Ralliant Corp. (RAL) Earnings

Management highlights

### Overall Financial Performance - Q1 2026 total revenue was $535 million, up 11% year-over-year reported and 9% organic, with a consolidated book-to-bill above 1.1 - Adjusted EBITDA margin hit 18.6% (270 basis point normalized year-over-year improvement), and adjusted diluted EPS was 57 cents (39% normalized year-over-year increase); both metrics came in above the high end of prior guidance - Trailing 12-month free cash flow conversion was 105%, above the company's 95%+ target - Regional performance: North America (55% of total revenue) delivered 16% organic growth driven by defense investment and AI-related innovation; Western Europe and the rest of the world (30% combined revenue) were slightly down organically amid macro and geopolitical uncertainty; China (15% of revenue) grew 5% organically on government-funded AI and energy infrastructure projects ### Profitable Growth Strategy & Market Tailwinds - The company's balanced strategy aligns with long-term secular growth tailwinds in electrification/grid modernization and defense, while maintaining strong profitable positions in slower-growth, recurring-revenue end markets - The AI-infused Ralliant Business System (RBS) enables consistent execution, operational discipline, and enterprise-wide productivity improvements - In electrification and grid modernization: The company's precision sensors and analytics protect critical grid assets (transformers, turbines, substations) to prevent outages and extend asset life; its test and measurement solutions validate grid-scale energy storage and advanced power systems including nuclear fusion; it also provides thermal/fluid measurement and testing for reliable data center cooling and next-generation AI-enabled electronics - In defense: The company is a trusted supplier of mission-critical safety systems for legacy programs and benefits from multi-year replenishment demand and modernization activity; its test and measurement solutions support development of advanced communications and power storage systems for new programs ### Capacity Investment & Productivity Initiatives - The company is making targeted capacity expansions to meet growing defense demand: key priority munitions programs (THAAD, PAC-3, Tomahawk) are scaling production to 2-5x historic levels, and the company has expanded output via productivity improvements and supply chain optimization, with plans for additional physical capacity expansion for long-term growth - A new precision sensor facility in upstate New York is planned to come online later in 2026 to support growing utility demand - A company-wide enterprise productivity program was launched to deliver $50 to $60 million in annualized run-rate cost savings by 2028, with a program team reporting directly to the CEO; approximately $20 million in annualized run-rate savings have already been identified and implemented - Savings are targeted across both cost of sales (via enterprise strategic sourcing and group purchasing synergies) and G&A (via organizational simplification, AI-enhanced workflows, and optimized labor sourcing from lower-cost locations) ### Capital Allocation & Shareholder Returns - Organic reinvestment for capacity and innovation is the top capital allocation priority, with a disciplined review process requiring returns far above the company's cost of capital - The company increased shareholder capital returns: it initiated share repurchases in Q1 2026, and now targets share repurchases equal to approximately 50% of free cash flow going forward - The board increased the total share repurchase authorization to $500 million, and a $100 million accelerated share repurchase program is planned for Q2 2026 - The board declared a new quarterly cash dividend of $0.05 per share; the company continues to evaluate tuck-in acquisition opportunities while maintaining a long-term net leverage target of 1.5x to 2x adjusted EBITDA

Guidance

- **Q2 2026 Guidance**: Revenue is expected to be $540 to $556 million, representing 7% to 10% year-over-year organic growth. Adjusted EBITDA margin is projected between 18.5% and 19.5%, with normalized year-over-year margin expansion. Adjusted EPS is expected between 58 cents and 64 cents, a 35% to 49% normalized year-over-year increase, driven by revenue growth, margin expansion, and reduced share count from planned repurchases. Weighted average diluted shares outstanding are expected to be approximately 112 million after completion of the $100 million accelerated share repurchase. - **Full Year 2026 Guidance (Upward Revised)**: Following a stronger-than-expected Q1 and improving momentum in shorter-cycle businesses, management raised full year guidance across all metrics. Full year 2026 revenue is now expected to be $2.185 billion to $2.245 billion, with the upward revision driven primarily by stronger test and measurement performance. Adjusted EBITDA margin is projected between 19.5% and 20.5%, and adjusted EPS is expected between $2.53 and $2.69. - **Enterprise Productivity Program Timing & Savings**: The program is expected to deliver $10 to $12 million in in-year savings for 2026, with an annualized run rate of $20 million exiting 2026. All remaining actions are planned to be completed by the end of 2027, with full ramp to $50 to $60 million in annualized run-rate savings by 2028. - **Long-Term Margin Targets**: The company remains on track to reach the midpoint of its through-cycle adjusted EBITDA margin range (low to mid-20%) by 2028. Total incremental adjusted EBITDA margin is expected to hit approximately 50% from 2026 through 2028, with 45% to 50% incremental margin expected in 2026, and ~50% incremental margin in 2027 and 2028. - The 95%+ long-term target for trailing 12-month free cash flow conversion is maintained.

Segment performance

1. Sensors and Safety Systems: Q1 2026 revenue was $324 million, representing 11% year-over-year reported growth and 9% organic growth. This segment accounts for approximately 60.6% of total company revenue. Defense and space organic revenue grew 21% driven by strong shipments and robust demand for critical missile and munitions replenishment programs. Organic revenue for industrial manufacturing and other end markets grew mid-single digits, with broad demand across North America, China, and the rest of the world. Utilities achieved record quarterly orders but posted softer organic revenue growth due to customer shipment timing. Adjusted EBITDA margin for the segment was 28.4%, a 70 basis point normalized year-over-year improvement, driven by higher operating leverage that was partially offset by a dilutive mix impact from faster defense and space growth. 2. Test and Measurement: Q1 2026 revenue was $210 million, representing 12% year-over-year reported growth and 9% organic growth. This segment accounts for approximately 39.3% of total company revenue. The segment achieved its highest quarterly book-to-bill ratio since 2022, between 1.1 and 1.2. Communications, which makes up 12% of total company revenue, grew double digits organically, driven by defense and government modernization programs. Diversified electronics, which represents roughly half of the segment's total revenue, also delivered double-digit organic growth, driven by strength across humanoid robotics, energy storage, and advanced research. Semiconductor organic revenue declined high single digits primarily due to lapping a large completed customer project from 2025; excluding this headwind, semiconductor organic revenue grew double digits driven by increased customer CapEx in power-related semiconductors, particularly wide bandgap applications. Adjusted EBITDA margin for the segment was 11.9%, a 700 basis point normalized year-over-year improvement, driven by significant operating leverage and early benefits from the enterprise productivity program.

Risks & headwinds

- Ongoing macroeconomic and geopolitical uncertainty continues to pressure performance in Western Europe and other regions outside North America and China, creating uncertainty for full year demand and execution - Potential supply chain disruptions in the second half of 2026 create downside risk that management incorporated into conservative guidance - Higher growth in defense (which carries below-average margins) creates ongoing mix headwinds that can lead to lumpiness in quarterly segment margin performance - Tariff costs are expected to total approximately $25 million in 2026, requiring offsetting actions including value engineering, supply chain optimization, and moderate price increases - General inflationary cost pressures create ongoing headwinds that require continuous mitigation via operational productivity improvements - Forward-looking statements about future demand, growth, and margin performance are inherently uncertain, and actual results may differ materially from guidance due to the factors listed above and other unforeseen events

Analyst Q&A

• Q: Julian Mitchell (Barclays) asked why full year guidance embeds a second half growth slowdown despite strong Q1 performance, and what the semiconductor growth outlook looks like after lapping the large prior-year customer project. /

  A: Management stated the full year guidance raise was driven by stronger-than-expected orders and book-to-bill in short-cycle test and measurement, with solid new product traction. The modest second half slowdown reflects prudence given broad macro uncertainty, not weak underlying demand; without uncertainty, results would land toward the high end of the guidance range. Semiconductors still face one to two more quarters of headline headwinds from lapping the large project, but underlying organic demand is strong, with double-digit growth excluding that one-time impact, driven by increased power semiconductor CapEx. Management expects full lap completion by Q4 2026.

• Q: Chris Snyder (Morgan Stanley) asked if defense and space growth can step up further in 2026 as capacity expands, and if the above-target growth will persist into 2027 and 2028. /

  A: The $1 billion defense backlog is multi-year, spanning two to three years of production. Management has been expanding capacity for over two years to meet demand, mostly via productivity and supply chain improvements, with additional physical capacity expansion planned for out years. Defense growth will remain in double digits in 2026, then moderate to the high end of the company's 3% to 5% through-cycle organic growth target in 2027 and beyond. Defense carries lower-than-average margins, creating ongoing mix headwinds that were already incorporated into the current guidance, and leading to some quarterly margin lumpiness.

• Q: Kevin Wilson (Truist Securities) asked for details on the planned Qualitrol utility sensor facility expansion, including investment size, capacity gains, and timing of revenue contribution. /

  A: Capacity increases for utility sensors have been driven primarily by RBS-driven productivity gains and shift expansion at existing facilities for several years. The new physical facility expansion is being planned to support demand beyond 2026-2028, with construction starting in 2026. Capital expenditure for 2026 is expected to come in between 2% and 3% of revenue, up from the prior 2% target, to fund this expansion. All organic capacity investments go through a strict approval process requiring returns far above the company's cost of capital, and this expansion meets that bar.

• Q: Scott Graham (Seaport Research Partners) asked for details on 2026 tariff costs, how the company will offset them, and how AI is being integrated into internal productivity initiatives. /

  A: 2026 tariff costs are currently forecast at ~$25 million, down from $30-$40 million in 2025 due to policy changes and mitigation efforts. Offsets come from a combination of value engineering, strategic supplier negotiations, supply chain optimization, and moderate 1.5%-2% annual price increases (with 2026 pricing tracking slightly above that range) all coordinated via the RBS playbook. The company launched an internal AI Foundry as part of RBS to drive citizen-led AI productivity improvements, which is now formally integrated into the enterprise productivity program, with AI used to eliminate unnecessary work steps and streamline workflows across the business.