics and were largely driven by a faster than anticipated improvement in our shorter-cycle businesses and increased productivity savings. Q1 revenue of $535 million was up 11% on a reported basis and up 9% on an organic basis. Total growth includes approximately 2 percentage points of FX benefit primarily in Western Europe and China. Both segments delivered high single-digit organic growth year-over-year, led by strong execution against backlog in defense and space, broad-based improvement across test and measurement and pockets of growth in industrial manufacturing.

As I shift to EBITDA and EPS, I'll note that we have included a table in our appendix, that provides a reconciliation to normalized adjusted EBITDA and adjusted EPS for each quarter and the full year of 2025. These normalized metrics adjust the first 3 quarters of 2025 results, reflect our fully ramped public company costs and higher post-spin employee costs. Given our midyear spin and the increase in our cost structure following the spin, we believe normalizing adjusted EBITDA to reflect the full year of our post-spin infrastructure as a more like-for-like comparison for 2026 results.

Adjusted EBITDA margin in the first quarter was 18.6%. On a normalized basis, this represented a 270 basis point improvement from the prior year driven by operating leverage on higher revenue and productivity savings achieved in the first quarter. I will cover more details on our productivity program shortly. Adjusted diluted EPS of $0.57 increased 39% on a normalized basis, driven by revenue growth and adjusted EBITDA margin expansion. Our free cash flow was $10 million, a step down year-over-year primarily due to timing. Our trailing 12-month free cash flow conversion remains resilient at 105%, above our target of greater than 95%.

I'll turn now to segment year-over-year performance, starting on Slide 15 with Sensors and Safety Systems. Q1 revenue of $324 million increased 11% on a reported basis and 9% organically. Defense & Space organic revenue grew 21% on strong shipments. Our backlog continues to build with robust demand for critical programs and replenishment and missiles and munitions. Organic revenue across industrial, manufacturing and other was up mid-single digits with robust demand across North America, China and our rest of world geographies. Utilities had a record quarter of orders with continued robust demand.

Organic revenue growth was softer this quarter due to customer shipment timing. Adjusted EBITDA margin for Sensors and Safety Systems was 28.4%, a 70 basis point improvement on a normalized basis, primarily due to higher operating leverage, which was partially offset by the dilutive mix impact from higher defense and space growth.

Turning now to test and measurement on Slide 16. Test and Measurement returned to growth in the quarter with revenue of $210 million, up 12% on a reported basis and 9% organically. Test & Measurement also delivered its highest quarterly book-to-bill since 2022 with a book-to-bill between 1.1 and 1.2. Communications, which represents 12% of overall revenue, grew double digits organically. Our communications applications are predominantly serving defense and government customers whose modernization programs and technology upgrades are driving demand for precise and reliable test equipment across defense applications.

Diversified Electronics, which represents roughly half of test and measurement also delivered double-digit organic growth, driven by broad-based improvement across humanoid robotics, energy storage and advanced research. Semiconductor organic revenue declined high single digits, primarily driven by lapping a large customer credit as we mentioned in the last quarter. Excluding this customer headwind, semiconductor organic revenue grew double digits as customer CapEx investment increased in power-related semiconductors especially in wideband gap applications.

Test & Measurement adjusted EBITDA margin was 11.9%, an improvement of 700 basis points on a normalized basis. This margin expansion is a testament to the significant operating leverage in Test & Measurement and the execution by the team to quickly implement actions identified in the enterprise productivity program.

Turning to our balance sheet and cash flow on Slide 17. We ended the quarter with $268 million in cash and cash equivalents. During the quarter, we completed the refinancing of our 18-month term loan extending maturity and amending certain covenants with more favorable terms. We also returned $56 million of capital to shareholders through a combination of dividends and share repurchases. Last week, our Board authorized an increase of our share repurchase authorization to $500 million. We are now targeting repurchases to be about 50% of our free cash flow going forward.

As a part of that, we are planning to execute an accelerated share repurchase program of $100 million during the second quarter. Turning to our outlook for the second quarter and our updated full year 2026 guide on Slide 18. In Q2, we expect revenue of $540 million to $556 million, which represents 7% to 10% year-over-year organic growth. Adjusted EBITDA margin is expected to be between 18.5% and 19.5% with year-over-year normalized margin expansion, driving operating leverage on higher revenue and savings from our enterprise productivity program. Adjusted EPS is expected to be between $0.58 and $0.64, a 35% to 49% normalized increase driven by revenue growth, margin expansion and a reduction in share count.

We expect weighted average diluted shares outstanding of approximately $112 million for Q2 after executing our anticipated $100 million accelerated share repurchase plan. Given the strength of Q1 and with more confidence in further recovery in our shorter cycle businesses throughout the year, we are increasing our full year 2026 guidance across all metrics. We now expect revenue of $2.185 billion to $2.245 million, adjusted EBITDA margin of 19.5% to 20.5%, and adjusted EPS of $2.53 and to $2.69.

On Slide 19, I'll go deeper into the enterprise productivity program that we introduced. While 2025 adjusted EBITDA margin on a normalized basis was below our through-cycle range, we established at Investor Day last June of low to mid-20%. We have taken quick action to begin a path back to the midpoint of our through-cycle range by 2028. For the enterprise productivity program, we anticipate driving run rate annualized savings of $50 million to $60 million by 2028. We have already begun to implement the program. Building on our previously announced $9 million to $11 million cost savings program, we actioned another approximately $10 million of annualized savings in Q1.

We expect 2026 in-year savings of $10 million to $12 million connected to these actions, exiting 2026 at an annualized run rate of $20 million. We are targeting to complete all remaining actions for the program on the end of 2027 and expect savings to continue to ramp until delivering $50 million to $60 million of run rate savings in 2028. We expect the enterprise productivity program savings along with strong baseline incremental margins to result approximately 50% total incremental adjusted EBITDA margin through 2028.

Our guidance range for 2026 assumes a 35% to 40% baseline incremental adjusted EBITDA margin, excluding productivity savings, slightly higher than our through-cycle incremental margin expectations given higher revenue growth and favorable test and measurement mix. The $10 million to $12 million of in-year productivity savings would add another approximately 10 percentage points of incremental margin, resulting in a total 45% to 50% incremental adjusted EBITDA margin for 2026. In 2027 and 2028, we expect baseline incremental margins to be more in line with our through-cycle expectations, but can vary based on the level of revenue growth and mix.

Additionally, the $20 million to $25 million per year of additional productivity program savings is expected to add another 15 to 20 percentage points to incremental margins, resulting in a total incremental adjusted EBITDA margin of approximately 50% in 2027 and 2028. This gives us a clear path to the midpoint of our long-term EBITDA margin range by that time. We are focused on driving this margin expansion to provide a resilient source of cash to help us achieve our disciplined capital allocation priorities.

I want to remind everyone of our capital allocation priorities on Slide 20. Our top priority remains organic and reinvestment. We are investing in capacity expansion in defense and utilities to serve identify demand. We have a disciplined review process that Tammy and I oversee that sets a high bar for organic investment, targeting returns far in excess of our cost of capital. Our next priority is returning capital to shareholders. In addition to our recent actions and commitment to share repurchases, last week, our Board of Directors authorized our next quarterly cash dividend of $0.05 per share. We continue to actively monitor the M&A landscape and build our funnel of potential tuck-in acquisitions.

We are committed to balancing these capital allocation priorities against our target cash balances and our long-term net leverage target of 1.5 to 2x adjusted EBITDA.

With that, I'll turn it back to Tammy to wrap before opening it up for questions.

I want to close by providing a few key takeaways. First, we are executing on our profitable growth strategy. We are using our RBS toolkit to identify areas to capitalize on secular demand across high-growth factors. We expect RBS to continue to serve as a competitive advantage, enabling customer innovation, and operating efficiencies, ultimately enabling us to perform with financial discipline. Second, we are driving margin expansion. The combination of strong incremental margins paired with our enterprise productivity program is expected to increase our adjusted EBITDA margin to the midpoint of our through-cycle range by 2028.

Third, we have confidence in Ralliant's value creation potential, and we're returning capital to shareholders. Our board increased our share repurchase authorization. And through this, we expect approximately 50% of our free cash flow to be returned to shareholders going forward. As I wrap, a big shout out to our approximately 7,000 employees around the globe for their ownership in grid to win as one team. Our teams have demonstrated operating rigor with the ability to profitably evolve our portfolio and deliver in any environment.

With that, I'll open up the lines for Q&A.

[Operator Instructions] Today's first question is coming from Julian Mitchell of Barclays.

Just a solid set of results. Just wanted to understand perhaps the sales growth guidance. So I understand sort of -- you talked a lot about improving end markets. but the year-on-year sales guide embeds something of a slowdown in the back half. Maybe that's reflecting tough comps, but maybe just flesh that out a bit more, I think, the half-on-half sales guided to step up a bit less this year than happened last year. So maybe kind of frame how you're thinking about the sort of confluence of comps versus the end market movements, and semis is a market I'm particularly interested in, you're finally, I think, coming to the end of that tough comp. How does that business grow from here?

Thank you, Julian. Thanks for the kind words there. As we think about the guidance in the second half, the T&M business certainly performed well in Q1 and revenue was slightly above our expectations. It's actually the orders and the book-to-bill that pushed for the full year raise in our guidance. And that business is a short-cycle business. We get solid 90 to 120 days of visibility there. And we do see the order increases, the funnels are solid, our new products, which we launched in the latter part of last year are doing well.

But when you step back, there's also a lot of uncertainty in the environment. We're going to control what we can control around spending time with our customers, continuing to launch new products and focusing where the higher growth opportunities are. But I do think it's prudent at this point to think about the second half as we have.

Julian, let me just add on to that. So if you think about normally how we seasonally work, we're roughly about 48% of revenue in the first half, 52% in the second half. If you look at the guidance, that would represent more like a 49% first half, 51% second half. So I'd say all else equal, Tammy kind of talked about some of the uncertainty in the macro, we probably would be the midpoint more towards the high end of the range that we gave, based on what we've seen seasonally before. The demand remains strong. I think we feel good about the momentum that we're seeing in the cycle businesses. Clearly, the defense backlog gives us a lot of confidence about where that business is headed.

But given the uncertainty on the macro potential supply disruptions in the second half of the year, those are things we're being cautious about. But from a demand perspective, I think it would normally land towards the higher end of the range, all else equal.

And just to close it on SME, that was the second part of your question, Julian. Underlying strength in semi across a broad set of customers. that we're still lapping a large customer deal from last year. We've got another quarter of that, but the underlying strength is strong.

That's great to hear. And then just my follow-up would be around the EBITDA margin outlook. So I think you have a very strong increase second quarter dialing sort of over 300 points of the normalized base. The second half, I think, is dialing in maybe a sort of 21% EBITDA margin. So maybe it's about 100 basis points increase year-on-year. Is that just because you've got perhaps slightly lower sales growth dialed in, and so there's just less of a margin increase or steady leverage. Is it conservatism? Anything happening with mix or cost phasing? Anything like that, that explains that second half kind of more muted margin expansion year-on-year, please?

Julian, as you think about margin performance, it's the formula would be revenue growth. We do have some headwinds in mix as well as the execution of our enterprise productivity program to drive some cost optimization there. It's those 3 factors.

The next question is coming from Chris Snyder of Morgan Stanley.

I wanted to ask about defense and space within the Sensing and Safety segment. So obviously, 21% organic growth is really good. But based on the backlog build in the quarter, it seems like demand is actually even well above that level. So I guess -- and I know you guys are working on investing in capacity. So can you just maybe talk about how you think to grow there as the year goes on. Could it step higher as the capacity comes online? I do know the comps there also get harder.

And then just following that, you guys said in the release that given some of the visibility you have there, it positions the business to -- or overall Ralliant for above-target growth. Was that a '26 comment? Or is that -- this will remain the case in '27, '28, just because this is a very long cycle at [indiscernible].

Yes. I'll start with your first question around backlog. The backlog that we talked about, the $1 billion, that's a multiyear backlog. So think of that as 2 to 3 years of backlog, and we certainly work closely with those customers to ensure that we're meeting their requirements for on-time delivery. And we already have begun capacity expansion. We've been at it for over 2 years here to keep up with the demands that we're seeing in that space. And we will continue. Much of that capacity expansion has come through productivity initiatives and focus on strategic sourcing in the supply chain.

And as we move forward and we think out towards '27 and '28, we do believe -- we do see a need to expand actually physical capacity there. So we see that opportunity and are continuing to execute against that. From a growth standpoint, if you think about our Investor Day, which was in June, we had talked about 3% to 5% through the cycle. If you -- where we stand today and you think kind of near term to midterm, we're at the high end of that just on an organic basis, higher than that in 2026, as you can see from the guide. But if you even think in the out years, we think with the increase that we've seen in both defense and in the utility space, that we will be towards the high end of that 3% to 5%, so in the 5% range, and that would be on an organic basis without M&A.

And let me just add on to that, Chris. So if you think about defense, while we do see higher growth rates, I think double digit, I think, over that kind of both in '26 and then out beyond '26 in terms of kind of that double-digit growth rate. change in trajectory, I think, out beyond '26, as Tammy said, that kind of mid-single-digit level as you get beyond this year, obviously, a bit higher this year, we get outside of that trough. But defense also comes with a little bit of -- just on the margin side, a little bit of a mix impact. Those defense products are at margins that are below the company average. So those are things that we're balancing, and we've got that all big in the outlook that we gave today.

No. I appreciate that. And maybe just following up on that last point. You guys incurred pretty significant mix headwinds in Q1 for the Sensing segment, Defense up 21% and Utilities only up 1% on kind of the more premium margin side is my understanding. So was that just all volume leverage coming through because we were just surprised to see the margins there up both sequentially and year-on-year. Or did you start to realize some of the benefits from the productivity actions you guys have been putting in place?

Yes. I think -- I'll hit this one, Chris. I think it's a little bit of both. One thing is you do see some mix challenge the defense strong faster, it's great because it's got a great growth rate and we have a nice backlog there. And so very good business for us. But we do have a little bit of that. There is some of the cost savings program, elements coming into this as well. And then clearly, you've got the volume leverage. And one thing I'll say is that the defense fees can be a bit lumpy. I think both in revenue and in margins from quarter-to-quarter as we're making this transition to these, I'd say, this bigger backlog focused on misses and munitions and things like that as we start to see that surge demand come through. We will see lumpy quarters, both from a revenue and from a margin perspective. I think in Q1, I think that was a bit positive for us.

I think as you go throughout the year, that can be a bit lumpy. You may see quarters where it's a bit lower as well. So I think your instincts are right, and we just saw a little more positivity there. But I think as you look throughout the year, we will see overall margin expansion throughout the year. I think Test and Measurement certainly help that and we continue to see that cycle improve. Sensors and safety might be a little bit lumpy, but I would say both will be a nice target ranges for us as you get -- as you look at the full year results.

The next question is coming from Deane Dray of RBC Capital Markets.

This is [ Kenny Simon ] on for Deane today. Congrats on a strong quarter. I think AMD released it out to us a utility as well. Can you just help us visualize or understand the applications that the defense sensors going to? And on the utility side, specifically how much is this business tied to the transformers sensor business, how long and then how long on the back versus would be helpful for us.

Yes. Thank you. Thanks for the kind words. On the defense, you can think of the backlog build predominantly in legacy production programs. These are programs for missiles and munitions that have been in use for decades that we're seeing a replenishment cycle on. That is from a dollar of backlog, the majority of the dollars of backlog. The other piece of the backlog, though, that will help us in out years is the new product innovation that's happening. And that's customer-funded innovation that's in the defense modernization space. and that quantity of programs is up almost 60% over the last 2 years.

So that's the composition of the backlog that continues to grow from replenishment, and no surge demand is in that current backlog. This is just real orders from customers for replenishment. If I shift to utilities in the utility space, our precision sensors and analytics solutions are used to keep critical assets within the grid up and running and extending their life. So that's the precision sensor side of the business. Also in the grid, our test and measurement solutions are being used to bring to market new power storage solutions as well as powering new energies like nuclear. So those are the places that we play in defense and utilities.

I appreciate that color. And just following up on free cash flow. What was the timing issue this quarter? And do you have a rough framework guidance for the full year 2026 in terms of conversion or margin given you're now committing half of that to buybacks going forward? Just confirming the 95%-plus framework has not changed for the out years?

Yes, thanks. Yes, first of all, the 95% plus free cash flow conversion rate has not changed. Q1 is seasonally normally a lower free cash flow quarter. We have some employee payments, think about variable comp, other payments to go out to employees usually in Q1. It's also a lower revenue quarter seasonally versus Q4. And lastly, we had a very strong quarter in Q4 as well. So just a bit of timing there, I think, both from natural seasonality in the business as well as, I think, a strong previous quarter.

As we look forward in the remainder of the year, I don't think that free cash flow conversion changes. And I think if you look at the buyback that we're talking about that 50% or so target for free cash flow return to shareholders. I think what we're talking about here is in line with that, maybe a little bit north of 50% based on what we're seeing. So no change there. I think it's seasonal in Q1, and we should see strong, I think, cash flow performance as you look throughout the remainder of the year.

The next question is coming from Kevin Wilson of Truist Securities.

Great quarter. Wondering if you could speak to how you see the capacity expansion and other growth investments you're making in Qualitrol playing out? You mentioned in the prepared remarks the facility expansion later in 2026. So maybe if you could quantify that or otherwise provide color around how much sort of capacity or throughput you could get from that expansion maybe how much the investment is there and when you expect that capacity to come online and translate to the top line?

Yes, I'll start with that one. If you think about capacity, think about something that's been ongoing for several years here of how we increased the capacity in our facilities. A lot of that comes from our RBS playbook and how we get more productivity in ourselves. In addition, we've added multiple ships, so move from 1 shift to 2 or 3 shifts during the week and amplified our strategic sourcing capabilities. So those are the things that we have been doing for the past several years to increase the throughput in our existing facilities. But as we look on the horizon and think about 2028 and beyond, we do see a need to add some more physical space for both those businesses, and that's what we'll be starting some investments in this year.

Yes. Let me just add to that. I think in terms of CapEx for the year, we talked I think back at Investor Day about 2%. We expanded that to about -- to be a bit closer to 2% to 3% of revenue, and this is part of the reason why because we believe we need to expand capacity in certain areas. I think that also -- it's good to clarify as well. When you think about this organic reinvestment, we certainly don't take that lightly either. Tammy and I have a very, very tightly managed process around how we think about capital across the company. Every dollar of capital incrementally needs to go through a process that Tammy and I review it approved.

And this clearly is an opportunity for us to invest and create, I think, shareholder value. So all of the capital in the company really competes for the best opportunity. It fits within those areas, whether it be commercial, innovation velocity or expansion of capacity. And this is one area that we believe is an important value driver for us to grow more revenue for the utilities business. and we believe it has excellent returns on it as well.

That's really helpful. And then maybe if you could just update us on the segment and margin assumptions embedded in your guide for the full year. I think last quarter, you implied sensors and safety at the top end of the total company range, test and measurement by the midpoint, it sounds like more of the 2026 raise is test and measurement driven here. So just any updates to that framework.

Yes. You outlined that correctly. The raise in 2026 is an increase in test and measurement for our '26 guide, think more to the high single digit for this year and defense and space in the double digit and the way the backlog is building, we see that double digit going forward for dispense and space. But that is what drove base.

The next question is coming from Piyush Avasthy of Citi.

One on like diversified electronics within your Test & Measurement segment, I think you experienced strong year-on-year growth in 1Q. There are a few end markets within that vertical. So if you could drill down a little bit more the trends you're seeing in autos and consumer electronics. And sequentially, like should we expect this performance to continue and maybe what's baked into your full year guidance for this vertical?

Yes. Diversified electronics is an area that we watch closely. By the nature of it's about 50% of the overall revenue in test and measurement and that diversity gives us a lot of durability. You're seeing the end markets, anything connected to AI, that's infrastructure going into data centers, both semiconductor and electronic subsystems for compute, for memory, for power modules, you're also seeing AI show up in a physical way, the robotics that we have whether it's at home, in our bit places of work or in our manufacturing facilities, all of those electronics fall into what we think of as our diversified set of our portfolio. and a place that's been strong and gives us the confidence of some durability in that business.

And you guys like raised the full year guidance -- full year margin guidance to like 19.5% to 20.5%. Maybe if you can frame for us like how you're thinking of margins based on like the segments, I think expectations for Test and Measurement were like towards the low end of your mid-teens to low double-digit range. Now you're kind of expecting high single-digit growth. So should we expect margins to be more in line with that long-term average? And similar question on like sensors and safety, I think you guys were talking about mid-20s to high 20s there, but 1Q was really strong performance. So how should we think of that for the full year?

So I'll give the context that we shared at Investor Day. Ralliant's overall low to mid-20s type adjusted EBITDA margins, think of test and measurement in the mid- to high teens adjusted EBITDA margins and the Sensors & Safety Systems segment in the mid- to high 20s type range.

And if you think about the year, I think that kind of frames it up well. I think as test and measurement starts to improve, I think you can look at margins in that mid-teens to low 20s, maybe below the midpoint of that a little bit for the year. We'll see how the level of revenue plays out. But clearly, within the range. I think as we start to see the year play out. From sensors and safety perspective, I think that mid- to high 20s is reasonable for the year. It could be a little bit lumpy quarter-to-quarter. We had some good defense mix, I think, in Q1, that might go the other way in Q2.

But those are just like I said earlier, a bit of lumpiness. But I think if you look throughout the year with the growth rate that we're seeing, the sustainability we have in that business, the backlog we have in defense, we feel very, very good about the volume leverage we'll get that will eventually translate to kind of those type of ranges of margins for the year.

The next question is coming from Ian Zaffino of Oppenheimer.

On the T&M side, can you maybe give us a little color from a geographical thesis, maybe North America versus China, I guess, versus Western Europe? And then in semis, what have you done lapping the large customer order for last year? And how should that grow?

Yes. For T&M geographically, the strength has been North America and driven again by anything tied to AI, where we're seeing customer innovation cycles happened really quickly, especially in the move from 400 to 800-volt in the data center, but also the innovation that's happening at the edge and in the power grid, where we now have test and measurement solutions for power storage systems. So North America has been strong. In Europe, it's been more defense type test and measurement that we've seen some green shoots there.

And then in China, this past quarter, the government was investing in some energy and AI-related initiatives, which contributed to the China piece.

Yes. And just on the semi timing, we think you'll probably see a little bit of headwind on the overall headline number for semis for us, I think for the next couple of quarters. I think we'll be fully lapped by Q4.

Okay. And then on the Sensors & Safety, we look at utilities, when does that sort of start to inflect higher there? And how do we think about orders and then order translating into growth in that area?

Yes, Utilities has been a strength for us, multi-quarter, even multiyear strength. What you saw this quarter was just a difference between our orders, which continue to be strong and robust and some timing on shipments for us. So that -- we expect that to be a one-quarter lumpiness and return as we move forward.

Our next question is coming from Joseph Giordano of TD Cowen.

This is Chris on for Joe. Are you able to give us any more color on the timing and the conversion cadence of the $1 billion space and defense backlog and how you expect that to ramp relative to the current defense revenue profile?

You can think about that as a multiyear backlog extending over the next 2 to 3 years. And we will continue to get orders that will build upon that as we're also producing those products and shipping them to customers. And within the year, we're expecting that business to maintain double-digit plus type growth rate, both in year and the out-years. I also frame that as a business that can be lumpy. I think Neill spoke to that, but it can be lumpy there in a place that certainly our RBS playbook is one that helps us get after executing against that backlog.

Great. And you alluded to this a little bit earlier, but could you update us on your recent product launches in Test and Measurement and what end markets and applications you're prioritizing and where you're seeing early adoptions and wins with new products?

Yes. In -- test and measurement is a place we're focused on what we control. And certainly, our velocity of new products is an area that we've been focusing on in the most recent years. And the announcements made last year, I think we had 6 announcements, 3 were major new platforms. are all getting solid traction as we come into 2026. You can imagine that a sales team with new products to go talk to customers about also drives opportunity across the entire portfolio. So it's certainly elevated our activity and our demand.

And a lot of the innovation that's happening right now is really in defense and AI-related activity. So any place that people are innovating around electronics. And when those customer innovation cycles are accelerated, those are new opportunities for us in test and measurement. So that's the part that we control that and being close to our customers. And our customers are constantly innovating and we are spending the time with customers to make sure that we're helping them solve their toughest challenges.

Our next question is coming from Scott Graham of Seaport Research Partners.

Congratulations on the quarter. I wanted to ask about tariffs. You have a notation in here that you'd expect to offset them. I was wondering if you could give us sort of what that number, the cost number looks like right now? And when you say you can offset, is that just purely price? Or do you need some productivity help to offset?

Yes. Tariffs is a place that we've had a good track record if you look back over the last several years. We have a lot of practice like many in the industry has had, but this is where our RBS playbook really supports it. And it's a combination. We're constantly working on a funnel of value-engineered products to manage our dual materials and costs. We're constantly negotiating with suppliers as we increase volumes to ensure we're getting best pricing and ensuring we get the value through our pricing methodologies that we get the right value for what we're creating for our customers. And the combination of those things are how we have continued to offset tariffs.

And just to put a number on that. If you look at last year, I think we were talking about tariff impact of about $30 million to $40 million. throughout the year. I think this year, based on some of the countermeasures kind of [ 10 ] you referred to, but also some of the changes in the tariffs, obviously, that's closer to about $25 million, we think, right now, what it looks like in the forecast for 2026. And then stepping back, it is a lot -- there is some pricing in there, but there's a lot of other countermeasures related to supply chain actions, value engineering work that we do to try and offset those things, but it's right within our ARB playbook.

And then while we're talking about it, if you step back, I think normally, we see 1.5%, 2% of price within a given year. A little bit on the north end of that for 2026 is what we have baked in, and that's just getting ahead of what those -- where some of that either inflationary or other pressures might hit us. So the team is all over this. We're leveraging the playbook. There's deep RBS work that's being executed here to offset those and other potential inflationary pressures.

Really appreciate that set of responses. And just a quick follow-up on the productivity. There's a lot of talk about using AI internally to enhance productivity, and I know your business system is very exacting on both sales and productivity initiatives. Are you really starting to incorporate AI into your productivity day-to-day?

Thanks for asking. Give me an opportunity to share all the work that we're doing around AI. Right as -- following spin, we developed the AI foundry as part of the Ralliant Business System office, and this is a citizen led AI productivity that we have now after a couple of quarters, built into, it will be a part of the enterprise productivity program. And the enterprise productivity program gives us the visibility, the program management, the governance and the hard targets, but we still leverage RBS is how we scale this across the enterprise and how we use the toolkit to really see how work gets done, so that we can take MODA and unnecessary steps, leveraging AI to drive productivity.

This brings us to the end of the question-and-answer session. I'd like to turn the floor back over to Ms. Newcombe for closing comments.

Well, thank you for joining us today. We appreciate all of your support, and we will continue to execute against our profitable growth strategy to drive both revenue and margin expansion.

Thank you. Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.

Great. Well, thanks, everyone, for being here. It's my pleasure to have up next Ralliant for the first time here as a stand-alone company. So excited to have you here, Tami Newcombe, Chief Executive; Neill Reynolds, CFO. So thank you both. And I think Tami you've got a couple of slides to walk through first.

I do. I want to leave plenty of time for questions. Thank you. Thank you for being here. landing here in Miami, it was a year ago. I was here. So a moment to reflect 1 year ago, Ralliant was a name on a piece of paper. And our expected spin was January of 2026. And here we sit having spun in June of 2025 with 2 quarters as a public company.

One of the areas we were purposeful about was ensuring that our operators, our presidents in the business focused on our customers. They were kept away from all the noise of standing up a public company. They focused on innovation, they focus on growth. And we're seeing the benefit of that as we come into 2026. Our guide for Q1 was a 5% to 8% growth. So I think we're off to a good start from a growth standpoint.

We still have work to do. Our profit numbers that we talked about on the earnings call were below what we had talked about in our Investor Day. In Investor Day, we talked about a low to mid-20s, our guide for this year was 18% to 20%. So one of the things I wanted to cover today is to just make sure that we're very clear on the steady state cost to run the business, and then provide the context of how do we take that forward. And one of the things this team has been extremely good about is the operating rigor to drive our profits faster than our revenue growth. That's just who we are, and that's what we'll do. We did it from 2019 to 2024. We'll do it again. We also want to add to that with growth, which gives us more operating leverage.

So we posted this presentation to our website yesterday and also filed an 8-K for anybody that isn't caught up on following along here. Three things that I'll just cover real quick here. One is our confidence in the long-term value of the company. And that confidence is demonstrated in a share buyback. We executed $39 million in share buyback since our earnings call.

Next, I talked about this in the beginning, but I want to go into more detail so that we clarify both where we're starting and also what you can expect moving forward from an incrementals and a profitability.

And then last, just a shout out to the team. With the standup of the public company, the team was able to deliver both Q3 and Q4 at or above the metrics that we guided on. So a good start there.

I have 3 slides in here for those that are new to Ralliant that talks a little bit about who Ralliant is. I'm not going to go over those, but if you ever want to follow up, we'd be happy to just give you the foundation there.

What I really want to get into is the guide that we have for 2026 and the metrics that we guided. And the growth rate -- what's exciting in the growth is the T&M segment, the Test & Measurement segment is back to growing in 2026, both for Q1 and for the full year. So healthy balance across our end markets where we're seeing growth. I talked about the adjusted EBITDA, I'm going to talk about that in a little bit more detail. But the incrementals we laid out at our Investor Day, were 30% to 35%, and while we're getting back into that range, we're committing to higher incrementals here. And then it's our first year, full year for EPS. And free cash flow is something we do well, if you look back, 117%, that's our operating rigor and committed going forward to keep that strong.

So we want to walk through where we start with 2 quarters of public company experience, a normalized 2025 for us, this is step #1 here, takes us to the starting point for our adjusted EBITDA margins. The page after this, we break that down by quarter, and we break that down annually. We had shared the majority of this in the August time frame. You probably remember those that were following a $170 million number. We've translated that to the margin impact here, and there is an additional $5 million that we experienced in the second half, $5 million per quarter that we experienced that we've added here. So that's where we start.

And then number 2 and number 3 are kind of what we're going to do about it. And I'll step through to those pieces. So this is the backup of how we got to this steady-state number. But then this is what do we do about it. And this is our RBS playbook, the Ralliant Business Systems, it's core to who we are and how we go about optimizing the company and driving efficiencies across the company. Immediately at spin, we announced a cost savings program of $9 million to $11 million. We are on track. Some of that is closing rooftops. It's the dis-synergies from separating our Services business and that will play out here in 2026.

But we have a funnel of other productivity initiatives that we do. We do value engineering, we do price realization, we do sourcing -- price strategies. All of that are our monthly metrics on how we manage through cost savings. We did some dynamic resource allocation. We've done a number of things in the fall time frame. We've reduced some G&A within some of the operating companies to fuel a little bit more R&D. But this is what we will manage. We will manage to ensure the 40% to 45% incrementals, and underneath that we manage our productivity and our cost so that we can make some growth investments.

And we get good operating leverage. So in addition to good operating rigor, we want to outgrow our historicals in these businesses. Historically, these businesses have over a 5-year period, grown about 3%. We have higher ambitions and aspirations for that. You'll see for this year, we gave a range of 2% to 6%. But we believe our growth vectors are where we can outperform in defense and utilities. And we've seen high single, low double digit in that space. Industrial manufacturing, there's some pent-up demand there. We're seeing good business there as well as Test & Measurement. This can be a growth driver after several quarters of being down.

No change to our capital allocation approach. We'll toggle between returning capital and tuck-in M&A. Right now, we're focused on repurchase. And nothing has changed in our priorities on driving value creation. Team is in place, we've got 2 quarters underneath us. This team is one that wants to win. We're a winning team. We want to win for our customers. We want to win for our employees and certainly want to win and deliver for our shareholders.

So thank you for a couple of minutes there, and I'll turn it over to you.

Thanks, Tami. Maybe first off, you mentioned maybe some pent-up demand in industrial manufacturing. And I know it's a big point of focus for people here around is there signs of any pickup in U.S. sort of short-cycle industrial activity? What are your sort of thoughts on that? What are you seeing in the two segments from that standpoint?

Yes, we saw a nice growth in Q4. It's about 4% in our -- both industrial manufacturing and other, which is a large part of Sensors & Safety Systems segment. I think there's a couple of things here. I think, first, it's probably a combination of a few small things. The first being, there's definitely pent-up demand. We went through a pull forward of supply chain after COVID. People were cautious. I think last year, we expected some of the demand to start to hit, and then we had tariff uncertainty. So now I think we're starting to see more optimism in North America and probably more spotty in Western Europe.

Great. And I know the Test & Measurement segment, kind of the biggest piece of that is diversified electronics and investors often ask what exactly is in that? What are the big drivers? So maybe -- and I think you mentioned some improvement there exiting last year in that diversified electronics piece. So maybe help us understand kind of what drives that top line there? How much is industrial manufacturing? You've also got that EA business in there.

We did. Yes. So diversified electronics, that's to me, the part of the business you want to see improve because that's the tens of thousands of customers. That's where we have reached through our distribution channels. And that's an indicator that a lot of companies are opening up CapEx spend, doing more R&D. We play in the advanced research and development side. Moving into the test automation and validation with some new products. But the indicators that we get in that business from our distributors, both sell-through inventory levels, quoting activity, look solid. We've seen those improve ever since Q2 when we spun. Those indicators have gotten better every quarter.

In the other two reporting end markets, the semiconductor and communications, that's our direct sales team. Those are the biggest, largest customers in aerospace defense, our hyperscalers and the semiconductor customers. Those are still a little choppy. We talked about a headwind in semiconductor. It's not an over -- the overall semiconductor has gotten better. That shows up in diversified. The call we made is just we have customer projects there, and sometimes they don't repeat year-over-year.

Got it. That's helpful. On the defense side, you mentioned there's exposure in comms, in T&M and then defense on the sensors side. So how should we think about framing the total defense percent of revenue for Ralliant kind of in aggregate? And there you had some lumpiness last year around big projects comping and that kind of thing. What's the outlook like for '26?

Yes. If you look in the defense and space end market, that's where we play in production programs. These are programs we measure in 10 years, 20 years, 30 years in production. And of recent following -- actually following our Investor Day, we realized an uptick in the replenishment for those production programs. So those are existing programs that we're on today that we thought were sunsetting over the next several years that we've -- through the government, through the primes, have indicated, no, we're going to extend those programs. And you see that's in our backlog. When I talk about the 2 years of backlog in those production programs.

What's not in our backlog. And what I haven't spent a lot of time talking about yet, but there's been recent articles around surge demand. And there's 12 critical missile programs that we're talking about taking that replenishment level up to a different level, probably 2028 to 2034 type time frame. We are actively working with the defense primes, but we've not factored that into any of the guidance at this point.

If you flip over the other place you called it, if you look at the comms, the communications piece of Test & Measurement, in there, there's probably half of that, maybe 2/3 of that is aerospace and defense. That's in the research. That's in programs that are in advanced research today that will move into production in the next 3, 5 years kind of thing. So very different parts of the realization workflow.

Got it. I see. But total defense is in the sort of comfortably in the teens or 20% of total company revenue, probably that sort of range. Okay.

And if we're thinking about kind of very near-term earnings cadence, you have an explicit first quarter guide. How are we think about kind of first half, second half, any way to understand in that how the margins kind of step up through the year?

Yes. So first of all, we provided a Q1 guide, as you mentioned, as well as the total year guide. Given the nature of our businesses, there's a significant portion of it that's more short cycle. We talked about that Test & Measurement, a lot of the industrial business as well. So what we've done is if you look at the guidance for the year, we talked about 2% to 6% kind of growth rate, an improvement in the margins from the new -- albeit from a new baseline in terms of the margins. The way we set it up is it's more front half loaded from a growth perspective until we get better visibility into the second half. So you could say there's some prudence from that perspective in terms of how we're thinking about that.

And then from a margin perspective, we thought about this as about 40% to 45% incrementals as we start to grow the revenue throughout the year. And again, I think that would be very much in line with a more front half-loaded growth rate, and then we'll see how that plays out into the second half of the year.

Perfect. And what's the visibility like -- as you said, it's mostly a short-cycle business, but there is like defense, grid and so forth, there's a reasonable backlog. Has that backlog sort of swollen a lot in some of those longer-cycle businesses? What's been the trend there on, say, the grid side and also defense?

Yes. We continue to grow the more durable contractual reoccurring type business across the portfolio. So the defense and space is predominantly contractual revenue. We get really good visibility there. In our Utilities business, about 30% is project oriented. So we have good visibility there. And then in the Test & Measurement space, about 20% is services, where we had good visibility. But you add all of that up, you're still about 60% of the business is still short cycle business. So as we look, we have real good visibility in the quarter you're in and probably 1 quarter out. So what that short-cycle business looks like. And that's how we put the guides together.

And probably more weighted towards the Test & Measurement piece where we see changes happen quicker, honestly. And when we get into Q2, we'll get good visibility into Q3, and we'll continue to update everyone. But to Neill's point, we took a -- we used the word prudent, maybe conservative look at the second half when it came to Test & Measurement.

Perfect. And if we're thinking about operating costs from here, is the operating cost kind of run rate segment and corporate in first quarter, is that the right level? Or is there another kind of step-up sequentially into the second quarter, what you think about it?

I don't think so. I think the run rate, I think, is kind of where we're at, maybe where we finished Q4. But I think the more important thing here is to think about incrementals moving forward. What we're trying to communicate is that we do have a lower starting point, and we acknowledge that, and we certainly own that. But I think as you look forward, it's about driving incrementals and looking for opportunities to invest with -- including those incrementals. So for instance, as we start thinking about investing into the business, it's really about, number one is, we're going to grow our profit faster than our revenue. We have a history of doing this historically, and we are absolutely committed to doing that going forward.

So when businesses invest in things moving forward, they have to go earn it. It's kind of how we talk about it internally. So there are business units or OpCos in our company that had to take their G&A costs down to fund some of the things they want to do to grow. So that's something we're committed to and we'll continue to do. We'll stay focused on the profit and the cost side, but all of that will be baked into incrementals moving forward. So that 40% to 45% we talked about is inclusive of anything else going forward, and we'll manage that.

And I think you mentioned the Investor Day sort of 30s operating leverage goal or forecast or guide and the sort of nearer term is more like 40% to 45%. So when we're just comparing those two numbers, is the point that the 40% to 45%, it's elevated because you're coming into an early part of a cyclical recovery, and then as growth normalizes, that's why a 30s operating leverage is appropriate.

That's exactly right. I think we've seen a couple of years of decline in Test & Measurement particularly. As that came down, we obviously saw some negative decrementals. But on the flip side, as we start to come back up, we see a higher growth rate projected in 2026 than we see it through cycles. We start to see that return. And that, in turn, comes with better incrementals as we start to move forward into 2026 and beyond.

And when you think about the segment and operating cost step-up, I guess, sometimes investors worry, okay, was the business underinvested in perhaps inside prior organizational structures could that lead to a need for prolonged investment step-up now Ralliant is a stand-alone company. Maybe sort of help give us some confidence why that isn't the case and why you think no, the current run rate exiting last year is the right cost base.

Yes. If I think about the -- what was on paper versus actually what happened in Q3 and Q4, there's three buckets. One, the corporate costs higher than we expected. The second one is the dis-synergies, so lower -- less price power on a lot of the contracts that we signed up for as a $2 billion company. And then the third piece is the visibility into the cost of our employee base. Our employee base is global, a lot of manufacturing, 20 different manufacturing sites. So we just have a different cost per employee. All of these things are normal get after for efficiencies. Some are contractual, they'll take a little bit longer than others.

As far as investing in the business, we were invested in to be a 3% grower business. That's what we have been doing from 2019 to 2024. When I talk about ambitions to be much higher than that, we have to invest to do that. We've got two businesses that have had high single, low double-digit growth now for 2 years -- I think almost 3 years now. Those businesses need some boost in capacity. That capacity comes in the form of extra shifts that we need to add, sourcing teams, industrial automation so that we can automate a lot of the work that we do, and we're leveraging AI across the businesses.

But we want to continue to invest in both capacity and in innovation. In a few select places, we have opportunity to add selling resources to drive some additional growth. So I think it's -- we're looking at these as growth businesses, and it's a different way that we would invest.

Got it. And the point is sort of in the future, you can encompass that reinvestment into a 30s incremental margin?

Correct. In near term into a 40% to 45% incremental, exactly what Neill said is we will earn that. The 40% to 45% is first. I don't think this was clear when we talked on the earnings call about our growth initiatives that those will be savings that we need to drive internally to fuel those growth investments.

Got it. Like the 40% to 45% is the net...

Correct. It's a net number. Correct.

Yes. Okay. And you mentioned, Tami, the second point, I think, was around sort of pricing. That was one of the three sort of shortfall buckets that you just cited. Any context around that? Was it because of competition or things just weren't in place to get price up quickly enough with inflation and tariffs? Where -- how comfortable do you feel on price today?

Do you want to talk about -- we have pretty good -- we have good operating rigor on price. We typically get 1.5% to 2% price. Last year, we outperformed on that and covered the dollars for the tariff cost, certainly a little pressure there on our gross margins. but dollar for dollar covered that in the price increases.

Yes, I think that's exactly right. I think we have seen the pricing. I think we were able to cover the tariffs with pricing as well as some other supply chain actions last year. We anticipate getting some pricing going again back into 2026, and that's baked into the plan.

But I think from a cost perspective, I think that's where you're going, Julian, is really, look, we're 2 quarters in. We identified that we have a lower basis to start with, but that's baked into the plan in terms of a new kind of steady kind of normalized run rate. But it absolutely doesn't mean that's not an area we're going to go after and attack. I mean if you look at the -- if you are Ralliant, you look at the segment historically, the team has a very, very strong operating cadence, operating rhythm and attention to detail on costs. So this is going to be an area that we're going to focus on going forward as well. So not just from a pricing perspective, but all the other levers that we can use to kind of go drive cost improvement moving forward.

So I think the guidance that we gave is really just a steady state of what we think about things and how they move forward. This is an area we're absolutely going to be focused on to drive improvement over time.

And is it fair to say that since the sort of the corporate cost run rate adjustment at last Q2 earnings, that guidance hasn't -- it hasn't gone up again since, is that fair? So on the segment side, the extra cost...

Exactly. I mean, there might be a bit of a modest amount there, but I think the corporate costs we talked about standing up the company, so to speak, at the corporate level is more or less in the same zone, maybe a little bit higher. But what we're really talking about here is costs related to operating the businesses. There's what we talk about is employee costs, we talk about health care costs, inflationary costs like that, but also dissynergies related to contracts as a smaller company after we spun, where we saw some dissynergy there as well. But again, those are areas that we've identified, and we certainly can go after from a cost perspective.

Got it. And competitive landscape-wise, anything you're watching, are the competitors remaining sort of pretty disciplined in a cost inflation environment? In terms of price and no ill-discipline...

The brands that we have been in the market for 50 to 150 years. The customers come to us that, we're trusted for the domain expertise. Price is always going to be a part of the equation. The customers are really looking to solve a problem. Often in an application that's a mission-critical application, where uptime, reliability, accuracy, precision is -- it's nonnegotiable. It's in a place where lives matter in some of these applications. So although price is part of every equation, they're looking for our expertise when we talk to them about solutions.

Perfect. And I think that one area people might want comfort on is mix can move around. So just in the interest of sort of minimizing margin surprises from here. Anything we need to be aware of in terms of any real outlier businesses on margins? I think on the earnings call, you mentioned PacSci, for example, has lower margins than Sensors. So you get a very heavy shipment quarter for those products. There will be some margin pressure for that little period. Any other kind of mix factors you think we might need to watch out for?

I think the biggest -- I think actually the biggest swinger is Test & Measurement. It's very volume sensitive as you know. So that could actually on the upside, provide some positive swing. I think you're right, though, on Sensors & Safety Systems. I think there's a bifurcation, I would say, within the segment from a margin perspective where you see defense and space run at lower margins than the average for Sensors & Safety Systems. So if that was to grow faster that could cause a little bit of margin degradation, albeit at higher growth rates. But I also think that the sensing businesses, particularly as you think about utilities run at a higher rate. So if that also goes faster, it can be somewhat of a natural offset.

So look, we've given the annual guide and the quarterly guide. So I think as we get closer each time, we'll be able to narrow these. And I think -- one thing, Julian, that in terms of approaching it that way is I think we can get better control of the communication of the narrative by providing that as we go into each of the quarterly earnings and updates around anything that may shift in that time frame.

And just you provided the segment guides about 8 -- 7, 8 months ago, since then a couple of drops on the cost base, the EA write-down. So what's the level of confidence that those kind of medium-term segment margin guides, they're still intact kind of thing. There isn't much downward pressure on the medium-term outlook.

Yes. I think I'll just reinforce, Neill talked about the volume recovery in Test & Measurement, is probably the thing we're watching the most, and that's a positive, that they've been below the guide that we gave 7 to 8 months ago. We want to get them squarely in that space. They're one of the operating companies that have done some restructuring to take down G&A costs and continue to fuel R&D. The R&D and innovation in that space really drives growth. Put new instruments into electrical engineers' hands, and that drives our growth rate. Last year, we announced 8 new products in that space. They've really got the flywheel going, and I expect 2026 to be another great year of innovation in the T&M space.

Perfect. And your point was there that the competitive landscape is pretty steady. It's just the market demand that's the issue. You haven't seen any competitors in T&M be particularly aggressive on price or anything like that.

I think the -- it's a low end of Test & Measurement. And you go back to 2018, 2019, when we had some restrictions on shipping to China, it really spawned a whole wave of low-end players in the T&M space, many of them Chinese headquartered companies that are now expanding into Western Europe and into the U.S. So I think you -- we have a great brand. People come because we're reliable. We've got services. We back it up for years, but it has opened. I think that did open an opportunity at the very low end of T&M for a different set of competitors.

Got it. Well, thanks very much. We'll now pivot to the audience response survey questions, please. So the first question is around sort of current ownership of Ralliant. It's around sort of 55% opportunity there.

Secondly, is around general bias or attitude to Ralliant right now. Neutral-ish.

Third question is around EPS growth profile kind of and that's versus the multi-industry average. It's around middle.

Next question is on capital deployment, and we just talked about the accelerated kind of buybacks that have been happening in recent weeks. So generally, a buyback is still the preferred use of cash.

Next question is on the warranted valuation on sort of 2026 PE. So sort of high teens.

And last question is, what's the main kind of anchor or headwind holding the valuation back? So it's kind of execution, just getting those margins out the door.

So fantastic. Well, thanks so much, Tami and also, Neill, for being with us today. Thank you.

Thank you.

Thank you so much.

Thank you, everyone. We are really excited to be up here with Ralliant. We have President and CEO, Tami Newcombe and CFO, Neill Reynolds. I think, Tami, you have some opening remarks, and then we'll get into Q&A.

Yes. Thanks for having us, Piyush. Thanks for everybody here in person and those that are joining us virtually. It's a pivotal time to be a part of Ralliant. We've just completed our first 2 quarters as an independent publicly traded company and starting our first full year. It was a year ago. It's been interesting being here today because a year ago, I was at this conference. And if I think back to a year ago, we were planning to spin at the end of the year. And to realize we did that 2 quarters early is really quite an accomplishment for the team.

I also think about we are really pragmatic about ensuring that the presidents in our operating businesses stay focused on our customers. And we're removed from any of the noise about standing up the public company. And they focus on customers, they focus on new product innovation. They were focused on growth because that was one of our thesis that we could grow these businesses faster. And as we come into 2026, we look at our guide for Q1, and that guide is a 5% to 8% growth on businesses that had traditionally been growing 3% and both segments growing. So Test & Measurement back to growth. And what I say to the team is, and we're just getting started.

We posted the presentation today and filed an 8-K. So you can find the presentation on our website. And also, there's some new information here, so we did post an 8-K. So there's a couple of messages that I want to share today. The first one is to just state as we're getting started here, we are building a company to endure for decades to come. We believe in the long-term value of this company. And with that, we have executed on a share buyback for $39 million. We have authorization for $200 million, but wanted to share that we had executed that.

Second, as we thought about our guide for 2026, the midpoint of our growth we shared was at 4%. The adjusted EBITDA, the profit in the business is 18% to 20%. That is below the long-term guide that we shared during our Investor Day. At Investor Day, we talked about 3% growth, which we're seeing opportunity to overachieve that this year, but we also called low 20s to mid-20s in adjusted EBITDA and profits. So we're going to talk today, give a little bit more clarity on how we got there. And then a little bit -- I think what's most important is what are we doing about it, and we'll get into that.

And then I just want to give a quick shout out to the team. In our first 2 quarters for the metrics that we guided, we were at or above each of those for Q3 and for Q4. So great job by the team. The next 3 slides are an overview on Ralliant for those that are new to the company. I'm going to combine two of them here and start on, I think this is Slide 6. I can't see the slide numbers. I think we're on Slide 6.

So Ralliant is a global precision technologies company. We design, manufacture, sell and service products. It's good to be a products company these days. We sell products to customers that care about uptime, they care about accuracy, reliability and typically harsh and demanding environments. We refer to them as critical, mission-critical, outdoor environments. Our end users and what our employees are extremely proud about is we serve engineers and scientists and innovators around the world.

Our growth strategy, which we have shared and really the progress that we're making on this starts with RBS Everywhere. This is core to who we are. This is our operating rigor. This is our toolkit for how we get after driving efficiencies in our business and how we drive innovation and growth across the business. I'll come back to this as we start getting into what we're going to do about it.

In our stronghold positions, this is where we're embedded, an extensive installed base. We've been there for decades. We have customers that trust us, very loyal customers. We're still innovating there. We're still investing there. One of the examples is in how customers now can find parts replacement because if you've got -- had a part for 15 years in a manufacturing facility, maybe a dairy plant and something fails, well, you can now click a picture as a technician and be able to know exactly what part that is and what distributor has that in stock. That's how we think about innovating in our stronghold positions for our customers there to create more lifetime value and reduce friction.

We spent a lot of time talking about our winning growth vectors. This is where we see secular trends that we expect to last for years where we believe we can outperform the market because we're very well positioned to win here. And this is in defense, utilities and power electronics, which is really electronics any place, whether it's at the low end of consumer or the high end of really power thirsty applications, power electronics is critical.

We go to market in two segments, and we're diversified across a number of different end markets. But what our customers know and trust are the flagship brands you see across the bottom. That's what customers talk about. They'll ask for a Keithley. We need a Keithley. It's strong brand recognition. And it's not just about the product. It's really about the domain expertise that we've been bringing to our customers. We understand that application, that electronic device under test, how you do that test. We understand in some of our niche applications exactly the issues that they're going to have in that environment, and they come to us for that domain expertise. But we've been doing this for decades and truly creating that value with our loyal customers.

Now I'm going to step into the guidance and long-term targets. These were shared in our earnings call about 1.5 weeks ago. I'm going to go a step deeper to provide some clarity. From a revenue growth standpoint, midpoint of our guidance here is 4% with a high end of 6%, and that's growth across both segments. I think T&M back to growth is a positive for us. The low point of that business was Q1 of 2025 in the test and measurement space. Every quarter last year, we saw the business improve. The revenue was bigger every quarter and turn to positive here in Q1.

Our adjusted EBITDA margins, I called out that the 18% to 20% guide for 2026 is below our Investor Day long-term target. And therefore, our commitment here on higher incrementals, the incrementals of 40% to 45% as we move back into our target profit ranges. And I'm going to -- I'll talk about some of what we're doing about it. But at spin, we did talk about our cost savings program. We came right out of the spin and announced a $9 million to $11 million cost savings program to get after some of the cost takeout we needed to do from the dis-synergies.

This is our first full year as a public company. We have an adjusted EPS of $2.22 to $2.42. And then another example or result of our discipline and rigor, our RBS playbook is the amazing free cash flow the team was able to generate last year at 117% and continue our commitment to be above 95%.

I wanted to now just make sure we are clear on our adjusted EBITDA margins. So we have provided a breakdown here. And I'll start with this number one, and there's a sheet behind this that goes into even more detail. But I think the -- just to be blunt about number one, our OpEx cost and a steady state when we landed as a public company are higher than we had anticipated. We talked about this increase in our August earnings call. We talked about an OpEx number, if you remember, a $170 million number we talked about. And when we announced our earnings just 1.5 weeks ago, we missed on that number, and it's a $175 million number that was actuals on that. And so that's where you -- if you take our Q3 and Q4 OpEx and you normalize that for a full year, we didn't have a full year as a public company, but we wanted to do that normalization just so that we understood where we're starting from, and we would build from there. And we can answer any follow-up questions that you have on that.

Some of these costs are corporate costs. Some of these costs are employee costs, which show up in the segments. And then some of the costs are dis-synergies, just less price leverage as a smaller company. I'm going to spend some time now on number two and number three to talk about what are we doing about it. So this is the detail that I just spoke through that you have in your backup. And then here is how we get after it. And we have a proven track record as an organization. If you recall, this was a segment. And between 2019 and 2024, we proved that we can grow our profit, which is our adjusted EBITDA faster than our revenue. And how we do it is really our Ralliant Business System and our RBS playbook.

I talked about getting out of the gates quickly with the cost savings program. Our RBS productivity initiatives, those span labor productivity, sourcing savings, price realization tools, value engineering that we do, all of those productivity initiatives happen underneath how we run the business. We also do dynamic resource allocation. And we had a couple of actions taken within the operating companies in the fall time frame to shift some G&A to more R&D to drive growth. Through all of this, we're expected to deliver 40% to 45% incremental adjusted margins, and that is -- that's in 2016 or -- 2026, flash back 10 years ago. And that is above what we had set at our Investor Day, which is the right thing to do because our overall margins are below.

So growing top line profits faster than revenue, that's step one. We add to that with growth. And our growth opportunity in front of us starts with the 30% of our business that is in defense and utilities, the top 2 there. At Investor Day, we called this market around 5% to 7%. As we came out of the Investor Day in Q3 and Q4, we've continued to get incrementally more positive news about these spaces. In the defense space, we've seen replenishment, which has driven almost a 2x backlog in our business there. In utilities, there is a super cycle of expansion going on in the electric grid worldwide, which is driving an up above the 5% to 7% that you see on this chart. And we've experienced some of that. We expect that to continue. That's 30% of our business that is outgrowing our expected market growth.

Our industrials business, which has been soft for the last 2 to 3 years, we've seen there was supply challenges, there was tariffs, there was uncertainty. We're starting to see a pickup now in the U.S. We had a nice Q4 in our industrials business. And we believe that the near term, we're probably at the high end, it's maybe a little above that range, but very healthy in our industrials business. And then Test & Measurement, the headline is we're back to growth in 2026 in our first quarter, and we're expecting this business to grow throughout the year. We had several new product innovations that were announced last year. Total amount was 8, which is about twice what we've seen in our Test & Measurement business in prior years, and we're going to build on that. We announced a couple of platforms that will allow us to innovate even faster. But this is the combination of our RBS playbook and doing what we've always done at lower growth and then really turning our sights to a higher growth is the combination of how we first deliver those incrementals and then get back into our long-term range of low 20s to mid-20s in our adjusted EBITDA.

We're executing against our capital allocation approach. We've outlined a couple of places that we want to invest organically. We want to ensure capacity in our defense and our utilities business. We want to continue to fuel some selling resources, especially with some AI augmentation to scale and drive productivity and then continue to invest in our best innovation ideas. You've seen us return capital. We have done the buyback. We've authorized the dividend, and we're toggling that with tuck-ins. We're continuing to keep a good funnel of tuck-ins, but right now, focused on returning that capital.

I think this is probably a good place for me to wrap up. There's not -- there's no change in the formula. We're just more energized and excited about delivering it. We believe we have the growth opportunity there. We'll be pragmatic, and we've got the discipline and the rigor to deliver the margins we talked about. You've seen our ability to convert the free cash flow, and you've seen us return capital. This team is a winning team, and we want to win for our customers. We want to win for our employees, and we want to be winners for every shareholder. So thank you for letting me share a few prepared remarks. And now I'll turn it back to you, Piyush.

All right. Perfect. A lot here. So let's take a step back. To start off, like as you said, Ralliant has been operating as a public company for not too long. You have been with the brand for a significant amount of time, but relatively the CEO seat and Neill, you are relatively new to the company. We are obviously coming off a tough quarter with a significant stock price reaction. In hindsight, could you have done anything different? Like any lessons learned, if you want to share that?

Yes. If I think about I think it goes back to sitting here a year ago, and I know I talked to a number of my peers who kept saying spins are hard, spins are complicated. There's a lot of moving parts in the spin. And boy, were they right? It's a lot to land. So we stood up an entire team. We built our culture. When we say about standing up a public spin like literally standing up Oracle for finances, for HR, standing up every single IT system, they are complicated. And I think we've landed in a good place 2 quarters sooner. If I reflect back to 1.5 weeks ago, I think the clarity that we're providing now is the clarity that was needed in some incremental changes that we made, and we needed to put it all together. Hopefully, the slides today, I guess we'll learn more as we exit today. But I think that clarity to bring everybody along is really important.

Helpful. And as we sit here today, you kind of talked about this bridge. But would you say that you fully understand and are on top of the cost structure and that investors should not be concerned with any more cost surprises?

Yes, the benefit we have is we have now had two full quarters to operate the business and actually to close the books here on 2025 with minimal, almost no TSAs in the business, which is extremely, extremely helpful. The team that I was bringing together in hiring, if you go back to Q1, Q2, I think Neill started about 3 weeks before our Investor Day. They've now got two quarters under their belt. The other part is just building the funnel of countermeasures. And as we came through Q3 and into Q4 and could really start to see what we needed to get after and got that visibility, we now have the levers underneath to go execute on what we have to do. And this team is built to go execute and operate these businesses. So I have high confidence that what we have called out and talked about from an adjusted EBITDA, from a top line, from our incrementals that we've got multiple paths to achieving those results.

Helpful. And we'll stay with margins. You did mention this bridge. Do you have a time frame in mind in terms of like how do you get from that 18% or like how fast can you get from that 18% to 20% EBITDA guidance to your longer-term target? Is it like a step away? Or is it like -- will it be more gradual?

So I think there's a couple of components here as you start to look at the margin transition both into 2026 and beyond. And if you look at the range, it was 18% to 20%. So I think at the high end of the range is up to 200 basis points. So I think we're touching on that. There's a few things that are built in here, and I think Tami talked about it a bit in her remarks. One is we got to go execute our playbook. And I think if you took and extrapolated what we look at as '26, I think as you get out in time, we're probably trending to the lower end of that range in the low to mid-20s. But that doesn't include the opportunity to go execute on some also what we talked about. I think we have a longer runway here to go execute cost programs. We have a longer runway here to look at some of the growth opportunities we have, particularly in defense and utilities where we could outperform there. So I think there's lots of opportunity to get into the mid and high end of that range, but then we just have to get after it. So I think with the guidance that we have, I feel like we've got nice control over the narrative, a nice control over the business in terms of how we want to communicate going forward. And I think we have a nice runway in front of us. And I think one thing you have to remember is that the starting point might be a bit lower than we anticipated, and we own that and we understand that. But the playbook going forward is basically the same. It's what we've talked about previously, growing our profitability faster than our revenue, and we think we've got good line of sight to that in 2026 and beyond.

Got it. Let's shift to growth. There has been a bit of macro volatility and some of your end markets are in a cyclical recovery. You have 3% organic growth, as you mentioned, as a long-term target and your guidance range for '26 is 2% to 6%, suggesting that a slightly higher growth rate. How much of this growth would you attribute to stabilization or improvement in your end markets versus your own initiatives to outgrow? There are recovering cyclical end markets, competitive dynamics and then Ralliant's own self-help. Like can you walk us through the puts and takes of your top line guidance framework?

Yes. I think to start with just how we thought about the 3% was historically what these set of businesses had done. And we thought prudent to say we land as a public company, we had better be able to do that. So that was kind of the flag in the ground that we need to be able to drive 3% growth. As we look at the opportunity out there and the 2 quarters that we've been running this business, we see even more opportunity in the defense and utility space where we are extremely well positioned, embedded supplier with our end customers and markets that are growing. I think in both those spaces, we can make our own luck, and we can outperform the market in both of those spaces. I think in industrial, we play in a lot of niche markets. In those niche markets, I think we get our fair share of opportunities, but they're slower growth opportunities, not as big of a SAM there. And I think making our own luck there is going to look a little bit different. I think it's going to look like how do we help our customers go faster. I talked about the AI application to get a replacement part in 2 days, really simple and really easy. I think we're thinking about how do we transform that business in a different way if we're going to grow outside and above the market. And then in T&M, it's all about innovation. And we got to put more innovation in the hands of our electrical engineers, and that's what drives outperformance in that space.

Got you. And we know like new product introduction has been a key focus, and I think you have highlighted expectations that NPI this year could be 2x historical average. First, are you on track with that goal? And second, help us understand how you balance investments in R&D and innovation versus driving margin. I think on the earnings call, and you mentioned like 50 to 100 bps impact from reinvestments. If you could dig a bit deeper into these investments and how they better position Ralliant in the market.

Yes, I'll start a little bit there, and then we'll get to the investment part. New product innovation in our Test & Measurement business was 2x last year of what we've seen historically. So that was a milestone and with that to have two platforms. And when I talk about a platform, our MP5000 platform is modular. So what they'll be working on and announcing this year are more modules that go into that platform. So you can see how velocity can accelerate there. What's very exciting and something we don't talk about a lot in our defense business that Neill and I were just at PacSci EMC, and they had a record year last year in new product innovation with over 24 new products, customer-funded products in that business. But those are programs that will start rolling into production. It will take 2 to 3 years for those to ramp, but that's also exciting.

So your question was a little bit more how do you make the trade-offs? How do you decide what you're going to do here? And we don't think about it as just a percentage of sales. We think about it as what are the best ideas. And we have a process, a dream process that we go through that really takes the ideas in and then does business cases on how big are these going to be? How valuable will they be? What are the margins going to be on those? And that's how we really decide what programs get funded. And then maybe you talk a little bit about how we make the trade-offs with investing for some accelerated growth.

Yes. So I think when we said it earlier, I think if you look back at this business over the last number of years, even pre-spin, I think with the hallmarks of execution is around growing the profitability faster than revenue. We're absolutely committed to that. Clearly, we've included that in the guide for next year. And so how do we do that? And I think the key here is as we reinvest into the business, we've got to drive some offsets and some savings. We've got to earn it in terms of how we think about investing into these businesses. Tami talked about, we took -- in one business, we looked at taking G&A costs down and invest in more R&D, and that's embedded in there. In other places, we've looked and seen where we've had higher growth and much higher margins where you can go back and reinvest in the business and still get great incrementals. So that's all embedded, I think, into the incremental margins that we talked about going into '26 and beyond. So as you look at the investment levels, there's a trade-off that we have to make within the business. But I would say we're absolutely committed to having discipline around that and including that in the margin expansion opportunity and driving that as we go forward.

So the words that Neill used are something we use internally is we have to earn that. We've made commitments on what our profitability would be. We want to make investments. We have to earn them.

I'll pause for a second if there are any audience questions.

[indiscernible].

Yes. The -- so what's in the middle of that is this tariff piece that we had in 2025, and we have been able to cover our tariff costs, price being one of the actions. There are multiple actions that be able to cover that and gotten pretty regular 1% to 2% price realization across the business. So I don't think there's a big fluctuation that you're going to see. I think you'll see more of the -- the margins are higher on the places where we add the most value, and that's at the high end of the portfolio, and that was some of the announcements that we made late last year.

When you think about PacSci and new product innovation, what are the specific submarkets that those are really tied to? I mean, is it space launch? We see a lot of talk about missile interceptors, munitions. Like what are the applications driving that?

Well, you know the space pretty well because I think you covered a couple of them. We think from -- the business, 80% of the business or so today is missiles and munitions. And when you see the new product innovation, it's everything from deep sea to deep space with a higher mix of space programs today.

Just a high-level question on Test & Measurement. Could you describe the cycle there and the drivers of the cycle? It seems to differ from what I call a general industrial cycle. Is it more tied to R&D of your customers to CapEx? Just anything you could help me there to understand the cycle in T&M versus general industrial?

Yes. T&M has traditionally followed technology cycles. So right now, we're in an up cycle around anything around the data center, whether it's communications or cooling systems or upgrade of power racks in the data center. So it tends to be technology inflection points. It was at one point, the mobile phone. It was a computer. We can go through time, and we can talk about those large technology inflection points. And somewhere between 4 to 5 years from a peak to peak, those tend to be. I don't know if one exactly matches another, but if you talk in general sense, that's what we've seen. We also see that the semiconductor business, when semiconductors are doing well, test and measurement is typically doing well. And that's because all those components coming out of semiconductor companies find their way into electronics everywhere, electronics that go in your robots, that go in your glucose monitoring machines, that go into agriculture. So those electronics or there's some engineer there that's taking and designing some electronics for that new product. So usually, those -- a new wave of semiconductor technologies will also drive our diversified electronics business.

I'll ask the same question in a slightly different way. Like diversified electronics had a challenging year, but it seems you are seriously working some stabilization there. Communications seems strong. And then semis is lumpy, but you sounded positive in the long term. You ended '25 down mid-teens, and it seems most of your end markets are bottoming or at least like improving sequentially, but you kept the Test & Measurement '26 guidance below the enterprise outlook. I know there is EV demand drag, but is it a relatively -- it is a relatively small part of the portfolio. So what do you think is holding back the growth at Ralliant in the segment?

Yes. I think that's a question on many people's minds. So I'll tell you how we guided and how we thought about Test & Measurement. We've seen three sequential quarters of improvement. As we come into Q1, we talked about the 5% to 8% growth. Test & Measurement is right in there with that growth rate. Test & Measurement for us, about 70% of the business is short-cycle business, book and turn business in a 30- to 60-day window, definitely within the quarter. So we have got good line of sight to Q1 and Q2, and we look at our direct sales funnels. We look at the sell-through at our partners, our distributors. We look at quote activity. We've got probably a dozen metrics that we look at that we feel confident in the first half, which is nice to have a business that's front-end loaded. We also said we need to be prudent. It's our first year out as a public company, and we need to be really prudent that the guide that we put out, it's a pretty wide range, 2% to 6%. We want to make sure that we land in that range. So we'll provide more information as we go, but that's the guide that we have for the year and how we thought about Test & Measurement.

Helpful. And we think investors understand that Ralliant is more aligned with R&D workflow, but it seems that you have been trying to also focus on validation. You had a few new products announcements in 4Q, and I understand that it's still early. But would you say that validation could be a more meaningful contributor to earnings growth?

Yes. We do believe that, that is an opportunity. It's an adjacency to the R&D workflow. a place where people have used our bench instruments in validation, but we've never had a purpose-built platform for test automation. The ramp will be a little bit slower. We don't have the large installed base that we have in high-end oscilloscopes. And much of the work gets done through system integrators, which is a new ecosystem for us. But the potential down the road here is, yes, that we have opened up a new serviceable market that presents a new opportunity in the test and measurement space.

Helpful. And one on Test & Measurement margin. I think you expect T&M margin in '26 to be at the low end of your mid-teens to low 20s longer-term EBITDA guidance range. Maybe talk about the confidence level here. How much of this is dependent on growth and end market recovery versus your own self-help actions? I know this business can have strong incremental margin, but you also have your pricing and cost actions. So help us understand the visibility to what seems to be a sizable margin expansion this year.

Yes. So if you look at the outlook for Test & Measurement for the year, and Tami hit on this a little bit already is I'd say the growth rate we have in Q1 is higher than the year. And the reason for that is exactly what we talked about. I think the timing of the book and ship orders, the short-cycle nature of the business is something that you want to get better visibility to earlier. And we have, I think, lower growth rates in the back half of the year. Now underlying that are positive signals around the funnels and the 60- to 90-, 120-day funnel that we have in terms of the activity that's going on in the business that's heading in the right direction. As we said, we're returning to growth. So as I think as we look at 2026, I think we've got some nice momentum coming off the bottom of the cycle. We see better growth here earlier in the year. And as we get better visibility into the mid and later part of the year, we'll give an update on that. So I think all the signals are positive at this point, but we want to see some proof points around how that plays out for the year. And as we see those things, we'll update our outlook.

Helpful. And moving to Sensors & Safety margin. I think your long-term EBITDA margin guidance is high 20s. The last two quarters you reported -- that you reported, you were averaging high 20s. But for '26, you're pulling it back a little to mid-20s to high 20s. If you could comment on that, like I think you -- there are some mix headwinds you mentioned on the call and then you are reinvesting in the portfolio. How soon can you go back to that long-term guidance range? And more importantly, would you say that these reinvestment -- with these reinvestments, Ralliant is being more aggressive to go to the market?

Yes. So I'd say on the margins for Sensors & Safety Systems, well, first of all, it's got very strong margins, mid- to high 20s. We saw growth last year in 2025. We're forecasting pretty nice growth mid-single digits here in 2026. So I think from a growth rate perspective and a margin perspective, we're in really solid shape. So I guess the question then is like why are we at the kind of mid- to low versus -- sorry, mid- to high 20s in margins versus the high 20s in margins. As we look to the year, I think some of the corporate costs or some of the allocated costs that go to the segments that Tami talked about earlier is affecting that a little bit. I also think the higher growth in defense, where we have margins that are lower than the total in Sensors & Safety drive a little bit of a mix headwind in that. But as you look out to the year, I think the key here is driving the initiatives we talked about earlier. I don't think that this is so much as -- and more growth investment is causing us to -- is holding us back. I think about driving more growth to drive more margin enhancement. We talked about it earlier, the playbook we have is to drive our profitability faster than our revenue. And we think in Sensors & Safety, we can do that as well and get back up to those margins over time. But right now, that's what we've guided to, given the visibility, given how we look at the cost structure of the business coming out of the call. But as we go execute for the remainder of the year, we'll continue to look for ways to -- continue to drive that profitability faster than revenue.

All right. And Neill, on capital deployment, you guys like Tami touched on it a little. You highlighted the $200 million in share buyback. It seems like the stock has pulled back. So could you be a little bit more aggressive there? It seems you are, right? It seems like it's already down to $160 million. And then on M&A, I think the focus is tuck-ins, but given the competitive dynamics versus your own offerings and the demand potential that you see across some of your higher growth verticals, could you lean in more on M&A going forward as you are a good generator of cash?

Look, I think that the profile and the order in which we allocate capital hasn't changed. I think first and foremost, it's around organic reinvestment in the business. We talked about a number of those areas where we continue to look to grow profitability, but also reinvest in the business organically. From a capacity perspective, we've taken up our CapEx from about 2% to 2% to 3%, and that's really about funding capacity investment in some of these higher-growth areas where we're going to need capacity out beyond 2026. The second piece of that is going to be returning cash to shareholders, one in the form of dividend, but also in the buyback that we've talked about today. And we'll continue to look to be -- to execute on that. And then the last piece is then the tuck-in M&A. And I think we're going to start out with looking to augment these areas where we've got great organic growth opportunity and start out there and start to build our case and our credibility around executing on M&A. And as Tami mentioned, toggling between, I think, the share buyback or the return to shareholders and with M&A. But look, I think the business has terrific cash flow capability moving forward from a free cash flow perspective. And I think as we think about being disciplined within our turns rate from a debt perspective, that will unleash some potential for us as we start to continue to generate cash flow and allocate capital within that framework.

Got it. This is a question we ask every company, and you can tag team on this, like what are the top 2 or 3 innovations and structural changes affecting your company over the next 5 years? And are there any emerging industry trends that are perhaps being overlooked in the current discourse?

Yes. I know we're coming up on time. So just take one, AI. We're taking advantage of it across the company internally for efficiencies and externally to create more value for our customers.

Perfect. We appreciate you guys joining us.

Thank you.

Thank you so much.

Hello. My name is Donna, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Ralliant Corporation's Fourth Quarter and Full Year 2025 Earnings Results Conference Call. [Operator Instructions] I would now like to turn the call over to Mr. Nathan McCurren, Vice President of Investor Relations. Mr. McCurren, you may begin your conference.

Thank you, Donna. Good morning, everyone, and thank you for joining Ralliant's Fourth Quarter and Full Year 2025 Earnings Call. I'm Nathan McCurren, Vice President of Investor Relations. Today, we'll walk through our results, highlight key operational progress and provide our outlook for the first quarter and full year 2026.

I'm joined today by Tammy Newcombe, our President and Chief Executive Officer; and Neill Reynolds, our Chief Financial Officer. Our earnings release issued yesterday and today's presentation can be accessed on the Investors section of our website at ralliant.com.

Please note that we'll be discussing certain non-GAAP financial measures on today's call. A reconciliation of these items to U.S. GAAP can be found in the appendix to our presentation. During today's call and unless otherwise stated, we're comparing our fourth quarter 2025 results to the same period in 2024.

During the call, we will make forward-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements we make today. Information regarding these risks and uncertainties is available in our information statement filed with the SEC on May 28, 2025, our quarterly report on Form 10-Q filed with the SEC on November 6, 2025, and our annual report on Form 10-K for the year ended December 31, 2025, to be filed later with the SEC.

With that, I'd like to turn the call over to Tammy.

Thank you, Nathan. Good morning, everyone. Thank you for joining us for Ralliant's Fourth Quarter and Full Year 2025 Earnings Call. Before we get into the numbers, I want to take a moment to recognize our teams for the incredible work they have done to establish Ralliant as a stand-alone public company and position us well for the future. That progress sets the stage for today's discussion.

I'll start with a high-level overview of our financial performance, share how we're building on our momentum and discuss where we're investing for growth. I'll then turn it over to Neill to walk through the details of our results and outlook before I come back to close and, of course, open it up for questions.

Let's turn to the key takeaways from the quarter on Slide 5. 2025 was a pivotal year. We sharpened our long-term strategy, ramped innovation across the portfolio and strengthened our culture to inspire growth and execution. In the fourth quarter, we exceeded our revenue guidance with stable to improving trends across most of our end markets. Adjusted EBITDA and adjusted EPS were both at or above the high end of our guidance ranges, another clear demonstration of our operating discipline. We delivered strong free cash flow with a conversion above our long-term target. As we look ahead to 2026, we are well positioned with secular growth drivers, a healthy balance sheet and clear strategic priorities guiding where we invest to create long-term value.

Drilling down into our Q4 financial results on Slide 6. Revenue was $555 million, a 1% improvement year-over-year. Consistent with our expectations to start the year, we showed sequential improvement every quarter with 5% sequential growth in Q4. The Sensors & Safety Systems segment grew year-over-year across all end markets. A record quarter of revenue in our Defense and Space end market was driven by replenishment of missile programs. The utilities market continues to benefit from secular tailwinds and multiyear CapEx cycle focused on energy grid expansion. Industrial manufacturing, while uneven, is improving as customers gain more confidence in their markets.

In Test & Measurement, revenue sequentially improved again this quarter. Improvement was led by communications for data centers, defense and research. Diversified Electronics has shown early signs of broad-based improvement with health signals from our distributor network. And our semiconductor revenue remains variable, dependent on customer-specific exposure. Adjusted EBITDA margin of 20.8% and adjusted EPS of $0.69 reflects revenue slightly above expectations and disciplined operational execution. We also generated robust free cash flow, finishing the year at a 117% conversion rate. We continue to have a healthy balance sheet with net leverage of 1.9x adjusted EBITDA, in line with our target leverage range.

Next, turning to Slide 7. The chart shows our revenue growth improvement over the course of the year. Let me discuss that by region. North America has trended positively with improvement across nearly all end markets. Western Europe saw a notable improvement, particularly in Test & Measurement, returning to year-over-year growth in the fourth quarter. China macro leading indicators have shown signs of recovery, but we expect continued pressure from export controls in an uncertain environment. Rest of World was our best-performing region in the year with outsized growth in Q4, primarily driven by customer wins in Korea, the Middle East and Africa. This sequential revenue improvement is fueled by secular tailwinds in several of our core markets.

On Slide 8, I will outline our 2025 end market mix and revenue growth. The final column reiterates the market growth expectations we shared at our June Investor Day. I'll start with the Sensors and Safety Systems segment, which is approximately 60% of our overall business. Industrial manufacturing is our largest end market and where millions of precision sensors are embedded in critical customer workflows and solutions. Despite uneven conditions, we saw selective areas of strength during the year, led by North America. We expect a gradual global recovery consistent with our Investor Day expectations.

The Defense and space market is poised to outperform long-term market growth expectations this year. We are well positioned to win future contracts as a key supplier on critical missile defense programs. The utilities market is supported by durable infrastructure investment in grid modernization and reliability, reinforcing growth above our long-term expectations.

Shifting now to Test & Measurement segment, which is about 40% of our revenue. Our largest end market is diversified Electronics, representing approximately half the segment, and it is showing broad-based stabilization. Early indicators include improving quote activity and a healthy distributor inventory levels, which we expect to further develop in 2026. The communications market has continued to improve sequentially as customers increase investment in our new high-performance oscilloscope platform and probing technologies that support research, data center and aerospace and defense applications. Global semiconductor customer spending, while improving primarily in AI-related applications remains uneven. In 2025, results benefited from a large customer project that completed its production cycle in the third quarter and is not expected to repeat this year. Excluding that dynamic, we are seeing pockets of improvement in the semi market as we enter the year.

To win across these end markets, we are committed to executing our profitable growth strategy, which I will cover on Slide 9. There are 3 pillars to our strategy. First, operating discipline through RBS Everywhere. The Ralliant Business System is the foundation of how we run the company. It makes work visible, creates shared language and reinforces accountability. We are enhancing our RBS toolkit with AI to accelerate learning and execution. Second, our stronghold positions. We continue to deepen our leadership positions in target markets where we have an expansive customer installed base and long-standing loyalty. Third is winning growth vectors. We are expanding our presence in attractive markets such as defense, energy and electronics to contribute to higher long-term growth across the portfolio.

Slide 10 highlights our competitive differentiation and how we are partnering with our customers across these winning growth vectors. In the Defense Technologies growth vector, PacSci EMC achieved record revenue in the fourth quarter with continued backlog build, highlighting the strong demand in defense programs where we are an embedded supplier. Using RBS augmented by AI, we are reducing turnaround times on customer proposals, strengthening our supply chains, automating and expanding our production.

In the grid modernization growth vector, Qualitrol was selected by one of the world's largest cloud providers as a global standard to make its data center assets more reliable, visible and resilient. This reflects both the capability of our technology and the growing need for deeper visibility into the health of critical assets. Our condition-based monitoring solutions combine sensors, data aggregators, monitoring software and analytics into a fully integrated solution that enables customers to detect and manage early warning signals before affecting operations.

In the power electronics growth vector, Tektronix has partnered with an AI robotics company that brings humanoids to life. This requires the validation of electronics that turn intelligence into motion, helping AI to move from software algorithms into real-time control of motors, actuators and sensors. In effect, translating digital intelligence into precise physical action where performance, safety and reliability are essential. These customer wins demonstrate that our technology innovation and RBS are clear differentiators to expand our presence in our winning growth vectors.

On Slide 11, I'll share our investments that support our profitable growth strategy. As we shared at our last Investor Day and have since reiterated, our top capital allocation priority is organic investment to enhance our long-term growth. We mentioned last quarter that we expect CapEx to be 2% to 3% of revenue in 2026, up from about 2% historically as we invest in more growth CapEx.

We've also taken growth investment into account in our incremental EBITDA margins that Neill will discuss shortly. This investment is focused on commercial, innovation and manufacturing. First, I'll begin with commercial execution. Our competitive advantage is rooted in decades of domain expertise with over 90,000 customers. To better serve and reach these customers, we are investing in sales resources and augmenting with AI and a digital platform.

Second, we are investing in innovation acceleration to shorten development cycle times, increasing the velocity of new products. We're deploying platform architectures that enable faster product refresh cycles and serve adjacent applications with less engineering investment. We are also innovating with new business models that have the potential to expand customer lifetime value.

Third, we're investing in manufacturing agility. Following multiyear outsized growth with our defense and utilities customers, we've begun to selectively expand our footprint to increase capacity while we continue to leverage RBS to drive productivity in our existing footprint.

Next, I'll turn it over to Neill to go over our financial results and provide guidance and insights on Q1 and the full year of 2026.

Thank you, Tammy. Good morning, everyone. Please turn to Slide 13. During Q4, we generated $555 million in revenue, up 1% year-over-year and flat on an organic basis. Healthy demand across the Sensors and Safety Systems segment, coupled with enterprise-wide pricing actions were mostly offset by lower Test and Measurement volume.

Before I go through the remainder of the results, I want to briefly address the $1.4 billion noncash goodwill impairment that we recorded during the fourth quarter in connection with our annual goodwill impairment testing. As previously discussed, the EA Elektro-Automatik business, which was acquired in January 2024 as part of Fortive, has experienced electric vehicle demand headwinds and is now trending below previous expectations. As a reminder, EA was purchased for EUR 1.6 billion or the equivalent of approximately USD 1.7 billion at that time. When you consider FX movement since the time of the acquisition, the carrying value for EA included in the Test & Measurement segment was approximately USD 1.8 billion immediately prior to the impairment. Due to the slower-than-anticipated progression and recent reduction in industry forecasts of future EV adoption, we have revised our long-term revenue and operating profit expectations lower as part of our annual long-range planning process, which is leveraged in our standard goodwill impairment testing actions. The noncash charge has been excluded from the adjusted results presented in the press release and presentation published yesterday, which I will now discuss.

Adjusted EBITDA margin in the fourth quarter was 20.8%. As expected, this was a year-over-year decline due to lower Test & Measurement volume and a step-up in operating expenses, primarily related to stand-alone public company costs and higher employee costs such as health care. Sequentially, adjusted EBITDA margin increased 40 basis points, driven by higher revenue and our cost savings program, partially offset by an increase in operating expenses. Our cost savings program is on track to achieve $9 million to $11 million run rate of annualized savings by the end of 2026. In the fourth quarter, we delivered $1 million of savings or an approximate $4 million annual run rate.

Adjusted diluted EPS was $0.69, a 15% sequential increase, driven mostly by operating leverage on higher revenue and lower-than-expected tax expenses. This was a year-over-year decline as expected, driven by lower adjusted EBITDA and an increase in interest expense, which was not incurred prior to separation. Our free cash flow for the quarter was $92 million, driven by disciplined capital expenditures and net working capital management, leading to a conversion rate of 117% over the trailing 12 months, which remains above our long-term target of greater than 95%.

On Slides 14 and 15, I'll provide more color on our segment performance and end market trends. In Sensors and Safety Systems, Q4 revenue grew by 6% year-over-year and 3% sequentially. All end markets within the segment had mid-single-digit or better revenue growth. Defense and Space revenue increased 5% year-over-year, driven by robust demand and an increase in shipments while backlog continues to grow. Utilities grew 6% year-over-year, driven by secular growth in grid modernization and expansion driven by electrification and data center demand. Industrial Manufacturing was up 6% year-over-year as we continue to see pockets of growth. We're seeing ongoing positive activity in North America and saw improvement in Western Europe throughout the year. Adjusted EBITDA margin for Sensors and Safety Systems was 28%, a 280 basis point step down, primarily due to higher employee costs.

Turning now to Test & Measurement. Revenue for T&M was $217 million, a decline of 6% year-over-year. Sequentially, revenue grew 7%. Diversified Electronics, which represents roughly half of T&M, declined year-over-year, primarily due to more cautious customer CapEx spending in 2025. However, we saw revenue stabilize and start to gradually improve, leading to 10% sequential growth in the quarter. Communications grew 29% year-over-year and 36% sequentially.

In semi, as Tammy mentioned, we have worked through backlog on a product line related to a large customer project, which we do not expect to repeat in 2026. More broadly in semi, orders have been stable to improving throughout the year. Test & Measurement adjusted EBITDA margin grew 200 basis points sequentially with strong incremental margins and disciplined cost management. Year-over-year adjusted EBITDA margin declined by 310 basis points amid lower volume and higher employee costs.

Turning to our balance sheet and cash flow highlights on Slide 16. We ended the quarter with $319 million in cash and cash equivalents, net of payments to Fortive of $34 million related to the separation. Despite these cash obligations, we kept our net leverage at 1.9x adjusted EBITDA.

Before turning to guidance, I want to remind everyone of our capital allocation priorities on Slide 17. Our top priority remains organic reinvestment. As Tammy mentioned, we are focused on investing in commercial, innovation and manufacturing. Our next priority is returning capital to shareholders. Last week, our Board of Directors authorized our next quarterly cash dividend of $0.05 per share. We also have a $200 million share repurchase authorization fully remaining. We continue to actively monitor the M&A landscape and build our funnel of potential tuck-in acquisitions. We are committed to balancing these capital allocation priorities against our target cash balances and our long-term net leverage target of 1.5 to 2x adjusted EBITDA.

And now turning to our outlook for the first quarter and full year 2026 on Slide 18. For the first quarter of 2026, we expect revenue of $508 million to $522 million or 5% to 8% year-over-year growth, including about 2 percentage points of FX favorability. The sequential step down from Q4 is in line with typical seasonality. As a reminder, Q4 is typically our highest revenue quarter, while Q1 is typically our lowest revenue quarter each year. We expect adjusted EBITDA margin of 17% to 18%. The step down year-over-year is mostly due to higher operating expenses and investments in our growth strategy, partially offset by the benefit of operating leverage on higher revenue. Sequentially, this represents a 330 basis point decline at the midpoint, driven by the seasonal step down in revenue, a small increase in costs as incentive compensation resets to target levels as well as the initiation of organic investments.

I'll note that our tariff assumptions are based on policy announcements as of January 30. With current policies, we expect to continue to fully offset the cost of known tariffs throughout the year. Adjusted EPS is expected to be $0.46 to $0.52 per share in the quarter. For the full year, we expect revenue of $2.1 billion to $2.2 billion, adjusted EBITDA margin of 18% to 20% and adjusted EPS of $2.22 to $2.42 per share. I will note that we have included tables in the appendix of our presentation that show full year 2025 results for your comparison.

This revenue range represents year-over-year growth of 2% to 6% on track with our long-term organic revenue growth target of approximately 3%. Consistent with typical seasonality, we expect to see sequential quarterly increases in revenue throughout the year. Adjusted EBITDA margin of 18% to 20% reflects a 50 to 250 basis point decline year-over-year on a reported basis. Following the spin, we have had structural changes to our operating costs. Given the midyear timing of our spin last year, I want to give a little color to help with year-over-year comparisons for modeling purposes.

In the second half of 2025, we had a ramp in operating expenses, as we have discussed. These are now included in our run rate. And as such, we will be lapping lower pre-spin costs through the first half of 2026. This equates to an approximately 250 basis point year-over-year headwind for the full year of 2026. Excluding this headwind, we expect a 40% to 45% incremental adjusted EBITDA margin in 2026 on a like-for-like basis. This is above our long-term target of 30% to 35% incremental margin and is driven by strong operating leverage on revenue growth and continuing to ramp our cost savings program. I will note, this includes the investment in our growth strategy that Tammy walked you through. We expect to continue to generate strong free cash flow with conversion remaining over 95% on a trailing 12-month basis throughout the year, inclusive of a CapEx at 2% to 3% of revenue.

With that, I'll turn it back to Tammy to reinforce our key takeaways for the quarter.

Thank you, Neill. Let me wrap our prepared remarks on Slide 20. 2025 was a pivotal year as we became a stand-alone public company and charted our course for outperformance. From the announcement of our separation in September 2024 to creating our leadership team and Board of Directors to fulfilling our public company commitments, the team has stayed focused on ensuring we meet our customers' needs and create shareholder value. We completed our separation earlier than anticipated and immediately launched a focused cost savings program aimed at offsetting post-spin dis-synergies. We established a quarterly dividend and our Board authorized $200 million of share repurchases, reinforcing our commitment to returning capital to shareholders.

During this time, we delivered on our financial commitments despite a year with a dynamic macro backdrop. We set guidance as a public company and delivered our first 2 quarters as a stand-alone enterprise with all metrics at or above the high end of our guidance ranges. We have confidence as we enter the year with the separation behind us, strong secular tailwinds at our back and strategic clarity on growth investments.

As I wrap, a big shout out to our approximately 7,000 employees around the globe for their ownership and grit to win as one team. Operator, please open the line for questions.

[Operator Instructions] Our first question is coming from Julian Mitchell of Barclays.

Maybe I wondered if you could flesh out the segment cost growth and how you see that playing out? And what the main focus points are?

Thank you very much, Julian. I'll address your question. In context of the targets that we set at spin, which was our Investor Day in June as well as our growth strategy and to start, we remain confident in the targets that we shared at Investor Day. And just as a reminder, through cycle, we talked about revenue growth of 3% to 5%, 3% of that organic and then low 20s to mid-20s on adjusted EBITDA. That remains our target. And this year, our first capital allocation priority was around executing our growth strategy and investing in that organic growth. So as you heard in the prepared remarks, we're -- we're fueling some of that across innovation, manufacturing and commercial. And then as I look out on the horizon and the annual guidance that we gave, we gave a range of year-over-year growth. And if you think about the midpoint of that range, think about our Sensors and Safety Systems, a little bit on the higher end of that range, and they have the stronger adjusted EBITDA margins, also where we're going to do most of the growth investments and then think about our Test & Measurement a little below that expectation, which puts them in the -- we talked about Test & Measurement mid-teens to the low 20s from an adjusted EBITDA. It would put them in the low end of that range.

So that's what we're seeing over the next 12 months and wanted to give that guidance to everyone.

That's very helpful. And just to try and understand how much reinvestment or top-up is sort of contemplated here. You have the step-up to standup costs you talked about in midyear. Now we have the step-up on the segment costs. Maybe just flesh out kind of what you learned and why we're hearing about this now.

Yes. So thanks, Julian, this is Neill. A couple of things on that. So if you go back and see kind of where we landed, obviously, we've only spun 2 quarters ago. We're gaining more experience bringing the company. And that's actually one of the reasons we wanted to give the full year guide to everyone here to help with modeling purpose to really kind of catch that investment as we start to look forward. As you think about the investment, more geared towards Sensors and Safety Systems, where we think about higher growth rates over time, thinking about utilities, thinking about defense and areas where we feel we've got really nice tailwinds. So we'll continue to invest in those and look to increase the growth rates and I think get very nice returns on that.

Narrowing that down to being a bit more specific, baked into that guidance for '26 is about -- at a company level, about 50 to 100 basis points of reinvestment back into the business, and it's incorporated into the margin numbers that we talked about.

The next question is coming from Deane Dray of RBC Capital Markets.

It was hoping to get some clarification on this 250 basis points headwind. How does that spread across the quarters? Is it front-end loaded? Or should we -- are you expecting -- does that get spread evenly across the year?

Yes. So great question. I'll hit that. So I think if you look at the cost structure of the business, there's obviously lots of puts and takes, number of days in the quarter can change things in terms of what we see. So you can see a little bit of lumpiness there. I think what we're trying to say here is previously, I think back in the 2Q call, we talked about a run rate to leverage about $170 million a quarter. What we're saying now is that's about $175 million a quarter. So that gets you closer to $700 million or so of OpEx for the year when you think about 2025. And then as we move into 2026, I would only think about a modest increase as we're thinking about some of the reinvestment. We obviously leverage RBS everywhere. The teams are working on productivity programs related to operating expenses and our cost of sales on a regular basis. So I wouldn't see it stepping up much further from here. But I think that's -- I think the $175 million a quarter, which gets you closer to the $700 million, that includes our corporate stand-up costs as well. That's a better, I think, jump-off point as to how we think about leaving '25 and going to '26. That would translate to the 250 bps.

Got it. And then just in terms of putting the impairment in context, I mean that's a sizable write-off for the investment in EA. Can you just take us through any other implications in the business? Are there other Test & Measurement businesses vulnerable here? It's just -- the magnitude of the write-off was really surprising given how recently the business had been acquired.

Yes. And this is -- we went through this in the prepared remarks. So this was primarily related to EA. I would read into other parts of Test & Measurement as a kind of a general statement. So looking at the write-down, we obviously spun 2 quarters ago, as I mentioned earlier. We've had some time to evaluate the strategy, evaluate the business. We've been working through that, obviously, and we saw some of the areas we've refined and we're looking forward in terms of advancing forward into 2026. But what changed recently there was we saw the reduction in the EV subsidies in the U.S. I think to a certain extent, that also translated to some pretty significant write-downs with some large OEMs as it relates to EVs. And that just triggered us to reevaluate our own forecast. As we went through our forecast, as we went through our strategy, and we went through the impairment procedures towards the end of the year, which we do every year, it just became clear that we needed to take an impairment and execute that write-down.

Deane, I think the second part of your question. The business fits nicely, folds nicely into the T&M business. It's still a best-in-class technology, measurement technology. It's got a standout engineering team, an advanced manufacturing facility that we're taking advantage of and expect the business at the new levels to be additive to 2026 for us. And nothing else in that test and measurement portfolio that would be -- that we'd have any other issues with.

The next question is coming from Ian Zaffino of Oppenheimer.

Just trying to get a little bit more color on T&M and how to think about it throughout the year. We're seeing sequential growth kind of still down year-over-year, but maybe give us color on what to expect over the next few quarters or so from that. And maybe you could do it by, call it, subcategory, whether it's Europe or communications or diversified electronics. Just any kind of color you could give there would be certainly helpful.

Yes. Thank you very much, Ian. In the Test & Measurement, you saw it's 40% of our overall business, that segment. You saw Q4 down 6%. But what's positive in there is if you look at diversified electronics, it's about 50% of that segment. And we do testing for electronics. So a lift in semiconductor globally will help the diversified electronics space. Predominantly, our go-to-market there is through our distribution partners. And we've seen sequential improvement in that business, about a 10% improvement quarter-over-quarter as we're coming into this year. So the positive part is our partners are seeing good quote activity, we are also very normalized inventory levels, and we're seeing good point of sale. So that's a really good signal for us in this business that have diversified electronics, which is 50% is strong.

The next piece of the business, which you saw is communications. We know those customers. We're working with those customers every single day, predominantly your aerospace and defense customers, your hyperscalers and great growth in Q4. I think it was up 29%. This is also where the new products that were launched by Tektronix in Q4 play. They take some time. These are very high-end expensive instruments. So you go through a pretty long sale cycle here, but we start to see traction in North America in that business.

The third piece of the business, it's the smallest piece of the business, it think it's 9%, 10%. It's our -- it's the pure semiconductor players. And in that business, we're lapping a large customer project. So we'll have some headwinds this year, although underlying semiconductor is doing well.

Okay. And then maybe you could talk a little bit about how to expect -- or how we should think about or how you're thinking about M&A going forward? And I know you took kind of this write-down, but -- and I think you're focused more internally. But how are you thinking of kind of M&A this year? And anything you want to add to? Or are we just kind of going to sit back for right now?

Yes, Ian, M&A is very tied to how we think about our innovation. We've got a really nice RBS process around looking at markets and doing market work. So we are continually active in markets that are adjacent or tuck-ins that will fold nicely into our business. So we continue doing all the work, as we said, and we remain confident in our strategy around tuck-ins, and the first place we're looking is where we're seeing growth, those structural markets that we expect to grow for the next 5, 7 years.

And let me just add to that. I think from a capital allocation perspective, as we think about the -- we talked about organic investments, we talked about returning cash to shareholders. We talked about the tuck-in M&A and Tammy talked about. But I think, first and foremost, we're going to be disciplined capital allocators, as we think about this going forward. So we're taking -- like anything we want to be disciplined, we want to have drive excellence in terms of how we manage this. And that's really what we're focused on right now, ensuring that we find the right targets and as that time comes and we get the right returns on them as well.

Our next question is coming from Joseph Giordano of TD Cowen.

This is Chris on for Joe. Can you comment on order activity in the quarter for Test & Measurement and how orders trended sequentially? And maybe also the book-to-bill for the segment and overall?

Yes. Thank you very much, Chris. We like the positive signals that we're seeing in the Test & Measurement business. Think about a 1:1 book-to-bill in the products piece of that business. We monitor our sales funnel. So our direct sellers spend a lot of time with semiconductor customers and those large communications customers that are predominantly aerospace and defense. And we've seen sales funnels build, we need to see that convert into orders to see the momentum continue throughout the quarters.

We've also seen strength in our distribution partners and that's 50% of the overall T&M business. It's how we get scale and reach to every single place around the globe that's involved in electronics design and our partners are giving us good signals. Our partners are saying quoting activity is up. They've got normalized inventory levels, and we should see that continue and need to see that continue.

Great. And could you help us better understand the level and the nature of the corporate costs embedded in the guidance and the fiscal outlook. Specifically, how large the level of the corporate costs and the cadence as we move through the year. And should we expect that to scale with volume? Or are they largely fixed at this point?

Yes. So first of all, let me just take you back to -- we've talked about some of the costs as we ramp throughout the year. I think the last update we gave was kind of ramping up to about $170 million a quarter in 2025, which is inclusive of corporate costs annually at $50 million to $55 million. And I think the corporate costs in totality, I think have kind of landed where we kind of anticipated last year. Although I would say other costs as it relates to segments, so we have plus 7,000 employees around the world, how we have health insurance and other things that support them, there's business insurance and other items that support them. I think it's really -- we're talking about getting a hold on those things that are embedded into the segments that support the operating teams that are out there right now.

So as we think about OpEx going into next year, like I said, I think the jump-off point is kind of -- think about it on a run rate basis at $175 million a quarter. I think that will come up a little bit modestly, maybe $700 million to $720 million, something along those lines as you get into the guidance range into next year. Just a modest step-up as we look into '26. But as you look at the framework for our margins into next year, I think Tammy hit on it earlier. I think it's the -- if you look at the 2 segments between Test & Measurement and you look at Sensors and Safety Systems. Right now, Test & Measurement with that growth, maybe just below the midpoint of the overall revenue guidance is at the low end of our longer-term range of that kind of mid-teens to low 20s with the lower end of that range. And as we get more volume in there, that's really the way to drive margin as we think about executing in 2026 and beyond.

And Chris, maybe -- this is Nathan McCurren. I just wanted to jump in and add quickly. The -- Neill is talking $175 million of adjusted OpEx. So just to be clear, that excludes amortization. And so we averaged about $175 million in the second half of the year, which is what we're saying is really more the kind of run rate entering 2026.

Our next question is coming from Piyush Avasthy of Citi.

Maybe like one clarification on margin performance in the Sensor and Safety segment in 4Q. I think revenues were up sequentially from 3Q to 4Q, but margins came down. Can you elaborate a bit on that? Like if there is a different mix in the quarter, like is there any competitive or cost pressure or anything that was unique to the quarter? Or is it just like higher investments? And I think -- maybe I missed it, but like can you also frame how you're thinking of margin in '26 for the segment in the construct of your 18% to 20% margin?

Thank you very much, Piyush. If you look at Q4, I called out our Defense & Space business, specifically, PacSci EMC had a record revenue quarter in Q4. And that growth, which is the real positive, comes at a different margin profile.

And then as you look into -- Yes. Sorry, you have a question?

No, go ahead.

Yes. So this construct as you think about going out into 2026. So we talked about the 2% to 6% growth overall as you think about 2026, Test & Measurement being maybe just below the midpoint of that, but Sensors and Safety Systems being above the midpoint. So solid growth year, defense and utilities going into next year. And then the margin structure, we talked about low long-term targets of kind of high 20s as you go into 2026 for Sensors and Safety Systems. We're also seeing a lot of strength in defense, as Tammy mentioned, which is at lower margins than the segment average. So that will mix that down a little bit. If you add a little bit of the organic investment, probably mid- to high 20s is kind of the framework we're thinking about now. But we also see some really nice growth tailwind in that business.

Got you. Helpful. And based on your 1Q and full year guidance, can you comment on your expectations for your major regions, like which regions would you say would have -- you have more visibility or confidence in seeing easier comps across the board, especially in Europe, but any incremental color on the demand trends from a geographic perspective. I think growth in 4Q was primarily driven by Western Europe, while North America was a little flattish. So maybe anything to call out there?

Yes. Thanks, Piyush. The North America and Europe make up 65% of our overall business. And as we've talked about, we have strong secular tailwinds in the defense and utility space. So expecting that to continue into 2026 and certainly baked into the guidance that we gave. Rest of the world, I think it's a sign. We're a very global company, and we have opportunities across the globe that pop up in different regions, predominantly in our Test & Measurement and our utility space. That's been a pretty good mid-single-digit grower for us. And then there's China. And we talked about China as we went through our Investor Day. It's a place that historically, we had seen a lot of growth in the electronics space, and we've resized that and have lowered our expectations. I will say we've seen some green shoots in the sensors and industrial space there where we have a really strong local-for-local strategy. And we've seen strength in the utilities end market in China. But generally, that's where we have lower expectations baked into our guide for the year.

Our next question is coming from Kevin Wilson of Truist Securities.

In Qualitrol, I'm wondering if you could expand on that award with the large cloud provider that you mentioned. I think you mentioned initial orders received in the fourth quarter. I wonder, is this kind of customer win the first of its kind for Qualitrol, which typically sells more to the utilities and OEs? And should we expect more from Qualitrol specific to data centers over and above the general transmission infrastructure Qualitrol sells into?

Yes. Thank you very much for the question, Kevin. A very good observation. So traditionally, the Qualitrol team end customer has been 2 parts. One is directly into the utilities who manage their own health systems, monitoring systems, and into transformer OEMs who sell a full solution into some utilities. So this is a third area that is ramping in their business, which is the hyperscalers that are directly building out their own grid infrastructure for data center. So yes, this is a new customer space, something we've seen coming for a couple of quarters here and wanted to highlight that in the win that we shared.

That's helpful. And then maybe sticking on that slide, the Tektronix AI robotics highlight, I thought was also interesting, particularly as it's on the validation side. Any more color on that engagement? And then maybe broadly how do you view the market share opportunity in validation for Tektronix? And maybe if you could provide an update on the customer adoption of the new product and platform introductions in that workflow that you announced last quarter?

Okay. Kevin, there's a lot to unpack in that one. Let me start with the -- I think the win as we spoke of as a customer, it's a broader statement to AI moving into the edge and all of the electronics I mean we're seeing this in our own lives that electronics are popping up in industries that never had electronics before, and that's good for Test & Measurement when you -- you're an electronic Test & Measurement company. So that's -- that's a signal of more to come as whether it's robotics or other electronics go into new end markets.

The platform that you're speaking of, the MP5000 platform that Tektronix launched in Q4 is the first time that Tektronix has a purpose-built solution for automated testing. This platform is one that has been well received, but we also -- it will take some time to ramp because it's a new go-to-market for us with system integrators that tend to build the test systems in the validation space. We have a small share in that space today. Just they take our bench instruments and kind of pull them into validation. We're expecting this to be a nice growth opportunity for us as we go throughout the year and get the adoption on that space.

So it is a -- it is some greenfield for Tektronix and so far, really nice feedback from customers.

The next question is coming from Rob Jamieson of Vertical Research Partners.

Just wanted to follow up on Deane's question here on EA. A lot of these EV headwinds and everything were -- at least on the CapEx side, were being flagged earlier in the year or even when the new administration came in. So I'm just trying to kind of understand when you went through that process, the revised expectations. What's -- how much of that was the actual reduction in the industry forecast versus EA-specific execution or competitive issues like what's the competitive landscape and high-power electronic load and supply tests? And have you seen any of EA's differentiation holding or eroding?

Yes. So in terms of the timing, as you called out, I think what's changed over the last couple of quarters is, I think the change in the EV subsidies. I think that's translated into other large auto OEMs taking write-downs as well. So I think as we look at that backdrop as end customers for EVs start to make those types of changes as it relates to not just the overall industry backdrop but also the change of the subsidies. It just became more clear as we went through our evaluation at a write-down -- that a write-down was needed.

You could imagine in that space, the customers -- many of the customers -- many of the write-downs are our customers that had ongoing projects or promises of projects that then instantly disappear. So the opportunity in automotive is smaller. However, the technology is applicable to other energy storage spaces, which is where we're directing the EA business now.

Okay. And then I guess you mentioned data center on the Test & Measurement side as well within communications. Can you give us a little bit more on exactly what you're doing in data center, whether that's power or the signal side and then also, what's the sizing within communications for data centers? Is it -- I mean, I assume it's a relatively small piece of that. I guess same question on defense and government, that was called out as being strong communication. But of that bucket, like how big are those 3 areas?

Yes. If you're speaking -- I'll frame it directly in T&M. So let's stay in T&M, because we do have a large defense business in the Sensors and Safety Systems segment. But within T&M, yes, when we talk about communications, I'd say 70%, 80% of that is aerospace and defense. The other piece of that is directly to hyperscalers. But the AI data center, I talk about it as almost a second derivative to raising the tide for all electronics because there's people testing all of the pieces that go into the data center, not only the communications, but the compute, the memory, the storage, and that's part of the ecosystem that ends up in a data center that certainly provides additional electronic Test & Measurement opportunity for us.

Our next question is coming from Scott Graham of Seaport Research Partners.

I'm just hoping for additional color on the projected margin decline in '26. I know you're investing in growth vectors. I know EA is part of that. But the delta does suggest underinvestment from prior. And I guess, I'm just wondering which businesses are you investing in most. Again, I understand the growth vectors, but which businesses maybe do you need to kind of get to a baseline to support their growth because of what appears to be prior under investment.

Yes. We -- and if you look at the annual guide, we had a range on the adjusted EBITDA, 18% to 20% in that range. And if you think about the Sensors and Safety Systems, that will contribute to the higher end and Test & Measurement at the volume in our guide would be more towards the low end part of that. The investments across commercial manufacturing and innovation. I'll start with the most obvious, which is manufacturing. We've had tremendous growth in defense and utilities over several year period. And we're starting to plant the seeds to expand our manufacturing footprint. In this particular year, those investments will be in increased shifts, RBS productivity in the footprint we have, but starting to stand up second lines in by equipment so that by '27 and '28, we expand that capacity.

So that's squarely in the Sensors and Safety Systems as well as where we're fueling some of those sales resources we talked about to get after the growth and to extend our reach. Now the people part of that will be smaller because we're augmenting that with AI and with digital. And then last is platforms. And we've had some recent launches from our Qualitrol business around arc detection, leveraging AI to get more intelligence to those operators who have to keep the electric grid up. We're going to fuel that with some platform investments in innovation. So predominantly in the sensors and safety systems is where you're going to see those growth investments.

Very good. Diversified Electronics, down 13%. I know you indicated that's up 10% sequentially. And maybe you could just tease out how much of that up 10% is seasonal and maybe a comment on January for the company.

The up seasonal. So when I look at the -- or the diversified electronics business, predominantly through our distribution channels. And what we're seeing is healthy sell-through, which is what we refer to as point of sale with inventory levels at a point where we're seeing that come back through higher quoting activity, which are all good signals in the diversified electronics space.

And so the sequential -- the up 10% sequentially, that was not seasonal, do you think?

There is definitely some seasonal piece to the Test & Measurement business, but the 10% sequential -- it's a broader sequential. It's improved as we've gone throughout the year. The Test & Measurement like the overall business has sequentially improved every quarter since Q1. Now that business tends to have a step down in Q1, which we factored into our guide, but I still think the signs there are very good.

Our next question is coming from Chris Snyder of Morgan Stanley.

And I apologize, I joined a little bit late, but I'm not sure if this question has been asked. I understand, obviously, that there's margin headwinds into 2026. But I guess when we specifically look at the Q4 to Q1 kind of sequential progression, I think at the midpoint, you guys are guiding it down about 330 basis points which seems steeper than normal. So is that sequential -- is that all just the higher investment that you guys are making in Sensors and Safety? Is it some of the mix headwinds that are continuing in Sensors and Safety? Just kind of why is that stepping down so sharply?

Yes, Chris, great question. This is Neill. So let me take a shot at that. So as you look at the transition from 1Q -- sorry, 4Q into 1Q, we've discussed previously, and I think we laid this out last quarter, that we anticipated from a guide, I think gave you 20% to 21% EBITDA for the company going out of Q4, about a 200 to 300 basis point decline going into Q1. So that would get us close to 18%. And we're guiding just a little bit below that. So I think what we have here is maybe a little lower, but consistent with how we talked about it in terms of seasonality in the business.

As it relates to why is it a bit higher, I think from just a natural perspective, it's going down a bit. We're also seeing a few things like conversation true-ups as you get into the start of the year. We are going to see a small initiation for some of these organic investments. So I would think about that outside of Q1 for the most part, think about healthcare costs being a little bit inflationary. So I think outside of the kind of midpoint of what we thought about, there's a couple of pieces that are driving a slight increase versus what we had said. But I think otherwise, more or less in line.

I appreciate that. And then on some of the investments that you guys are making into the businesses, -- when do you think that will have a positive impact on top line? Is there some of that benefit that's included in the '26 sales guide? Or do you think those benefits will more so pay off in '27 and beyond?

Yes. We have embedded the goodness in those investments into the guide for 2026. And there's always room to overdrive especially on sales resources if they can come online faster but predominantly, that investment will be in 2027, will pay off in 2027.

Ladies and gentlemen, this brings us to the end of the question-and-answer session. I'd like to turn the floor back over to Ms. Newcombe for closing comments.

Thank you for your questions and for being with us today. I'd like to wrap up the call with a few closing remarks. While public for only a short time, over the last several years, we've undertaken deliberate actions to create a sustained streamlined portfolio with world-class leaders. One of our greatest strengths is the passion and commitment of our employees to win as one team. We're executing against our growth strategy by leveraging RBS to compete across businesses with stronghold positions and in secular high-growth vectors. We expect RBS to continue to serve as a competitive advantage, enabling customer innovation and operating efficiencies, ultimately enabling us to perform with financial discipline. Our teams have demonstrated operating rigor with the ability to profitably evolve our portfolio and deliver in any environment. We are resolute in our commitment to supporting our customers, inspiring employees and delivering for our shareholders. Thank you for joining us today. I hope you have a great one.

Ladies and gentlemen, this concludes today's event. You may disconnect your lines or log off the webcast at this time, and enjoy the rest of your day.

I'm Rob Mason, the Senior Analyst at Baird's that covers the Advanced Industrial Technology sector. Very happy to have Ralliant here with us. We're going to open with Tammy Newcombe who is going to make a few opening comments. Tammy is the CEO of Ralliant. We also have Neill Reynolds, the CFO, with us on stage. And then we'll take your questions as you have them. You can send those up via the iPad. You can also just raise your hand, and we'll work those into the conversation. So very happy to have Tammy here with us, and I'll turn it over to you.

Thank you, Rob. Welcome. Glad to be here. We are Ralliant, and I am the President and CEO, Tammy Newcombe. Last week was a big milestone for Ralliant as we had our first earnings call as an independent public company. And I applaud the team. We did a lot in that quarter. We spun from our former company. So we had to land the spin, a number of new hires, especially in our corporate functions as well as standing up new processes and systems and still delivered at or above our metrics that we had guided for the quarter.

So I'm an old sports player. I know that, that's just one quarter on the scoreboard, but proud of the team for posting that first one. This begins our journey to become a company that's built to last, one that's going to endure for decades to come. We spun about 5 months ago, it was June 30. And as I stand here today, I'm even more excited about the opportunity that we have in front of us. And I'll give you 3 reasons for that. First, my leadership team. The presidents that run our businesses were handpicked over my 8 years at the former company. So lots of stability in those businesses. Our newest President is almost 3 years into the business. They were picked for their depth of knowledge in those industries and also the rigor with which they go after that business and their knowledge of the business system, which was born back at Danaher, and we have now refined as the Ralliant Business System.

Number two, what gets me excited. We introduced our profitable growth strategy at our Investor Day, and we talked about our growth vectors. And I have even more conviction over the last 5 months that these growth vectors are places where we'll see long-term secular trends and give us the opportunity to drive above-market growth. Third is just the discipline. And Neill has joined us recently as the Chief Financial Officer, and he's remarked a number of times about the discipline that's in this business. The leaders that I hired externally, they come from a variety of backgrounds. We've got depth in industrials, health care, defense systems, consumer, enterprise systems, all have worked in scaled enterprise businesses as well as emerging start-ups. So great leadership team, great growth vectors and the operating rigor that we bring with us.

My commitment continues to our employees, to our owners and to our customers to build a company that's here to last. I'm going to jump to our first slide here. So we're going to start with Slide 4. So let's just talk a little bit about our customer base. Our customers are the world's largest industrial and technology companies, 2 emerging start-ups, about 90,000 customers around the globe. When we walk into those thresholds at those companies, we're going to talk to the engineers, the scientists and the innovators that are on the forefront of the next breakthroughs, the next breakthroughs that are happening in the electric power grid, in fuel cells, in defense technologies and electronics.

When I think about what really makes Ralliant different, it's around precision. Precision where precision matters. Precision is hard to engineer. We often build our own components, our own ASICs to deliver that type of precision. We have patents in our manufacturing process, how we build for precision. Our sales organization and our channel is very technical, very application-oriented so that we can work with those personas I spoke of. And we service all of these products around the globe, either in service centers for our precision instruments or in our MRO business in our sensors. But that is truly what makes us different, combined with the Ralliant Business System.

Our business is diversified. You see here the diversity by end markets, end markets that are driven by different market drivers, which gives us that diversity. We're also diversified geographically. About half the business is in the U.S., half the business is outside the U.S. And then you see our flagship brands. These are the brands that our customers know. If you talk to our customers, they've been working with these brands for decades. They often refer to them the brand almost like Kleenex. They know these brands and they know what they do well. I mentioned our customer base, 90,000 strong. And last year, we were $2 billion with 7,000 employees around the globe.

We report and operate as 2 segments. Our Sensors and Safety Systems segment is 60% of our business. And here, you will see our deep expertise in defense safety systems. So think in defense, anything that flies or is submerged, and the higher you go into the atmosphere, the harsher the conditions and the more the quality and reliability matters. In our sensors in the industrial space, they're in very niche applications where we have domain expertise and strong competitive moats. And in our business called the Qualitrol business, this is where we build critical sensors that go in the infrastructure of the electric grid.

If I shift to the Test and Measurement segment, it's about 40% of our business. This is the business that we build and sell precision instruments used by electronics engineers to build the next level of electronics from materials to semiconductor chips to the chips that go on the boards that need to be tested, those boards go into systems in the whole product realization flow. We provide instruments, software and services for that market space.

Our growth strategy. I talked about the Ralliant Business System a couple of times. This Ralliant Business System is used from where most people remember its roots, which is in lean manufacturing to how we drive innovation. We had 2 platform launches from our Tektronix business this last quarter. And both of them are state-of-the-art high-performance systems that came to market through a lot of customer VOC and driven by customers in our RBS toolkit.

Our stronghold positions. This is where we have critical sensors in industrial applications. These are Austin niche markets where we add a lot of value not only in the product, but in our domain expertise of serving that market. I used an example in our earnings call around liquid cooling for data centers. We have a particular sensor that is ideal in that application in a place that we're seeing some growth. But in stronghold positions, we are committed. That is our installed base. We are committed to road maps and continuing to strengthen our MRO business.

And then our winning growth vectors. I'm going to dive into each of these fairly quickly. In defense, we're seeing a surge in demand for our defense business. And maybe a little bit later as I speak with Rob, we can dive in deeper on some of the signals there, but even stronger signals than we talked about 5 months ago. In our power grid business, these are -- where we play is we surround the critical assets in the grid with sensors and with analytics solutions that help our customers with maintenance and predictive troubleshooting in the space.

Our next growth vector is around electrification. And anything that touches electronics is a place that we serve with our precision instruments and our sensors. I'll close out by just talking and reiterating that we developed the value creation that we feel strongly about. We're still committed to as we step into this new business. We want to drive outsized growth. We want to continue to deliver the strong profits that we did as a segment and now as a public company. That includes driving outsized free cash flow and continuing to be disciplined about our capital allocation.

Thank you, and I'll turn it to questions now.

Perfect. Again, if you have any questions, send those up to the iPad or just raise your hand, we'll work those in. Tammy, maybe just to touch on to start, something you mentioned at the beginning. Obviously, you're fresh off your separation from Fortive, the spin itself. Sometimes I think investors don't fully appreciate all the work that goes into that. And it's not just -- it's not done on the spin date. It's beyond that. So just maybe talk about where you think you are in that process, building out the internal structure that you need and maybe when you can be beyond that?

Yes. I would start with a reminder that the company we spun from was a spin. So there was a lot of embedded knowledge on how to do a spin. And we were the second spin that our former company did. So process to do the spin was well worn and understood. If anybody had been following, we were supposed to spin at the end of this year and actually pulled it forward 2 quarters and spun 6 months early. So we really felt like we were ready to become a public company. That said, there's a lot of lift and shift in systems and processes that we're refining to be Ralliant and for our size and our employee base.

We also have to -- we have very, very small TSAs. The TSAs are mostly linked to the services business that we carved out because this was a segment. So that's another piece that makes it pretty simple as this was a segment that we just shifted to a public company with the exception of about $100 million in services that we left with one of the other businesses. So we've got some TSAs to wind down. We've got a little bit of -- we've got some money still to pay back to the parent company. But I would say we're in a really good place from the spin standpoint.

Very good. Maybe just dive right into some of the businesses, start with your larger segment anyway, the Sensors and Safety segment. The opportunity set there, high level, as you mentioned, kind of 2 main markets, defense tech and grid modernization. In the marketplace today, how -- and these businesses have been around quite some time inside this ownership. So how are they evolving to meet kind of the growth opportunities that you just outlined? It sounds like they're accelerating because for people that have followed this Fortive or even going back to Danaher, we didn't hear a lot about these. We certainly didn't hear a lot about the growth vectors within those businesses. So just kind of bring us up to date and what's most positive, I think, as you look forward here?

Yes. So these are exciting businesses. They're really strong profitable businesses. And if I think about the defense space, you can look back over the last 65 years, and there's been 2 times in the 65 years where defense spend has gone on for a 10-year period or more. We believe where we sit today that, that is what we're in the middle of right now. We're about 3 years in. It's our PacSci EMC business. We're on many of the critical and core defense programs that there's a lot of activity right now on additional spend over the coming years. And we have a great backlog there. We've got almost twice our annual revenues already in backlog, established for '26, '27 and for '28.

So we feel really good about that business. We're working on capacity and throughput. We're working on strategic supply chain. If I shift over to a business that plays in the power electric grid, a couple of data points there. In the U.S., almost 70% of the infrastructure in our grid is over 25 years old. So even if we didn't add any more power to the electric grid, there's still an enormous opportunity to upgrade the infrastructure that's out there. And we ride parallel to transformer sales. So there's about a 2-year wait list right now to get a transformer any place in the world. So that's one part of the business.

The other part of the business, because transformers are backed up, there's a lot of retrofits and refurbishment going on. When that happens, we also have an opportunity to upgrade those critical sensors that monitor those assets and add more sophisticated software and analytics. We announced a quarter ago an AI-driven analytics package that allows customers to say, well, if this sensor, this sensor and this sensor read these numbers, that typically means in our 50 years of data that this is about to happen and give predictive maintenance guidance. So exciting, both places, exciting opportunity.

Yes, for sure. If we -- just to go back to the defense PASi business, if you think about -- obviously, we're exposed to broader defense spending, but are there 2 or 3 barometers that we should look at maybe externally to get a sense as to where your business is headed? You talked about you're more positive than you were 5 months ago. I'm just -- what areas should we be focused on that are discrete growth drivers for that business?

Yes. Specific to that business, we get good signals from customers. So customers tend to give us orders with 3-year visibility. So when I talk about the backlog we have, that's the first place where I'd say that visibility is helpful in the business. The other is the quoting activity that we've seen. And there is 12 core military programs that have been deemed critical for replenishment and some are calling this a demand surge that we're going to be going through. We haven't seen those orders yet, but we're seeing a lot of the activity happening in the quoting activity, and we will get visibility. Those won't be 2026. That will be '27, '28, '29 as we start to see that demand. So we get long-term signals in that business, which is super helpful for planning capacity.

Yes. And maybe what are -- what does the decision tree look like when you're assessing when and how much capacity to add in a business that's as long cycle as this?

Yes. We've been able to double the capacity of the footprint that we have. As part of our strategic plan process, we look 3 years in a cycle. So think of it as a rolling 3 years. We're always looking at where the business is going, do we have the capacity? The Ralliant Business System, the toolkit has really allowed us to drive the throughput in the current existing facility.

We do believe as we get into the latter half of 2026, that there's some opportunity to establish some centers of excellence specifically around electronics. Electronics, the company -- you think about energetic materials that they do, like very precision timed explosives, but the electronics is really a capability that's critical for this business. So we're talking about a center of excellence around electronics. And then probably by '27 and into '28, we'll need to expand the footprint.

And Rob, let me just add to that a little bit. So when we think about the investments we're going to make from a capital deployment perspective, we talked about focusing first on organic growth, giving cash back to shareholders, number two, and then may be some tuck-in M&A along the way is number three. So this really aligns well to the kind of that organic investment strategy. In fact, we talked about taking our CapEx rate up from 2% of revenue to between 2% and 3% of revenue as you get into '26 to support some of the opportunities that Tammy is talking about here, both in defense and utilities as well.

So we're going to continue to look at where do we have these long-term growth drivers, where do we have great signals from our customers around where that long-term growth opportunity is. And then the returns from an organic perspective are very, very solid, very, very good. So we feel like we're in the right position. It's consistent with how we think about our capital deployment as well.

Can capacity expansion in this business come via inorganic means?

Look, like I said, there's 3 levels to this. If you look at, number one, from an organic investment, we just kind of talked about that, returning capital to shareholders will certainly be kind of #2. And then there can be tuck-in opportunities along the way, and that will play a role, I think, about how we think about expanding these businesses over time. We're going to start with that organic investment and we have something like this, I think, in front of us that has this really nice setup from a growth vector perspective, has multiyear kind of legs to it that just provides a great opportunity for us to get really nice returns off of the organic investment.

Yes, I would put it in priority order. Tuck-in -- if we did tuck-ins or inorganic, the priority is growth. If we got a manufacturing facility with it, then that would be an added benefit. But right now, our thinking is that we would expand.

Yes. Okay. Just to the utility business, a quick question there. I mean, to some degree, I guess, transformer production can be a gating factor, I guess. How are you trying to work around that? And then what's your opportunity to add to your dollar content within the installed base as you think about retrofits?

Yes, 2 great questions. We play about 50-50 in new builds and refurb and retrofit. So the nice part about if the transformers can't keep up coming off the line new, there's a lot of work going on, on retrofits and refurb that we take advantage of about 50% of the business. And the way that you can think about the Qualitrol business is they have the highest number of sensors that would go on one of these assets. So what they've built out is a bronze, silver and gold package solution, which is pretested. It takes work off the customer because normally, the customer get these individual sensors, they'd have to put them together, light them up, read the data, figure out what's going on.

What we started to move to, and this is about 2 years ago, is solution. So you can say I want the bronze package, silver package, gold package, not only does it come with pretested sensors, it also brings you that analytics and that software that give you the answers to the problems you may be facing. So that's how that business is evolving from an individual sensor product business into a solutions software and analytics business.

Yes. Again, if there's any -- I'll pause here,if there's any questions, we'll keep moving. There's one there in front, yes.

Yes, just some of the end markets you're talking about defense, power grid, and data centers, obviously, they are quite healthy growth markets, kind of high single digit market. You talked, I think on the slide was kind of 3% to 5% as the target. Are there parts of the portfolio that are growing below that and is there a path or way to get those higher [indiscernible]?

Yes. I would start with, I spent 30 years in sales. My team knows that we're seeking the growth pockets -- the profitable growth pockets that we can go drive growth beyond those numbers. I think it was prudent to spin out our track record from 2019 to 2024 was total growth, 3.5%. We gave a range of 3% to 5% to show the stretch in there. But there are certainly parts of the business that are growing faster than that. Defense is one we've talked about. That's been high single-digit type growth here over the last couple of years.

And similarly, with power grid, we've seen some green shoots in industrial, especially in North America. We're starting to see some green shoots. And Test and Measurement, I've been talking about this since Q2, and it's played out the way we guided, which is Q1 would be our lowest quarter of the year. And each quarter, we've gotten incrementally better from a revenue standpoint and sequential growth. Now our year-over-year is still negative, but sequentially, we've improved as we've gone through each quarter of the year. And I think there's going to be -- continue to be a modest recovery in the Test and Measurement space.

That's a good segue into Test and Measurement. That's where we were headed next. As you think about drivers and catalysts behind trying to get some growth to return in Test and Measurement, you talked about a couple of new products. I think maybe we're reluctant to think any single new product can be that impactful, but these seem like kind of significant new launches for you. How should we put those into context in terms of near intermediate-term contributions? And does it open up any new markets -- served addressable market for you as you launch these?

Yes. I'll separate the 2 products. We think in Test and Measurement about the engineer -- the product realization workflow, which starts usually in materials lab, R&D type lab environment. Then those products go into a validation phase where you do 24-hour, 7 days a week sort of testing on them before they get launched into the production space where Tektronix has a very strong footprint, probably 40% of the available market there is in the R&D space. And the platform that was just announced, I call it both a product and a platform because it is a product. It's a product that we've introduced for the R&D space, state-of-the-art, lowest noise in the industry.

So electronic engineers are seeing signals for the very first time, signals they didn't know exist, they're able to see. That's positive. We will get refreshed there. Some of our existing footprint will refresh. We'll also take some share there. We'll expand in that space. The other product that we introduced is the MP5000, and this is an adjacency for Tektronix. It's in the validation space, a space where our market share is like mid-single digit, 4% to 5% sort of happenstance, engineers tend to take our bench instruments into validation.

This product was built with a validation engineer in mind. It's purpose-built for running code and applications for weeks at a time. It's a 1U, like 1 rack unit, if you think of a rack like in a data center or a lab. And it's got hot swappable modules in the back, SMUs and power supplies, and you can make a rack of 32 of these. Now that product will be sold into a lot of system integrators to build out test systems. So the ramp on that will be a little bit slower than the places we've always played.

But that is opening up an adjacency, opening up new market and coming at it in a way that we're approaching it with an open ecosystem, open source code, engineers can use Python, they can use our test script. They can use any established software in the industry. So we're trying to open up the ability for engineers not to be locked into a single provider, but to use any software tools that they want. But that's definitely an adjacency and a new opportunity for the team.

Yes. Yes. That makes a lot of sense on the software layer. Maybe just to wrap on the Test and Measurement business. One of the challenges, I think, has been the China market. You talked about some changes in the selling conditions there, I think, on the last call. What -- how do we go forward within China? Are we looking beyond China into India and other regions as maybe some of the talent also moves out of China? How are you managing that?

Yes. We have a very strong team in China. Our leader for China is a 20-year established veteran and just been at the forefront of helping us navigate this. As a U.S.-based company, there are companies now that we cannot sell to in China. So it's a smaller served market. We addressed that over a year ago with restructuring and rightsizing the organization. And we've seen it be quite stable. So last 4 or 5 quarters, orders, it's been a little up and down on shipments. But on an order standpoint, it's been very stable. So I think we've got that right. And then we've had some programs on follow the money. And when our customers are leaving China following where they're going, whether it's Southeast Asia or India or back to the U.S., we've got pretty good signals on following that.

Very good. I want to touch real quickly before we run out of time here. Just around the margin profile of the business, 2 distinct maybe stages that we're in between the 2 segments. Your targets, Sensors and Safety is already in the zone that you have targeted. Maybe talk about potential upside to that? And then what needs to happen to bring Test and Measurement up? Is it just volume to get those within the target range?

Yes. So if you look across the 2 businesses, you're right. So the Sensors and Safety Systems business runs at kind of that high 20s EBITDA percent level. Test and Measurement, we had kind of target maybe mid-teens to low 20s over time, and that's through cycle. We're obviously coming through the down part of the cycle and starting to see some stabilization as it returns. So -- but the business, as you mentioned, it is volume sensitive. We saw an improvement in margins as you look just from this last quarter, going from 2Q to 3Q, we saw 400 or 500 basis points of improvement from a margin perspective just on relatively modest growth, 4%, 5% type growth.

So -- and we anticipate seeing that going forward as well. But it will be driving the volume, driving efficiency, bringing on the new products that Tammy has talked about to help drive growth. And I think that puts you in a zone where you start to see us through cycle. We have a lot of confidence we can get into that zone as you look out over time.

Now one thing we did bring up, Rob, as you think about the business is, it is volume sensitive. We saw it come up. It will probably increase again as you go here into the end of the year into Q4. And as you get into Q1, though, as you go out into next year, there is some cyclicality, seasonality that will start to see it come back down the other way as you get out into next year, and that will start to see the margins come back and then improve again as you come out over time. But the key here is driving volume, driving competitiveness, as Tammy talked about, and that should through cycle, improve the margins over time.

Excellent. We're out of time. We'll wrap there, but I want to thank Tammy and Neill for joining us. Thank you.

Thank you, Rob.

Thank you.

Good to see you.

You too.

Hello. My name is Donna, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Ralliant Corporation's Third Quarter 2025 Earnings Results Conference Call. [Operator Instructions] I would now like to turn the call over to Nathan McCurren, Vice President of Investor Relations. Mr. McCurren, you may begin your conference.

Thank you, Donna. Good morning, everyone, and thank you for joining Ralliant's Third Quarter 2025 Earnings Call. I'm Nathan McCurren, Vice President of Investor Relations. Today, we'll walk through our third quarter 2025 results, highlight key operational progress and provide an outlook for the fourth quarter. I'm joined today by Tammy Newcombe, our President and Chief Executive Officer; and Neil Reynolds, our Chief Financial Officer.

Our earnings release issued yesterday and today's presentation can be accessed on the Investors section of our website at ralliant.com. Please note that we'll be discussing certain non-GAAP financial measures on today's call. A reconciliation of these items to U.S. GAAP can be found in the appendix to our presentation. During today's call and unless otherwise stated, we're comparing our third quarter 2025 results to the same period in 2024. During the call, we will make forward-looking statements, including statements regarding events or developments that we expect or anticipate will or may occur in the future. These forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from any forward-looking statements we make today.

Information regarding these risks and uncertainties is available in our information statement filed with the SEC on May 28, 2025, and our quarterly reports on Form 10-Q filed with the SEC on August 11, 2025, and to be filed on November 6, 2025. With that, I'd like to turn the call over to Tammy.

Thank you, Nathan. Good morning. Welcome to Ralliant's third quarter earnings call, our first reporting period as an independent public company. The team approached the post-spin separation with discipline and focus, stepping into new roles and implementing refined processes, all while delivering quarterly results that were at or above the high end of our guidance ranges. On today's call, I'll start with a brief overview of Ralliant and a high-level look at our financial performance. Next, I'll invite Neil to share deeper insight into our Q3 results, the Q4 outlook and discuss considerations as we move into 2026.

Then I'll be back to showcase progress on our profitable growth strategy, leveraging the Ralliant business system. Slide 4 highlights what makes Ralliant different. We stand at the forefront of precision, driving safety and breakthrough performance through advanced technologies that perform in demanding environments. Our solutions help ensure reliability, safety and efficiency when failure is not an option. We continue partnering with our customers to unlock advancements that will change the world and have an impact for years to come. We develop and manufacture precision solutions globally across diverse end markets.

Our portfolio of trusted brands has earned our customers' confidence by delivering precise instruments, sensors and safety solutions that enable faster customer innovation. As electrification, digitization and AI accelerates the demand for high-performance, data-driven equipment, we meet these needs by serving customers in critical markets such as utilities, defense and electronics. What truly sets us apart is our people-first culture ingrained in decades of precision, expertise and the Ralliant business system. This has enabled us to solve our customers' toughest challenges in the many applications that we serve, earning customer trust and positioning us well for future growth.

With that, let me provide the key takeaways from the quarter on Slide 6. First, all our financial results were at or above the high end of guidance ranges we provided last quarter. demonstrating our commitment to delivering results while executing our long-term strategic priorities. Second, we are delivering high growth in the utilities and defense end markets and sequential improvement in test and measurement and industrial manufacturing. Third, we are executing our levers to drive growth and innovation. This was demonstrated in the quarter as Tektronix launched 2 new high-performance precision instruments architected to be scalable platforms that will accelerate our new products road map. Fourth, we delivered significant free cash flow with a conversion rate above our long-term expectation of greater than 95%. And last, we progressed on our cross savings program that we announced last quarter to deliver $9 million to $11 million in annualized savings by the end of 2026.

Drilling down into our Q3 financial results on Slide 7. Our revenue was above the high end of our guidance range. We continued to deliver sequential improvement with 5% growth over Q2. We -- this was driven by secular demand in several end markets and improved shipment execution, particularly in defense. We expanded adjusted EBITDA margins by 60 basis points sequentially to 20.4%, reaching the low end of our long-term through cycle target range that we communicated at Investor Day in June. Turning to Slide 8. Our growth has improved each quarter throughout the year across most regions. North America turned positive with 3% year-over-year revenue growth driven by exposure to our growing Defense and Utilities end markets. We also delivered sequential improvement with green shoots in industrial manufacturing and test and measurement.

While Western Europe experienced a 6% decline, largely driven by customer cautiousness, we remain actively engaged with customers and partners across the region. China is also down 6% year-over-year as we continue to see cautious demand amid geopolitical headwinds. China macro leading indicatives have shown signs of recovery, but we expect continued pressure driven by export controls, tariffs and an uncertain environment. China was a significant driver of test and measurement growth for Ralliant from 2021 through 2023, but selling conditions have changed. In 2024, we executed a restructuring of the team in China, since then we've been investing to capture new opportunities in other markets such as India and Southeast Asia.

While there are still puts and takes within each region, our teams are focused on strengthening relationships and positioning ourselves strategically so that when spending resumes, we are ready to capture growth opportunities and accelerate momentum. I'll now invite Neil to go over our financial results and provide some insights on expectations for the balance of the year.

Thank you, Tammy. Please turn to Slide 10. During Q3, we generated $529 million in revenue, roughly flat year-over-year as growing demand in sensors and safety systems and pricing actions across the business were offset by cautious customer investment in test and measurement. Notably, we achieved a 5% sequential increase in revenue, driven mostly by higher shipments on a growing backlog in defense and a seasonal step-up in test and measurement. Adjusted EBITDA margin declined year-over-year, driven by lower test and measurement volume and a step-up in operating expenses. Our adjusted operating costs were $170 million, consistent with the expectations we laid out on our second quarter earnings call.

Adjusted EBITDA margin increased 60 basis points sequentially, driven by a 200 basis point increase in adjusted gross margin, primarily due to operating leverage on higher revenue, partially offset by an increase in operating expenses. We also fully offset the cost of tariffs in the third quarter, ahead of our year-end goal. As a reminder, we expect the pricing countermeasures to continue to be a small gross margin percentage headwind, but we now expect this to be closer to 50 basis points on a run rate basis given additional countermeasures we executed this quarter.

Adjusted EPS was $0.60, in line with the top end of our guidance range of $0.54 to $0.60. This is a reduction year-over-year, driven by lower adjusted EBITDA and the addition of $16 million of interest expense this quarter following the spin-off. Looking at the results, please note that adjusted EBITDA and EPS contains several non-GAAP adjustments. There are 2 unique items this quarter I would like to shed more light on. First, we are making a $22 million non-GAAP adjustment related to a stock-based compensation modification, which is a spin related mark-to-market expense associated with Ralliant team members who transitioned from Fortive. This was a onetime noncash expense due to the equity conversion at the time of spin.

For our normal practice, we are not adjusting for stock-based compensation expense from new equity granted in the period. Second, we are making a non-GAAP adjustment to exclude a $12 million favorable noncash discrete tax item related to a reduction in the German corporate tax rate. Now turning to cash. We generated $127 million in free cash flow, representing a conversion rate of 185% in the quarter. Over the trailing 12 months, our free cash flow conversion rate has averaged 124% and significantly exceeding our long-term target of over 95%, underscoring our focus on operational efficiency and working capital management.

On Slide 11 and 12, I'll provide more color on our end markets and segment performance, starting with our larger segment. In Sensors & Safety Systems, Q3 revenue grew 11% year-over-year and 5% sequentially. Higher volume was led by increased demand in defense and utilities. Defense & Space revenue grew 18% year-over-year. We saw higher shipment levels in the quarter and backlog continues to grow. Utilities revenue grew 11% year-over-year driven by the continued investment in power grid modernization and expansion. We also had pockets of growth in industrial manufacturing, which grew 9% year-over-year in the quarter after delivering stable revenue for the preceding 6 quarters.

Adjusted EBITDA margin for Sensors and Safety Systems was relatively flat as positive volume leverage was offset by higher post-spin employee costs. Moving to Test & Measurement. Demand continued to stabilize, which combined with a typical seasonal step-up generated 6% of sequential revenue growth. Year-over-year revenue declined 14% as customers remain cautious with capital investment, and we compare against some large projects in the prior year period. We have seen momentum start to build in the communications market with Q3 representing the highest revenue and order quarter for the year.

Revenue declined over 30% year-over-year as we are lapping about $15 million of projects from a customer in the third quarter of last year. Sequentially, revenue grew 6%, primarily driven by military and government customers. Diversified electronics revenue declined year-over-year, most pronounced in China and Western Europe. Semiconductors revenue grew both year-over-year and sequentially, as we work through backlog. Orders remain at low levels as power CapEx remains largely on hold for many customers. We are seeing semi customers defer R&D lab investments while they focus on AI infrastructure investments and maintenance CapEx.

Adjusted EBITDA margin in the segment grew 480 basis points sequentially, with strong incremental margins on revenue growth and disciplined cost management. Year-over-year, adjusted EBITDA margin declined about 10 percentage points, driven by volume decline and the higher post-spin employee costs. Turning to our balance sheet on Slide 13. We -- we ended the quarter with $264 million in cash and cash equivalents as well as $1.15 billion in term loan debt, resulting in 1.9x net leverage. Our cash balance increased $65 million versus Q2, including the expected payments to Fortive and tax authorities. We have paid $57 million of approximately $90 million for Fortive commitments related to the spin-off and expect the remaining roughly $35 million to be paid during Q4. Turning to capital allocation on Slide 14. Our priorities remain intact.

First, invest organically in the business, second, return capital through dividends and share buybacks; and lastly, executing selective tuck-in acquisitions focused on our high-growth vectors. Our commitment to organic reinvestment was demonstrated with our new product launches in the quarter. As we look ahead, we see meaningful opportunity to continue to invest in growth and anticipate ramping CapEx from approximately 2% currently to between 2% and 3% of revenue in 2026. We remain focused on deploying capital and high-return opportunities. Last week, our Board of Directors authorized a quarterly cash dividend of $0.05 per share. We also have a $200 million share repurchase authorization in place.

We are committed to balancing these capital allocation priorities against our target cash balances and our long-term net leverage target of 1.5 to 2x adjusted EBITDA. Before I turn the call back to Tammy, I want to review our outlook for Q4 2025 as well as provide some color on the seasonality of both segments to help you understand Ralliant better. I'm now on Slide 15. For the fourth quarter of 2025, we expect revenue of $535 million to $550 million, a continued gradual improvement with consistent shipment delivery in sensors and safety systems and a typical small seasonal step-up in Test and Measurement.

We expect adjusted EBITDA margin of 20% to 21%, in line with Q3 and adjusted EPS of $0.62 to $0.68. Free cash flow can naturally fluctuate based on the timing of certain payments. Following this outsized quarter, we expect free cash flow to be down sequentially in Q4. For the full year, we expect our conversion rate to remain above our long-term target of over 95%. Turning to Slide 16. To help you with your planning as we look ahead to 2026, I want to provide color on the historical seasonality of our business and outline some of the important timing factors in 2025 and given our midyear spin.

Let me touch on our normal seasonality. As we start to look ahead to go from what is typically our highest revenue quarter of the year in Q4 to what is typically our lowest revenue quarter of the year in Q1. Over the past 10 years, the seasonal sequential revenue step down from Q4 to Q1 has been in the mid- to high single-digit percentage range. Given our operating leverage, particularly in our more seasonal Test and Measurement business, this typically results in a roughly 2 to 3 percentage point sequential decrease in EBITDA margin. We have also included on Slide 16 items from 2025 to keep in mind that will impact our comparisons next year. including the impact of tariffs, spin-related costs, interest expense and our cost savings program.

We will provide more details on our expectations for Q1 on our fourth quarter earnings call in the new year. but we hope this color is helpful as we continue to learn more about Ralliant. With that, I'll turn the call back to Tammy to talk through an update on our profitable growth strategy.

Thank you, Neil. I'll continue with Slide 18. Our profitable growth strategy is anchored in 3 pillars that are designed to deliver enduring value. The first pillar is RBS everywhere. RBS is our engine for innovation, scale and profitability, and we have embedded its processes and tools across the enterprise to drive disciplined execution and increase customer-centric innovation. Second pillar is stronghold positions. We are committed to delivering sustained customer value through differentiated services, robust product road maps and global channel reach.

This quarter, we expanded our footprint with strategic wins, including 1 of the world's largest motor producers, a leading steel supplier and a global pioneer in direct air capture technologies. These customer partnerships reinforce our ability to perform reliably in demanding environments and critical applications. The third pillar is winning growth vectors where we are investing to capture secular growth trends, specifically across defense technologies, grid modernization and electrification. I want to highlight where we're focusing our efforts in how our portfolio investments align with long-term demand trends and shareholder value creation.

Starting with Defense Technologies. We expect the super cycle of investment in defense programs to continue with global annual defense spending projected to increase from $1.8 trillion last year to $3 trillion by 2030. Our defense customers have been awarded multiyear contracts on many critical programs that include our Paksai EMC safety systems. Our backlog, which is now over 2x our annual revenue has continued to build throughout this year as customer demand has outpaced shipments. We continue scaling production of these essential solutions to support the U.S. and its allies. To serve this surge in demand, we are leveraging RBS to increase the production capacity within our existing manufacturing footprint and future expansion is a key area for organic investment.

Shifting to power grid modernization. Utility companies are investing in both expansion and upgrade as they face significant increases in power demand with aging infrastructure. Expansion investments are needed to support power demand growth, which is expected over the next 5 years to be 6x higher than the prior 20-year average. Upgrade investments are needed as over 70% of power transformers in the U.S. are more than 25 years old. We are capitalizing on this customer demand with sensors and analytics solutions for the power grid critical assets like generators, transformers and substations, resulting in 14% revenue growth in our utilities end market year-to-date.

Our last growth vector is electrification. As the world becomes more electrified, we help customers innovate and enable much of the supporting infrastructure. A great example of this in Q3 is our growth in data center applications where Gen Setra provide sensors for both liquid and air cooling systems. In the fast-moving data center market, RBS enabled the Gemsetrateam to respond quickly through evolving customer requirements and numerous product iterations, leading to an accelerated production ramp of a new pressure sensor for liquid cooling. While data center applications are a smaller part of our portfolio today, they drove the sequential growth in our industrial manufacturing end market in the quarter.

Now turning to Slides 20 and 21 and the 2 new test and measurement launches. The DPO 7000 sets a new benchmark by combining ultra low noise, high ENOB or effective number of bits and unprecedented throughput with a scalable architecture. This enables engineers to capture and analyze signals that were previously invisible. This level of precision performance is critical for next-generation technologies like AI, robotics, quantum systems and ultrafast cereal communications. At the same time, we launched the NP 5000 series modular precision test system, which expands the Tektronix portfolio into the validation workflow by bringing new levels of flexibility to automated testing.

Its modular design empowers engineers to add or reconfigure testing modules in minutes, offering a platform that will evolve with the needs of our customers. Last week, Tektronix hosted nearly 100 customers and partners for hands-on demonstrations. The positive feedback was tremendous. During the event, I heard firsthand from our customers and partners the value of these solutions to innovate more efficiently and confidently. We expect to continue to fuel innovation with a focus on high-return organic investments aligned with our growth vectors. Before I close our prepared remarks, I want to review our key takeaways for the quarter. They're on Slide 22.

We activated our profitable growth strategy in Q3 and we will continue to execute against our 3 strategic priorities, driving strong cash generation and free cash flow conversion while investing organically. We are capitalizing on secular growth trends focusing on innovation and strategically allocating resources while navigating ongoing macro and tariff dynamics. We are executing our plans to drive profitable growth through our proven RBS playbook with powerful examples in the launch of 2 new breakthrough products and the progress on our cost savings program to enable both growth and efficiency. The team remains energized to achieve our goals for 2025, and we will build on our momentum in 2026 and as we execute our clear profitable growth strategy to maximize shareholder value as a stand-alone company. Now I'd like to open up the mic for your questions.

[Operator Instructions] Our first question is coming from Julian Mitchell of Barclays.

Maybe just wanted to understand, first off, how sort of demand -- the cadence of demand in recent weeks and months, any notable changes there? And sort of allied to that, when we're thinking about the low single digit, I think, sequential sales increase you have guided for the fourth quarter. I'm trying to understand if there's any particular difference in that sequential move between the 2 segments.

Julian, good to hear your voice this morning. It's -- you were with us at Investor Day. And as I look back on the last 5 months, I have to say post spin, I continue to be more positive, the signals we're getting across the business. to get this unprecedented opportunity in utility and defense. And we're seeing stabilization to some modest growth across the rest of the business.

Specifically to your question around demand maybe how I look at the business, we've got some project business or backlog business that it's all about execution. That's predominantly in our defense business. But we do have project business in utilities and in the T&M space. The rate of the business is more of a bookings turn. And as we look at orders, we look at orders weekly, we have continued to see orders keep up with our revenue, about a 1:1 book-to-bill, if you look on a -- of an annual basis this year. So orders are keeping up. Sales funnels healthy, good strength in North America when it comes to sales funnels. And then we also -- we're really close with our channel partners, it's about 50% of our business. So we get sell-through or point-of-sale reports as well as inventory levels and productivity, many of them give us and those are trending in a positive direction.

And just activity. I mean, the launch of the new products. Last quarter, we were talking about some new products at Qualitrol. This quarter, we're talking about 2 industry-leading platform announcements Tektronix lots of good customer activity across the business. So I'm enthusiastic about the opportunity we have here in front of us.

Julian this is Neil. I think if you look across both the kind of sequential 2Q to 3Q then and the guide in 3Q to 4Q, underlying that is predominantly volume. We've seen a little bit of the pricing impact from the tariffs. That was largely big in Q2. So that kind of 5% or so sequential revenue improvement we saw in 2Q to 3Q was predominantly volume-based, and we're kind of seeing that as well into 4Q as well, of course, just some seasonality step-up that we'll see going into 4Q, [indiscernible] but underlying that, I think you saw kind of volume shipments that's kind of underlying that step-up.

That's good to hear. And then just turning to the margin side of things. I just wanted to sort of 2 sides. So 1 is sequentially, shouldn't we see a slight increase in margins in Q4 of the increase in volumes, and then when we're looking year-on-year the Sensors segment, margins are flat despite double-digit sales growth. When should we see kind of operating leverage pick up there?

Yes. Julian, just at a high level, we're still committed to the margins, the adjusted EBITDA ranges that we gave you during Investor Day. And as you know, those were different by segment, and in Investment Measurement segment, very much tied to volume. So our focus is really around growth there. Neil, if you'd like to...

Yes. So I think if you think about the margin profile going forward, particularly, I think you're asking about stepping up into Q4, even beyond that. So from a test and measurement perspective, we saw a nice improvement in incrementals as you went from 2Q to 3Q that step up in margin of substantial eicrementals on it. Sensors and safety systems, a little less so, although still at that kind of high end of the margin range. in terms of where that business is targeted. As you move into 4Q, we'll step up as well. And I think you'll see some margin expansion in Test Measurement again based on the volume. So there is some volume sensitivity there.

As you move over to the sensors and safety systems side, a couple of components there to unpack. The first is on the defense front of those products, those products run at the lower kind of end of the range as you think about sensors and safety systems. That kind of average margin runs lower than the average of the Sensors & Safety Systems segment. So as we grow that business, there will be a little bit of a margin headwind as we grow that. However, the other side of the business runs at very healthy margins and the pickup we saw industrial should help. But as you think about growing the business step up in T&M, obviously [indiscernible] fall through there, maybe offset by a little margin mix related to the defense products as you move into Q4.

Our next question is coming from Deane Dray of RBC Capital Markets.

Thank you. Good morning, everyone. I want to first congratulate you all on the debut that was first quarter, check the box, and I especially appreciate the slides, a lot of good details and you've shared a lot of insights about the business and trends and mix. And so it's Yes, we knew this business when it was part of Fortive, but we didn't have that detailed lens that you're providing now. So just first of all thank you for that.

And secondly, just want to drill down on the Defense business because we don't see typically growth of 18% in an Industrial type of business. So just kind of frame for us how that breaks out? And so is it programs? Is there any kind of MRO to it? And what does the shutdown mean for the business over the near term?

Deane, the Defense business, we're specifically talking about our tax side, EMC business. If you look back over the last 65 years, there's been only few other times in history where you've seen defense spend be positive up and to the right for a 10-year period. And we're about 4 years into this cycle and all the signals that we're getting, the increase in defense budgets to $3 trillion by 2030, which is about a 40% growth rate, the focus on these core programs, there are 12 core programs have been identified is critical. And the [indiscernible] EMC safety systems plays in the majority of those programs. gives us a lot of confidence that this business has more years to run here probably as through 2030.

As we work with the customers in that space, they give us good visibility. You heard me say earlier that we've got visibility to about twice the backlog that we did or will do this year. So our annual revenues, and it gave us good visibility not only to the backlog, but when they need the supply. So we're partnering very close with these customers that we have. There's been a lot of activity. You can -- it's public information. There's a demand surge on these 12 programs. We've started to see quoting activity which is very positive and expect some of those orders would start to build as we go into the future here.

I'll just add on to that one. So we have seen very significant backlog build as you think about this year -- and we do anticipate seeing further backlog growth as we move forward in the business, and we continue to work with customers on that, as Tammy has said. If you look at it going forward, you mentioned taking the CapEx rate up from roughly 2% to -- 2% to 3% we're going to invest in a couple of areas, and 1 of them is in Defense, and we're going to continue to expand capacity there to support the increase in the backlog and the orders and the timing that we looked out with the customer.

So I think more to come there, but clearly, we're seeing strong signals and proof points from a backlog perspective that show we're going to see some solid growth in this business into the future.

Great. That's good to hear. And just as a follow-up, Tammy, more of a holistic question for you. I'd be interested in hearing your perspective of how integrated, coordinated, optimized is the organization today because it is brand new. Are there some operating inefficiency still? And just maybe if you can give it a scale of 1 to 10, 10 is your humming 100%. I know that's continuous improvement. But just where do you fit on that spectrum. And for Neil, just very specifically, that $35 million that's due to Fortive, are those shared services -- I don't recall how much shared services there are and what's the ramp down there?

Let me take that last 1 quickly for you. Those are payments that we returned Fortive. One is just based on the amount of cash that we generated out of spend was at a somewhat of a reverse working [indiscernible] speak. So we paid that back already. the other is related to the split of entities and payments back and tax jurisdictions that required as part of the spin. So we paid out $57 million of that so far. We dissipate the total of both of those being $90 million, another $35 million to go, primarily based on the jurisdictional cost relating to the spend and the split.

Going back to your question, Deane, around the optimization piece, we announced last quarter a cost-out program that we, as the team executed very quickly. It's going to take some time for the savings to roll in. Some of it is closing some sites so that takes a little bit, goes into next year. So that's one piece of it. The second is just who we are, our culture. We're steep in continuous improvement operating rigor, discipline, we are always looking for those opportunities, whether it's a safe to invest or it's an opportunity just to add to the to the profits that we deliver. So that's -- again, it's who we are. It's what we look for every week in the business is where can we optimize the businesses.

The next question is coming from Joe Giordano of Cowen.

Can you touch on market share within Tektronix. I know that's been an area of focus with investors? And then clearly, you're launching some new products here. Just how has that trended? And are some of the -- are you looking to push more into validation now like strategically?

Yes, Joe, there's -- overall, in the test and measurement space, Tektronix is a top 5 player in that space. When you talk about market share, there's different ways that people look at it. They look at it by product realization workflow, from R&D to validation to production or there's different end market looks that you can take, and depending on which way you look at it, there's places we play and when we play, we're a strong player. And there's places we've made the conscious choice not to play.

The 2 announcements that we made, I call them both products and platforms because they're announced as a new product. One of them squarely in the R&D space. That's a PPO7,000 product. And the feedback from engineers that I was with last week, just outstanding on the low noise floor and the amount of [indiscernible] they're seeing signals that they once up invisible. So it's a terrific product. It also has a scalable architecture where we can upgrade that. That's why I also call it a platform because you'll see some velocity here as we introduce higher levels of bandwidth in that product.

And then the second product, which you alluded to, which is the MP5000 platform, it takes us into the validation space with a product that is custom built for validation. So customers certainly have taken our bench instruments, particularly the Keithley branded instruments, power supplies, SMUs and use a validation in the past. But this is a scalable architecture, meaning modules on the back that -- you can stack in [indiscernible] high and really designed for validation and even into production. So yes, this is an adjacency and an opportunity for Tektronix to really expand the portfolio.

Interesting. And then just shifting over to Golden Dome, you mentioned. Can you talk about what the opportunity is there for you guys and kind of what you're supplying into something like that?

So in the Space business where we play, I mentioned some of the critical core programs that have -- we've been a part of for a decade or more. Those programs will also be instrumental in the Golden Dome project. So these are existing programs, not new stores, but programs that [indiscernible] EMC already has safety systems and content on that would be deployed for that particular application.

Got it. And if I could just sneak 1 last 1 on margins. Like how should we think about Test & Measurements exit margin kind of informing us into next year as like a run rate? I know there's like 4Q to 1Q dynamics. But if we think about 4Q exit rate in context of like what a full year next year might look like. Can you kind of talk us through there? And where is like EA electro kind of fit into that now?

Yes. So from a T&M perspective, as I mentioned earlier, we saw some nice improvement from 2Q to 3Q. So pretty step-up in [indiscernible] space is very volume sensitive. So we did see a nice pickup in the margins. I'd expect to see another nice pickup similarly into Q4 for that business, and that's helpful. And then as we mentioned, seasonally, we'll start to see a step down just as the natural seasonality moves into Q1. But I think that's kind of the baseline you want to think about for an exit rate. And the way that we think about it is, look, we've got to drive through cycles here at our long-term margin goals. And at this level of revenue, we're at the low end of that range overall. But from a test and management perspective, we'll see a step up. And then in Q1, we'll see kind of a bit of a step-down stealing, but we continue to drive improvement as we work through the year.

The next question is coming from Amit Daryanani of Evercore ISI.

At least a lot of questions to be asked. I'll ask you a couple of maybe just housekeeping ones. On the test and measurement side, can you just talk about when do you expect that business to stabilize from a revenue perspective? Is it the back half of '26. And how much visibility do you have from a backlog or wins basis to know that business will stabilize?

On the test and measure, pretty similar across all of our businesses, how we look at it. And there are parts of that business, the test and measurement business, where we get long projects, whether it's on -- it's mostly the systems business. But the majority of it is book in turn. So it's important that we watch our orders rates on a weekly basis. Our sales funnels and our sales formats have been healthy. So as our channel and our activities, and if you go through this year, Q1 was our lowest revenue quarter of the year. And each quarter, we have seen sequential improvement in that business.

Really, North America probably being the strongest. Europe and China kind of still bouncing along the bottom, but that's how we have looked at that business and...

The second thing I'll add to that as well as we think about the business, I think it largely we feel is largely stabilized with the sequential growth that we've been seeing. The comps are going to change as we move into Q1, we talked about a little bit of a step down there, but the comps are going to be better as well. So I think as we move into next year, what can we feel like we'll be in a good position despite a sense of that seasonality come in to that quarter.

Got it. And then I thought I heard you just talk about the semiconductor space and about how customers are deferring R&D spend there to focus on AI. Just any visibility or any perspective from your side in terms of how long is that deferral going to happen? And does that essentially mean that '26 could be a more outsized growth here on that segment as you go forward?

Yes. In semi space, we certainly have close relationships with those customers, they're innovating, whether they're spending or not in a given quarter or a given year. So we stay pretty close to them. You also -- we followed the semiconductor index. And what I'm seeing is a bifurcation in the customers in that space, there's customers that have a lot of CapEx and continue to invest in T&M.

And then there's a set of customers that are more cautious. And I think probably just following earnings, you've seen that -- you've seen that play out. But the semi space is one that we will continue to say, close to the new product announcement, the DPO-7000 fits squarely into those technology companies that are doing next-generation electronics design, so an opportunity for us to be back with those customers and really drive activity and funnel.

Here we sit, it's November -- it's the time of year that most of our technology companies are setting their budgets for 2026. So as we hit into January, February, there's always -- there's a lot of engineers that have a lot of a laundry list of wants for their electronics labs, and then we'll start to see as we get into the first quarter. How much they open up the spending checkbook and drive some CapEx. So Activity levels goods, funnels are healthy. We're seeing some early signs, but we've got to get the money flowing.

Our next question is coming from Ian Zaffino of Oppenheimer.

I wanted to maybe key industrial manufacturing as far as that the acceleration there. What exactly are you seeing as far as by region or area or sector? And then is this sustainable? Or how sustainable do you think this is?

Yes. In the industrial manufacturing end market, which is predominantly our genset and [Hanford Dynapar] businesses, I would start with where are we seeing the growth opportunities? And where the teams are focused is what are the pockets of growth. I talked about our [indiscernible] business. They're fantastic in pressure in liquid sensing, and they've got a great opportunity here with data center and the equipment build-out that we're seeing. North America, looks pretty healthy. We've seen some good growth in North America, both from opportunity and also what we're hearing from our channel partners.

I'd say Western Europe is still still weak. We stay close to customers there. We still have good activity, but the results have been weak. And then is China somewhere in the middle. We have a strong local-for-local program in China, in industrial, but it's just kind of bumping along.

Okay. And then maybe just a follow-up. Can you just touch upon the M&A environment. What you're kind of seeing there from a willingness from the sellers, maybe the multiples? And then when we talk about tuck-ins, what is sort of the ceiling as far as purchase price to be considered a tuck-in and any other type of areas that you'd be looking to make these tuck-ins in.

Yes. I would -- I'd start with our clear priorities, and we're really focused on executing the priorities we laid out just a couple of months ago in our Investor Day is about 1% to 2% of long-term through-cycle growth to come through M&A. Our first priority in these businesses, and we really like where we start with these businesses is organic investment. And we will be thinking about that for '26, '27. Our second priority is returning to our shareholders. We've authorized the dividend. We paid 2 quarters in a row here, and we've got authorization for a share buyback Third in the order there is tuck-in M&A. And I think of that as businesses that will fuel the businesses that we have.

So we're in utilities do we want to make some investments to take advantage of this tremendous unprecedented opportunity that we're seeing in the utility space. in both new builds and in where we play in retrofits and in refurb. So other places there. hardware is what we're good at. That's our core end product. But in the [indiscernible] business, we're also starting to deliver and monetize some software and analytics products.

Our next question is coming from Piyush Avasthy of Citi.

One on diversified electronics within your Test & Measurement segment, you mentioned it declined year-over-year. there are a few end markets within that vertical. So if you could drill down a bit more there, if you could touch on trends you're seeing in autos and consumer electronics. And sequentially, are you seeing any signs of stabilization in that vertical and maybe what's baked in your 4Q guidance for that vertical, that would be helpful.

Yes, Piyush, on the -- you're exactly right on the diversified electronics and some of the bigger movers in there. That's in there from an auto standpoint, the biggest play is our product line. It's now part of Tektronix, which is the EA product line. And we've pretty much stabilized there from a run rate standpoint, maybe seeing some modest improvement in our smaller deals. Where the opportunity is, it's really a automotive and the battery specifically has shifted more towards energy use. We are seeing large projects that we're participating in, owning, designing. I just want to set a time frame on these because they're big CapEx, they often come with a new building that's coming off a production facility. So we're keeping our eye on that. But I would say in the diversified electronics quarter-over-quarter, it's stabilized to modest improvement.

Yes, we've seen if you look over to the comps year-over-year are pretty heavy. If you look sequentially, we've seen some nice pickup over the last couple of quarters and a year ago. but predominantly in North America. And I think that's really where things are shifting to from that perspective. So we are seeing some more focused efforts and some growth in North America. If you look at the overall North America from a company perspective that we talked about showed had in the presentation there. So we have seen some life there in North America picking up both year-over-year and now sequentially. So we feel like that's kind of heading in the right direction. I think it's another piece of another data point that kind of underpins will while we're looking at some tough year-over-year comps for T&M, we're also seeing some sequential improvement, particularly in North America, which gives us -- that makes us be incrementally more positive on the business than maybe we were a couple of months ago.

Helpful. And 1 quick 1 on the cost saving plan. The $9 million to $11 million of cost savings by the end of 2026, like can you remind us of the cadence of when you realize these savings? Is it more spread out? Is it more first half, second half? Any incremental color there would be helpful. We said by the end of the year, look, there's some -- built into that is rationalization of site and infrastructure rationalization, so that always takes a little bit of time. I'd say from an execution perspective, we've already started the execution on that plan. We should see by midyear or so kind of the execution on some of the closure and rationalization of some of the infrastructure related to that plant, which is primarily cost of sales savings and we'll see some benefit from that to get to that half of 26%.

Our next question is coming from Rob Jamieson of Vertical Research Partners.

I just want to stick with test and measurement and dive in a little bit more here. Just just on semiconductor and the test equipment, I mean there's currently some bifurcation here some weakness in memory and make sure those offset by strength in leading AI chips and packaging. But with subsegments in semiconductor you're serving? And how does your product portfolio enable you to maybe benefit from some of the AI-driven investments in advanced packaging, high-bandwidth memory validation test. I mean, are these areas that you're trying to grow exposure to?

Yes, absolutely. We certainly want to be where the growth is in test and measurement, if you think about our business, it's predominantly in the R&D space. probably 50% to 60% of the focus is R&D. So next-generation AI, next-generation compute, next-generation communication protocols, that's squarely where the Tektronix business is and where this new product that they just announced played extremely well. the adjacency that there's 2 new products, the NT-5000 platform takes them into the automated test part of the workflow, which is relatively new.

I'd made the point that there's been -- certainly, customers will use the bench instruments to do some automated tests, but this is like purpose-built ground up to play in that segment and really go after the opportunity there, both new build opportunity when you're building out a new lab and upgrades and replacements of where we would be getting share gains. So both of those.

Okay. That's helpful. And then just when you think about the test and measurement space and recovery path that you're on, what end markets in regions do you think are going to be the biggest drivers of getting your organic growth back towards the broader test and measurement peer group average over time? Like what should we be looking for? And then just also, can you help like in order of magnitude, size or just qualitatively how you rank the diversified electronics portion of Test & Measurement like what's your largest and small exposures there?

Yes. The way we think about the business is really where we start to see activity, channel activity, sales activity, funnels build, orders where most positive there is in North America. We talked earlier in our prepared remarks about China, which has been a strong growth driver for the Test and Measurement business from '21 to 2030, not expecting any type of a recovery there anytime soon in the short term. But we do think it has stabilized and seems we're -- if you look at the order side of the business, there's been some up and down from a revenue standpoint in China. But from an order standpoint, pretty consistent for the last 4 to 5 quarter. So I think the -- when I say a modest recovery, we'll see in North America as well as Southeast Asia, India, where some of the companies have moved.

The second part of your question was around diversified electronics, if I were to think about what's inside Diversified Electronics, the biggest end markets would be industrial consumer, some auto, battery, medical and then education in that bucket.

The next question is coming from David Ridley-Lane of Bank of America.

Sure. What were test and measurement orders in the third quarter of 2025 and the third quarter of 2024.

We have not shared orders profile in the past. I directionally gave a view that we've seen a really strong orders profile in North America in test and measurement. And all of the -- what's wrapped into our guidance for Q4 is our visibility into earlier demand. And in some of its orders, some of its sales funnels channel insights, all those different pieces of the business that we look at to give you that guidance.

Yes, I think the overall -- if you look at the year-over-year, we're obviously doing revenue. A lot of those bookings are kind of [indiscernible] quarter. So I think from a book-to-bill of 1 to 1 year ago and a book-to-bill more or less 1 and 1 in the last quarter or so. So I think that's kind of the way to think about.

Let me try it a different way. Deferred revenue on the balance sheet is up $22 million year-to-date and $19 million quarter-over-quarter. So if you are seeing orders growth as would come with down payments directionally, should your investors look at that quarter-over-quarter or year-to-date increase in deferred revenue as indicative of the bookings number.

Yes. So deferred revenue primarily relates to our Defense business. So the way that those contracts work, generally, we get some incremental, I guess, cash investment from our customers as we go -- as we start to go execute on long lead time items. And then down the road, we go ship those and then match that up. So that deferred revenue is really in relation to the increased backlog that we're seeing in defense, and [indiscernible] that we're getting from customers upfront to go act on some of those longer lead time items as it relates to that defense growth you talked about ever.

And then just since you mentioned it, I guess, what about your contracts in PaksiMC make them not qualify for the GAAP remaining performance obligations. Because if I look there's less than $10 million of RPO in sensors and safety.

I'm sorry, I didn't catch the end part of that question.

There's less than $10 million of remaining performance obligations in the Sensors & Safety Systems segment. And generally speaking, if a business had firm noncancelable backlog that would be in the RPO metric.

So we'll follow back with you on that 1 in terms of how that works. I think the backlog that's related to the Defense business is very strong, obviously, which is consistent with how we think about defense businesses overall, will come back on the RPO.

Our final question today is coming from Scott Graham of Seaport Research Partners.

Thanks for all the detail. I want to understand a little bit about maybe cutting defense, diversified electronics a little differently. I know, Tammy, you mentioned that EA is the largest business there. But that business has a lot of -- that division has a lot of non-EA. So I guess my question is, within those markets, is this the 7,000 to 5,000 upgrades, are you going to look to pivot to new markets there. And I'm asking that, I know that these are products, particularly the 7000, which was very engineer-oriented but engineers work everywhere. So there's clearly an end market issue away from EA there as well.

So I'm just wondering if there's a plan here to move some of these new products into your salespeople moving them into new markets that are maybe better markets than what we've seen in that business.

Yes, Scott, you're absolutely right. The products that Tektronix just announced both the GP7000, more research play and the NP5000 which is more in the validation workflow really transcends end market. So any end market where you're building out electronics, whether it's electronics in the medical field, electronics, all over the consumer space or IoT, electronics and industrial, education, every 1 of those customers, anybody building electronics. We had a traditional plumbing fixture supply company that's [indiscernible] electronics into their fixtures. That's an opportunity for Tektronix.

You're absolutely right as electronics spread across almost every end market as we kind of talked about this electrification of many devices, you will see the opportunity for Tektronix and testing measurement across all of that.

That's helpful. Then just a quick follow-up on sort of sort of the margin development here. Can you give us what pricing was in the quarter? Help us maybe triangulate toward price cost. I know you mentioned a mix factor, you mentioned the mix factor in defense as being negative in the quarter. But maybe just help us understand the dynamics of price cost in the quarter, if you can give us a price.

Yes, in the quarter. So normally, we see about 1 to 2 points of price year-over-year, and we talked about that previously. As you think about moving from 2Q to 3Q, a lot of the pricing had already been baked in, including the pricing for tariffs. So we didn't see a large step-up in price from 2Q to 3Q, both of that was underlying volume. We might see a little bit trailed into Q4 space on the timing about some of the countermeasures on the tariffs and how we manage that. but predominantly the buildup is from volume. And also, I take quarter report from an FX perspective, I'm not anticipating any material moving to either. So underlying [indiscernible].

That brings us to the end of today's question-and-answer session. I would like to turn the floor back over to Ms. Newcombe for closing comments.

Thank you all for joining us today. Again, I want to thank my team for how they executed the first full quarter as an independent company. With the spin behind us, we are energized about the opportunity that we have in front of us here. We are balancing our operating rigor and our discipline and our heritage with a growth mindset and innovation and how we go drive growth in this business. Thank you all for joining, and I look forward to continuing the conversation in the weeks to come.

Thank you. Ladies and gentlemen, this concludes today's event. You may disconnect your lines and log off the webcast at this time, and enjoy the rest of your day.

Well, thank you, everybody. I'm Chris Snyder, U.S. multi-industry analyst. Really excited to be up here with Ralliant in about 3 months into the separation. We have CEO, Tami Newcombe. We have Nathan McCurren from IR. Before we get into the Q&A, Tami was just going to kind of provide some opening remarks about the company post spin.

Awesome. Well, thank you for being here. Honored to have this opportunity. It's actually week 11 for us. I'll give a couple of thoughts just to open, and then I will refer to a presentation. You've got a barcode there. It's been put on our investor part of our Ralliant's website. If you want to follow along, I'll stand up and walk through it. But just as I think throughout my career, I have had the privilege of working with some of the brightest minds in technology and in business.

And they've really shaped my experience as I've come in into the CEO role. So a couple of things that are really important at Ralliant. The first is a people-centric culture. I've had the opportunity to handpick my entire leadership team in this process. And you'll see a diverse team comes from different industries from start-ups to Fortune 50 enterprise-scale customers. So I'm really pleased with the leadership team. And as I pick these people, one of the things that is really important is can we work as a team. And we have a belief at Ralliant that we are one team. There's one scoreboard. It's for our employees, our customers and our shareholders.

The second thing is I've been decades in sales. You have to find the growth in the business. We call it unlocking growth. And I'm going to walk through in the presentation some of the growth vectors, but where are there tailwinds in end markets where we are uniquely positioned to take advantage of those growth vectors?

And then the third thing is an operating rigor and discipline on how we do things. It doesn't matter if you're in sales or you're innovating or in your manufacturing facility. The operating rigor and discipline is how we deliver results and execute on our promises. So with that, I'm going to turn to a presentation. I think it's about Slide 4 is where I'm going to get started.

I'm going to start with who is Ralliant. And Ralliant is a premier player in precision technologies. So maybe I'll tell you that story from our customers' viewpoint. Our customers are engineers, technicians and innovators that are working in industries where there are breakthroughs and systems that will make the world a better place. Our customers trust us for precision. And typically, that precision is in a very critical environment where the reliability, it really matters.

We operate in 2 segments. The first segment is our Sensors & Safety Systems. That's exactly what we do in that segment. Our customers are in industrial manufacturing. They're in utilities, they're in defense and space and then other critical environments. In this segment, we have dozens of brands that are well-known by customers. There's 5 businesses that we talk about. It's the Qualitrol business, the PacSci EMC business, the Hengstler-Dynapar business, Gems Setra and Hengstler-Dynapar.

In our Test & Measurement business, we specialize in electronic test and measurement. So we're on the forefront. Our instruments, our software is on the forefront of the next breakthroughs in advanced semiconductor technologies, communications and anything electronic that you find in the world. The Ralliant Business System is the how. It's how we bring together all the people, we unlock growth and have that operational rigor. It is an operating cadence. It's a common language that we use across every function and a common set of tools. It's truly how we deliver sustainable results across the company.

If you're following along, I'm going to move to Slide 6. These are -- this is our financial profile. Last year, we were over $2 billion. Going forward, as a public company, our total growth through the cycle is expected to be 3% to 5%. If you look back at 2019 to 2024, our total growth was 3.5%. So we aspire to continue to improve that. And our adjusted EBITDA margin targets are the low 20s to the mid-20s. We're diversified both geographically and by end markets.

North America is the largest with a strong presence in China, Rest of World and Western Europe. And we serve 7 end markets. So now for the fun part. The fun part is growth. How do we unlock that growth? We have a $16 billion market that we can serve with our portfolio today. In these markets across all 7 end markets, we have what I refer to as stronghold positions. These are positions where we are embedded in a customer's workflow.

We're differentiated by our specs and our precision, and they count on us in this space. We deliver tremendous customer value, which you will see in the margins in our stronghold positions. We also have opportunity in 3 growth vectors. A growth vector is where we see a long-term trend for higher growth, 5%, 6%, 7% growth, and we have solutions where we believe we can take market share. And I'm going to cover all 3 of those.

The first growth vector is grid modernization. So today, we work with over 7,000 utilities across the world in 143 different countries, but they trust us to monitor the most critical assets in the electrical grid. This is how we help the utilities avoid power outages and keep the lights on around the world.

Our Qualitrol business has been doing this for over 80 years since the beginning of monitoring these assets. We have over 4 million devices deployed. If I think about the tailwinds that are multiyear that drive our solutions here, there's an aging infrastructure. Over 70% of the U.S. infrastructure is beyond 25 years old. So that means upgrades and retrofits, which is time to add new monitoring solutions to those assets.

The other piece is new power demand. So expansion of the grid, data center is a big one, driving power demand. And then the last is just new energy sources that are coming online. In our Defense Technologies growth vector, we provide energetic materials and voltage safety systems. Energetic materials is an industry award for the electronics and precision explosives that are used in this sector.

PacSci EMC is a critical component in 50 long-term defense programs with the primes and the Department of Defense. And this puts us in a very unique position to continue growing alongside the replenishment and expanding defense budgets.

The third growth vector is electrification. I'm on Slide 10, if you're following. In Test & Measurement, we specialize in the precision instruments, software and services that innovators use on the forefront of advancing semiconductor technology, communications and electronics everywhere. Tektronix has continued to invest in R&D and is extremely well-positioned with a loyal base of customers and new product innovation.

I'm going to move to product innovation with Tektronix. So they have over 75 years of experience in this space. I think it's actually 78 years now. They have an extensive global base. And for those existing customers, we continue to innovate. And you'll see a fresh lineup of new products, new software and new services. Next week is actually a major launch for the Tektronix brand in this space of R&D where we have played for decades.

But the other side of the innovation is where we're expanding to new customers and into new markets. And you'll see more of this as we go through the year. You'll see opportunities where we're moving into more software, more automated test and the technologies that help test fuel cells, which go into both batteries and to energy storage systems.

So as I called out on the earnings call, we're seeing a gradual improvement in the business. Q2 was better than Q1. We expect Q3 to be better than Q2. So the combination of that improving spend environment and the lineup of new products is an exciting time to be in this space. So as I come to a close, I think the last piece is just to reiterate our financial priorities for value creation.

And just go through the cycle, we think about a through-cycle 3% to 5% total growth and adjusted EBITDA in the low 20s to the mid-20s. We will continue to be disciplined on our industry-leading strong cash flow. a solid balance sheet and our goal to return value to our shareholders.

I'll come back to what I stated in the very beginning, which is I'm here to build a company designed to last. To Chris for some Q&A.

Separations and spins have been a big theme in multi-industry over the last few years. I guess, as you guys become a stand-alone company, what opportunity does that bring kind of compared to being part of a larger, bigger organization?

You have 2 words that come to mind, strategic focus. And if you go back, I've been in these businesses 7 or 8 years. And over that time, we have been refining the portfolio. We went through an exercise of portfolio rationalization, where we sunset some products where we weren't advantaged. We divested a piece of business that didn't fit the portfolio.

So we came into the spin with a really nice portfolio. And what we get to do now is you heard our growth strategy. It's very focused. We've got stronghold positions. We've got growth vectors. It's a simple strategy. Our Ralliant business system, it's going to be defined by how we operate the business. We're not diverting to SaaS companies or different industries. We know exactly where we want to point our really strong Ralliant Business System. And then the last piece is just our customers.

Although we're in different end markets, our customers are very technical people that need our application expertise and support and how we bring that to them in a more digital way as we move forward as we allow them the insights that they need in their businesses. I just think it comes back to strategic focus.

Yes. No, absolutely. You mentioned in your remarks about Tektronix being a leader in customer R&D labs. The one big beautiful bill reinstated permanent expensing for R&D. I guess what impact do you think that could have on your customers and their R&D spend? And any timeline for when any impact could start coming through there?

Yes. I think simply put, expanding R&D is good for our business. Anything in electronics where investments are being made in R&D, more engineers need more instruments, R&D in the utility space. That is an area where we also play, R&D in defense.

So in general, any lift of R&D is good across many different parts of the business. We're pretty close with our channel and our sales funnels. I couldn't point today to this -- we got velocity because people are moving faster or funnels are getting bigger, specifically based on the one big, beautiful bill.

Yes. Maybe staying on the theme of government policy. Are you seeing any negative impacts or pressure from maybe some of the spending cuts -- DOGE -- I know PacSci obviously has government contracts?

They do. I would say the PacSci EMC business, which is long-time existing programs, there's a replenishment cycle going on right now. So no impact there, strong demand signals there. I would say, and I think we talked about this a little bit around Q2 that there's been more cautiousness in universities and some of the research that is further out. And I -- we haven't actually heard cuts, but I think people are cautious about what might be coming.

Yes. I guess maybe looking at some of your geographies in Q2. Americas, I think, was down about 5%. Can you maybe just talk about some of the pressure that's faced there and how you see the Americas progressing from here?

Yes. I'm optimistic about the Americas, really strong in our utility business and the Qualitrol business. in demand signals for PacSci EMC were really strong. Q2, we didn't ship as much as we expected to ship. So we were down on revenue, but the orders are strong. And then we're starting to see opportunities here for Test & Measurement and new products coming out. So Americas, I feel really good about.

China has stabilized. It was about flat, down 1% to flat for the quarter. And in China, we're seeing, again, some strength in utility and some softening in Test & Measurement. But that -- the softening in Test & Measurement has been going on for a number of years with some restrictions on export. So that sort of stabilized and starting to gradually improve. And then Western Europe was by far the worst region that we had. And that is specifically electric vehicle and battery. And less of a mix. We don't have as strong a mix in utilities and defense in Europe. But that will be -- that's probably our toughest comp quarter was Q2 for EV and battery.

I mean I have to follow up on China because the stability there did kind of stand out. When you look at China from here, do you feel like there's positive rate of change for the businesses there? Or is there a concern that there could be negative rate of change with a lot of the U.S. policy bringing headwinds to them?

I think that one is hard to call because if you go back 1 year ago, I don't think we would have seen all the tariffs and the things that we're in the middle of now. But what I will say is our teams have gotten really good about reacting. We have a very, very strong team in the China market. And they tend to move very quickly with news and always finding new opportunities for us that we can go after.

Yes. The guide calls for, I would say, modest improvement into the back half, the organic growth getting closer -- improving off Q2 levels, the decline there. I guess what gives you confidence in that recovery? Is there anything that you could share you're seeing on orders or book-to-bill that is telling you Q2 was the trough essentially?

Yes. I wouldn't -- I don't feel like we're calling a recovery. We tend to see in the Test & Measurement business a stronger second half than first half. We also have a great lineup of new products there. So we're calling that piece. There's typically more defense spend in the third and the fourth quarter. So PacSci EMC, we're expecting to be shipping more in the second half. So we built the expectations for Q3 really based on what we're seeing in the business without overlaying any type of a macro change.

Yes. Yes. Maybe turning to the segments and starting with sensing. Obviously, your bigger division, more stable.

60%.

So gets less focus given the stability. But I guess what really stood out to me as we learn more about that business was the 30% EBITDA margins. I think that's real differentiation versus other sensing companies in the market. So I guess, how do you guys get that level of margin? And is there the ability to expand from these levels?

Yes. I talked about our stronghold position. And we are playing in spaces often regulated environments like utilities or food and beverage or critical and harsh environments where these things have to withstand the atmosphere down to below the ocean. So we have picked where we want to play.

I did talk pre-spin, we did some rationalization of the portfolio, which certainly helped that we got out of some businesses that weren't as profitable. But it's really -- I think margins are the truest example of the customer value exchange. Customers see a lot of value in what we bring, both in the instruments and the depth of the expertise that we have in some of these industries goes 50 to 100 years of working in these spaces. So proud of the team for the work they've done there.

Yes. I guess how do you balance growth versus margins in that segment? I would imagine there's more opportunities, whether it's certain industries, certain geographies, where you probably could push in and take share and drive top line, maybe harder to get to 30% EBITDA margin and all those. I guess how do you balance that? And as a stand-alone company, maybe is there any difference in that strategy versus under Fortive?

Yes, that's -- I go back to our strategic focus. Two of our growth vectors sit in Sensors & Safety Systems. One is around the opportunity that we see for grid monetization. And I do think there's opportunities here for us to expand. Right now, the team has gone from what used to be just monitoring. So we just give data to customers, let them try to figure out what that means to moving to more analytics, software, preventative.

We put some AI health metrics in there so that customers get more of a sense of, well, what do I do with this information? And I think there's opportunities here to invest. And as we talk about organic investment or tuck-in M&A, that's a great example of where we need to go after that.

Yes, absolutely. So obviously, the growth in sensing has remained resilient, holding in that like a plus low single range. You talked about Qualitrol and utility. You talked about defense and space. I guess, which end markets within sensing are being -- are under pressure? And are there any end markets that -- where you feel like there's positive rate of change there as we look into next year?

Yes. The story stays pretty similar. We see -- we've seen tailwinds for a couple of years here in the utility space. We're continuing to see that in the defense space, both in replenishment, and we're getting a lot of quote activity now on some surge demand that hasn't shown up in orders yet, but lots of quote activity.

If I were to pick some place that's been softer, I would say industrials in Western Europe, we still can't figure out where -- when that's going to turn. We've worked with the largest industrial customers we sell to and inventories are good. They don't have -- there's a big channel stocking right after COVID, that seems to be settled. But we haven't seen the demand signals there start to turn around. It's probably the softest market for us right now.

Yes. One thing I'd add on that, Chris. I mean this tends to be the part of the business, and this is really our industrial manufacturing and other end markets. It tends to be the part of the business most closely correlated to like manufacturing PMIs. And so as Tami pointed out, there was a big increase at the kind of end of COVID coming out of COVID, followed by a slowdown kind of right in line with what PMIs have trended at. But it's now been pretty stable for about 5 or 6 quarters.

Yes. No, I appreciate that. And then maybe moving over to Test & Measurement. Obviously, a challenging couple of years for that side. Are you seeing a positive rate of change? Obviously, the comps get easier. So that helps improve the top-line performance. But yes, are you seeing reasons for optimism or are things getting better?

Yes. Before I address the soft quarters that you're talking about, I want to take you back. There were 7 or 8 quarters from '22 to early 2024, where everybody was asking why is tech leading in Test & Measurement? What are they doing right that nobody can keep up with tech?

So just want to remember, we were celebrating in the end zone for a couple of quarters there. And it's a lot to do with Test & Measurement is a broad space. And where you are in the engineering workflow from R&D to production, also where your specialties are. Tech is very, very good at power electronics. And during that wave, it was a big EV battery infrastructure build-out and very, very strong. That softened the last several quarters.

But we're seeing good signs of just gradual improvement in that business. And it comes -- we look at -- we've got a large direct sales organization. So we get instant signals from them every month, we're doing funnel reviews. We've got an extensive -- about 50% of the business goes through the channel. So channel reach is pretty good. A lot of our channel partners also sell semiconductor components. So we get pretty good visibility there.

And then the indexes were probably the semiconductor index is one that we follow quite close. But everything -- we track our wins and our losses. Everything seems really healthy in the business. We're just out there fighting. And the other thing I remind people, when you're working with some of the largest semiconductor companies around the world, they're equally as much work when they're buying and when they're not buying. And they're innovating around the clock, their CapEx spend comes in chunks. So we've committed to taking care of our customers through this, and that will pay off as we come out of this.

So -- and do you feel like -- you talked about we had a huge run-up. Do you -- and there's a lot of industry challenges. Do you feel like the company is holding or maintaining its share in that Test & Measurement market, and this is just end-market headwinds that are facing?

Yes, in the places that Tektronix play. And Tektronix is a $900 million business and where they play, I ended up at this company because a recruiter called me and said the name Tektronix. I'm an electrical engineer. That's like saying clean it, like it's an amazing brand. They are known for oscilloscopes and they're always #1 or #2 in that space where they play. In the Keithley Instruments portfolio, it's another place that, that word to a scientist or researcher is a well-known brand. So in those places, they've continued to hold share.

Yes, absolutely. On the segment margins, a lot of pressure in the first half. Q2 did show nice improvement versus Q1. I think the first half was tracking in like the high single-digit range. You guys are targeting mid-teens to low 20s there. So can you just kind of talk about why did the margins decline so much in the first half of the year? And what are -- what's kind of the bridge or the drivers of that improvement as we look into '26?

Yes. A couple of pieces to that. I think first, if you go back to towards the mid part to late part of 2024. I think across the industry, we all expected '25 to be a much better year in semiconductor and Test & Measurement. We had made a decision at that point, we were going to -- we're not going to slow down any of our R&D, and we continue to fuel R&D. Volume plays a big role in this business as far as margins and volume is down. So holding the R&D, lower volume, probably the biggest contributor.

You can add in a little bit from tariffs, a little bit of public company costs, additional headwinds that we faced in that business. That's where we are. So what are we doing about it? We announced as soon as we spun our first earnings call, we announced a cost savings program. And what we're getting after is some dissynergies in our services business. So about 1/3 of the Tektronix service business got carved out and stayed with our parent company. It's Fluke services, so it made sense, but that left us with places where we need to optimize.

So we called out about $9 million to $11 million in savings with that program. The second thing is just getting the volume up. And that's why I highlighted the new product, 8 new products being launched in Tektronix. Over half have already been launched, a big one next week. There's another major launch that will come in Q4. But just getting the volume up with new products is probably the second biggest lever there.

Yes. Very high gross margins at Test & Measurement relative to the broader industrial world. I guess what kind of incrementals can we expect for this business into a potential recovery?

Yes. We didn't break incrementals out by businesses that we targeted 30% to 35% -- and I always say mileage will vary by quarter. That's sort of over a period of time, you'll see 30% to 35%. We were purposeful in doing that because in our capital allocation, the first thing on our list is to do some organic reinvestment here. So that's the reason that you see the 30% to 35%.

And then I guess on Test & Measurement, it feels like the margin, Q2 was better than Q1, and you guys talked, I think, Q3 in the low double-digit range. So again, maybe some sequential improvement. Do you feel like that business has a pathway in '26 to get to that mid-teens? You guys called out a mid-teens to low 20s. Like do you think that's in play for '26? Or that's maybe still too early to get into that range?

Yes. So we're 11 weeks -- coming back to that. We only gave guidance for Q3 on the call. But our target range is absolutely the mid-teens to the low 20s is absolutely what we expect to do in Test & Measurement.

And then when I think about Ralliant and we compare it to history, I think in the last up cycle, so say, 2019 to '24, I think the business did about a 50% incremental. Obviously, the target is for something 30% to 35%, obviously lower than that. Is that just because the reinvestment and -- which would obviously boost the top line? Or is there anything else in that, that's just keeping the incrementals below history?

Yes. It's really back to the last part that I answered is it's a number that will be averaged over time and gives us the opportunity to reinvest in our growth vectors. So as I said a number of times, you'll see us hit the ball right up the middle of the fairway. We're going to invest in our growth vectors where we've got tailwinds. We've got solutions where we can take a share. That will be both organic and any tuck-in M&A that we do.

Appreciate that. Maybe going to capital allocation. M&A feels like a smaller piece of the capital allocation versus history. But it still is a use of capital for the company. Can you talk about the M&A process? Is it different versus when the company was under Fortive?