Ralliant Corporation (RAL) Earnings Call Transcript & Summary

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?