Ralliant Corporation (RAL) Q4 2025 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reveals a mixed sentiment. Strong defense growth and power grid modernization are positives, but EA impairment and declining margins are concerns. The Q&A highlights uncertainties in Test & Measurement and EA's competitive position. The guidance suggests stable financials but lacks strong growth catalysts. Overall, the sentiment is balanced, leading to a neutral stock price prediction.
Key Financial Performance
Revenue $555 million, a 1% improvement year-over-year. Reasons: Sequential improvement every quarter with 5% sequential growth in Q4. Growth in Sensors & Safety Systems segment across all end markets, record revenue in Defense and Space end market driven by replenishment of missile programs, and benefits from secular tailwinds in utilities market.
Adjusted EBITDA margin 20.8%. Reasons: Revenue slightly above expectations and disciplined operational execution.
Adjusted EPS $0.69. Reasons: Reflects revenue slightly above expectations and disciplined operational execution.
Free cash flow conversion rate 117%. Reasons: Driven by disciplined capital expenditures and net working capital management.
Net leverage 1.9x adjusted EBITDA. Reasons: Maintained within target leverage range.
Sensors and Safety Systems revenue 6% year-over-year growth. Reasons: Growth in Defense and Space (5% YoY), Utilities (6% YoY), and Industrial Manufacturing (6% YoY) driven by robust demand, secular growth in grid modernization, and positive activity in North America and Western Europe.
Test & Measurement revenue $217 million, a 6% year-over-year decline. Reasons: Lower volume in Diversified Electronics due to cautious customer CapEx spending, offset by sequential growth in Communications (29% YoY) and stabilization in semi orders.
Adjusted EBITDA margin for Sensors and Safety Systems 28%. Reasons: A 280 basis point step down due to higher employee costs.
Adjusted EBITDA margin for Test & Measurement Sequential growth of 200 basis points. Reasons: Strong incremental margins and disciplined cost management.
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Operating Highlights
New high-performance oscilloscope platform and probing technologies: Improved sequentially in communications market, supporting research, data center, and aerospace and defense applications.
Condition-based monitoring solutions: Selected by a major cloud provider for data center reliability and resilience, combining sensors, monitoring software, and analytics.
AI robotics partnership: Tektronix partnered with an AI robotics company to validate electronics for humanoid robotics, translating digital intelligence into precise physical actions.
Defense and Space: Record revenue driven by missile program replenishment and backlog growth.
Utilities: Growth supported by grid modernization and electrification, driven by data center demand.
Industrial Manufacturing: Improvement in North America and Western Europe, with selective areas of strength.
Rest of World: Best-performing region in Q4, driven by customer wins in Korea, the Middle East, and Africa.
Ralliant Business System (RBS): Enhanced with AI to accelerate learning and execution, improving operational discipline.
Cost savings program: Achieved $1 million in Q4 savings, targeting $9-11 million annualized savings by 2026.
Manufacturing agility: Selective footprint expansion to increase capacity for defense and utilities customers.
Separation as a stand-alone public company: Completed earlier than anticipated, with a focus on cost savings and shareholder value.
Capital allocation priorities: Focused on organic reinvestment, shareholder returns, and potential tuck-in acquisitions.
Growth investments: Investing in commercial, innovation, and manufacturing to enhance long-term growth.
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Risk or Challenges
China macro leading indicators: Continued pressure from export controls and an uncertain environment, which could impact revenue growth in the region.
Electric vehicle demand headwinds: EA Elektro-Automatik business has experienced slower-than-anticipated progression and reduced industry forecasts of future EV adoption, leading to a $1.4 billion noncash goodwill impairment.
Test & Measurement segment: Lower volume and cautious customer CapEx spending in 2025, with uneven semiconductor revenue and a large customer project not expected to repeat in 2026.
Operating expenses: Higher employee costs, including health care, and increased operating expenses related to being a stand-alone public company.
Defense and space market: While poised for growth, the market is dependent on winning future contracts, which introduces uncertainty.
Industrial manufacturing: Uneven conditions globally, with selective areas of strength but no consistent recovery.
Semiconductor market: Variable revenue dependent on customer-specific exposure and uneven global semiconductor customer spending.
Tariff policies: Potential changes in tariff policies could impact cost structures, though current policies are being offset.
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Guidance & Outlook
Revenue Expectations: For Q1 2026, revenue is expected to be $508 million to $522 million, representing 5% to 8% year-over-year growth. For the full year 2026, revenue is projected to be $2.1 billion to $2.2 billion, reflecting 2% to 6% year-over-year growth.
Adjusted EBITDA Margin: For Q1 2026, adjusted EBITDA margin is expected to be 17% to 18%. For the full year 2026, adjusted EBITDA margin is projected to be 18% to 20%, with a 50 to 250 basis point decline year-over-year due to structural changes in operating costs post-spin.
Adjusted EPS: For Q1 2026, adjusted EPS is expected to be $0.46 to $0.52 per share. For the full year 2026, adjusted EPS is projected to be $2.22 to $2.42 per share.
Free Cash Flow: Free cash flow conversion is expected to remain over 95% on a trailing 12-month basis throughout 2026, inclusive of CapEx at 2% to 3% of revenue.
Capital Expenditures: CapEx is expected to increase to 2% to 3% of revenue in 2026, up from about 2% historically, to support growth investments in commercial, innovation, and manufacturing.
Market Trends and Segment Performance: The Sensors & Safety Systems segment is expected to see growth driven by defense and space, utilities, and industrial manufacturing markets. Test & Measurement is projected to stabilize with growth in communications and diversified electronics, while semiconductor revenue remains uneven but shows pockets of improvement.
Regional Performance: North America and Western Europe are expected to show positive trends, while China faces continued pressure from export controls. The Rest of World region is anticipated to perform strongly, driven by customer wins in Korea, the Middle East, and Africa.
Cost Savings Program: The cost savings program is on track to achieve $9 million to $11 million in annualized savings by the end of 2026, with $1 million already realized in Q4 2025.
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Shareholder Return Plan
Quarterly Dividend: The Board of Directors authorized a quarterly cash dividend of $0.05 per share.
Share Repurchase Authorization: The Board of Directors authorized a $200 million share repurchase program, which remains fully available.
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Key Q&A
Q:Can you elaborate on the segment cost growth and its main focus points?
A:The company remains confident in its targets shared at Investor Day, including 3%-5% revenue growth (3% organic) and adjusted EBITDA in the low to mid-20s. Investments are focused on innovation, manufacturing, and commercial growth, with Sensors and Safety Systems expected to perform at the higher end of the range and Test & Measurement at the lower end.
Q:How much reinvestment or top-up is contemplated, and why is it being addressed now?
A:The company is incorporating 50-100 basis points of reinvestment into its 2026 guidance. This is focused on Sensors and Safety Systems, targeting utilities and defense, with expected high returns. The reinvestment is part of the adjusted margin numbers.
Q:Can you clarify the 250 basis points headwind and its distribution across quarters?
A:The headwind translates to about $175 million per quarter in operating expenses, totaling approximately $700 million annually. This includes corporate stand-up costs. The company expects only a modest increase in 2026, with productivity programs helping to manage costs.
Q:What are the implications of the impairment in EA, and are other Test & Measurement businesses vulnerable?
A:The impairment was primarily related to EA due to reduced EV subsidies in the U.S., which impacted forecasts. The EA business will now focus on other energy storage spaces. No other Test & Measurement businesses are expected to face similar issues.
Q:Can you provide more color on Test & Measurement performance and expectations?
A:Test & Measurement, which is 40% of the business, saw a 6% decline in Q4. Diversified electronics (50% of the segment) showed a 10% sequential improvement. Communications (aerospace and defense) grew 29% in Q4, while the semiconductor segment faces headwinds due to lapping a large customer project.
Q:What is the company's approach to M&A this year?
A:The company remains focused on tuck-in M&A aligned with its growth strategy. It is actively evaluating adjacent markets and structural growth areas, with a disciplined capital allocation approach to ensure high returns.
Q:Can you comment on order activity and book-to-bill for Test & Measurement?
A:The Test & Measurement segment has a 1:1 book-to-bill ratio. Sales funnels are building, and distribution partners report increased quoting activity and normalized inventory levels, signaling potential growth.
Q:What is the level and nature of corporate costs in the guidance?
A:Corporate costs are approximately $50-$55 million annually, with total operating expenses at $175 million per quarter. These costs include health insurance, business insurance, and other employee-related expenses. A modest increase is expected in 2026.
Q:Why did margins in the Sensor and Safety segment decline in Q4 despite revenue growth?
A:The decline was due to a record revenue quarter in the Defense & Space business, which has a lower margin profile. Investments in manufacturing and sales resources also impacted margins.
Q:What are the expectations for major regions in 2026?
A:North America and Europe, which make up 65% of the business, are expected to benefit from strong secular tailwinds in defense and utilities. Lower expectations are set for China, except for some growth in sensors and utilities.
Q:Can you expand on the Qualitrol award with a large cloud provider?
A:This is a new customer space for Qualitrol, which traditionally served utilities and transformer OEMs. The award represents growth in hyperscalers building their own grid infrastructure for data centers.
Q:What is the market share opportunity in validation for Tektronix?
A:Tektronix launched the MP5000 platform for automated testing, targeting system integrators in the validation space. This represents a greenfield opportunity with potential for growth as adoption increases.
Q:What led to the EA impairment, and how does it relate to competitive issues?
A:The impairment was driven by reduced EV subsidies and changes in customer projects. The EA business will now focus on other energy storage markets. The competitive landscape remains strong for EA's technology.
Q:What is the role of data centers in Test & Measurement communications?
A:Data centers represent a small but growing part of the communications segment, which is 70%-80% aerospace and defense. The broader electronics ecosystem for data centers provides additional opportunities for Test & Measurement.
Q:What is driving the projected margin decline in 2026?
A:The decline is due to investments in manufacturing, sales resources, and innovation, particularly in Sensors and Safety Systems. These investments aim to expand capacity and fuel growth in defense and utilities.
Q:How much of the sequential 10% improvement in diversified electronics is seasonal?
A:The improvement reflects both seasonal factors and broader sequential growth throughout the year. Positive signals include healthy sell-through and increased quoting activity.
Q:Why is the Q4 to Q1 margin decline steeper than normal?
A:The decline is due to seasonality, compensation true-ups, healthcare cost inflation, and the initiation of organic investments. These factors contribute to a slightly lower margin than previously anticipated.
Q:When will the benefits of the investments be realized?
A:The benefits are partially included in the 2026 guidance, with the majority expected to materialize in 2027.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing the competitive landscape and differentiation of EA's technology post-impairment. Additionally, while discussing the Q4 to Q1 margin decline, the explanation lacked clarity on the specific impact of each contributing factor.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI application
AI learning
AI platform
AI software
AI turnaround
Africa improvement
America improvement
America recovery
Automatik Fortive
Communications backlog
Day Sensors
Day capital
Day expectation
Defense Technologies
Full
Neill
SEC Form
Sensors Safety
appendix presentation
course
customer project
customer spending
distributor
goodwill impairment
health
impairment testing
intelligence
market Slide
market expectation
missile
point decline
policy
presence
program utility
record
semiconductor customer
separation cash
step employee
tailwind
term portfolio
track
utility market
work
RAL Transcript
Ralliant Corporation (RAL) Q4 2025 Earnings Call Transcript
Unknown2-5
The earnings call reveals a mixed sentiment. Strong defense growth and power grid modernization are positives, but EA impairment and declining margins are concerns. The Q&A highlights uncertainties in Test & Measurement and EA's competitive position. The guidance suggests stable financials but lacks strong growth catalysts. Overall, the sentiment is balanced, leading to a neutral stock price prediction.
Ralliant Corporation (RAL) Presents at Baird 55th Annual Global Industrial Conference Transcript
Neutral11-11
Ralliant Corporation (RAL) Q3 2025 Earnings Call Transcript
Unknown11-6
The earnings call reveals mixed results: strong growth in Defense and Utilities, but declines in Test & Measurement and Diversified Electronics. Positive guidance on margins and defense growth is offset by cautious sales guidance and ongoing organizational inefficiencies. The Q&A suggests stabilization and modest growth, but management's lack of clarity on orders and RPO discrepancies raises concerns. Overall, the mixed signals and lack of strong positive catalysts suggest a neutral stock price movement in the short term.
Ralliant Corporation (RAL) Presents At Morgan Stanley's 13th Annual Laguna Conference Transcript
Neutral9-10
RAL Slides
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