Ralliant Corp. Q4 FY2025 earnings call

Management Statement and Operational Highlights

• Key Takeaways: 2025 was a pivotal year with sharpening strategy, ramping innovation, and strengthening culture. Fourth quarter exceeded revenue guidance with stable to improving trends across most end markets. Adjusted EBITDA and adjusted EPS were at or above guidance ranges. Strong free cash flow with conversion above long-term target. 2026 well-positioned with growth drivers, healthy balance sheet, and strategic priorities.
• Q4 Financial Results: Revenue was $555 million, 1% improvement year over year with 5% sequential growth in Q4. Sensors and Safety Systems grew across end markets with defense and space record revenue. Test and Measurement had sequential improvement. Diversified Electronics showed early signs of improvement. Semiconductor revenue variable. Adjusted EBITDA margin 20.8% and adjusted EPS $0.69.
• Strategy: Three pillars - operating discipline through RBS everywhere, strengthening stronghold positions, and winning growth vectors. RBS enhanced with AI. Stronghold positions in target markets. Expanding in defense, energy, and electronics.
• Competitive Differentiation: Examples include PACSCI EMC in defense with record revenue, Qualitrol in grid modernization selected by cloud provider, and Tektronix partnering with AI robotics company for electronics validation.
• Investments: Focus on organic investment for long-term growth. Commercial execution with sales resources and digital platform. Innovation acceleration for shorter development cycles. Manufacturing agility by expanding footprint and leveraging RBS.

Segment Performance

• Sensors and Safety Systems: Q4 revenue grew 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 shipment increase. Utilities grew 6% year over year due to secular growth and grid modernization. Industrial manufacturing was up 6% year over year with pockets of growth in North America and improvement in Western Europe. Adjusted EBITDA margin was 28%, a 280 basis point step down primarily due to higher employee costs. This segment accounts for approximately 60% of overall business.
• Test and Measurement: Q4 revenue was $217 million, a decline of 6% year over year but 7% sequentially. Diversified electronics, representing roughly half of T&M, declined year over year but saw 10% sequential growth in the quarter. Communications grew 29% year over year and 36% sequentially. Semiconductor revenue was variable dependent on customer-specific exposure. Adjusted EBITDA margin for Test and Measurement grew 200 basis points sequentially but declined 310 basis points year over year due to lower volume and higher employee costs. This segment is about 40% of revenue.

Guidance

• First Quarter 2026: Expect revenue of $508 million to $522 million, a 5% to 8% year over year growth (including about two percentage points of FX favorability). Adjusted EBITDA margin expected to be 17% to 18%. Adjusted EPS expected to be $0.46 to $0.52 per share. Sequential step down in line with seasonality.
• Full Year 2026: 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. Revenue range represents year over year growth of 2% to 6%. Adjusted EBITDA margin reflects structural cost changes and operating leverage on revenue growth, with a 250 basis point year over year headwind to be lapped.

Risks

• Forward-looking statements are subject to a number of risks and uncertainties, and actual results might differ materially from forward-looking statements. For example, the goodwill impairment recorded in the fourth quarter related to the EA Electroautomatique business due to EV demand headwinds and revised long-term revenue and operating profit expectations.

Question and Answer

• Q: Julian Mitchell of Barclays asked about segment cost growth and focus points **A: Tamara Newcombe mentioned remaining confident in Investor Day targets, with sensors and safety systems expected to be on the higher end of revenue growth and test and measurement on the lower end, and Neill Reynolds added about gaining experience running the company and investment geared towards sensors and safety systems with tailwinds.
• Q: Deane Dray of RBC Capital Markets asked about the 250 basis points headwind spread across quarters **A: Neill Reynolds said it's about a run rate of $175 million a quarter, with modest increases as teams work on productivity programs and it translates to the 250 basis point headwind.
• Q: Ian Zaffino of Oppenheimer asked about color on Test and Measurement and M&A **A: Tamara Newcombe talked about diversified electronics in Test and Measurement having sequential improvement, normalized inventory levels, and good quote activity, and about M&A being tied to innovation and looking at adjacent or tuck-in markets. Neill Reynolds added about being disciplined capital allocators.
• Q: Joseph Giordano of TD Cowen asked about order activity in Test and Measurement and corporate costs **A: Tamara Newcombe said one-to-one book to bill in products piece, sales funnels building, and distribution partners giving good signals. Neill Reynolds discussed corporate costs on a run rate basis of about $175 million a quarter and modest step up into 2026.
• Q: Piyush Avasthy of Citi asked about margin performance in Sensors and Safety segment and regional visibility **A: Tamara Newcombe said defense and space growth has different margin profile. Neill Reynolds talked about sensors and safety systems above midpoint of revenue growth and long-term margin targets. Tamara Newcombe discussed North America, Europe, Rest of World, and China regions with varying outlooks.
• Q: Kevin Wilson of Truist Securities asked about Qualitrol award and Tektronix AI robotics engagement **A: Tamara Newcombe said Qualitrol win is in new customer space of hyperscalers building data center grid infrastructure. For Tektronix, the AI robotics engagement is about electronics validation in new end markets, and the MP 5,000 platform has been well received with expected growth.
• Q: Rob Jamieson of Vertical Research Partners asked about EA goodwill impairment and data center in Test and Measurement **A: Neill Reynolds said EV subsidies change led to goodwill impairment. Tamara Newcombe said EA business is directed to other energy storage spaces. Tamara Newcombe discussed data center in Test and Measurement as part of communication and defense business.
• Q: Scott Graham of Seaport Research Partners asked about margin decline in 2026 and investment impact **A: Tamara Newcombe said investments in manufacturing, sales resources, and platforms in sensors and safety systems, with investments embedded in 2026 guide but paying off more in 2027. Neill Reynolds discussed Q4 to Q1 sequential progression and factors driving it.
• Q: Chris Schneider of Morgan Stanley asked about Q4 to Q1 sequential margin decline and investment impact on top line **A: Neill Reynolds said it's in line with seasonality and factors like compensation true-ups and organic investments. Tamara Newcombe said investments are embedded in 2026 guide with payoff in 2027