Prepared remarks
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 provided 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 three 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 declined 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 recurring revenue. Enabling our strategy is the AI-enabled 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 two to five times 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. Flagwells 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 three quarters of 2025 results to 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 is 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 & 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 in 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 & 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 & Measurement on Slide 16. Test & 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 & 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 wide bandgap 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 billion, adjusted EBITDA margin of 19.5% to 20.5%, and adjusted EPS of $2.53 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-20s, 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 at 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 in 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 & 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 reinvestment. We are investing in capacity expansion in defense and utilities to serve identified 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 sectors. 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.
Questions and answers
Operator provided instructions. Today's first question is coming from Julian Mitchell of Barclays.
Just a solid set of results. I wanted to understand perhaps the sales growth guidance. I understand 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 could you 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 frame how you're thinking about the confluence of comps versus the end market movements. Semiconductors is a market I'm particularly interested in — you mentioned coming to the end of that tough comp. How does that business grow from here?
Thank you, Julian. As we think about the guidance for the second half, the Test & Measurement 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 us to raise the full year guidance. That business is short-cycle, and we generally get 90 to 120 days of visibility. We are seeing order increases, the funnels are solid, and the new products we launched in the latter part of last year are doing well. However, there is still uncertainty in the environment. We're focusing on what we can control: spending time with our customers, continuing to launch new products, and focusing on higher growth opportunities. We believe it's prudent to be as we have guided for the second half.
Julian, let me add to that. Normally, our seasonal split is roughly about 48% of revenue in the first half and 52% in the second half. If you look at the guidance, that represents more like a 49% first half and 51% second half. So all else equal, Tammy talked about some macro uncertainty, but we probably would land more toward the high end of the range we gave based on historical seasonality. Demand remains strong. The defense backlog gives us a lot of confidence about that business. Given macro uncertainty and potential supply disruptions in the second half, we're being cautious. From a demand perspective, however, we would normally expect to be closer to the higher end of the range.
And just to close on semiconductors — that was the second part of your question, Julian — there is underlying strength in semiconductors across a broad set of customers. We are still lapping a large customer deal from last year; we have another quarter of that headwind, but the underlying strength is strong.
That's great to hear. My follow-up would be around the EBITDA margin outlook. You have a very strong increase in the second quarter, dialing up over 300 basis points of the normalized base. The second half looks like maybe about 21% EBITDA margin, which is only about a 100 basis point increase year-on-year. Is that because you have slightly lower sales growth dialed in, so less margin expansion? Is it conservatism? Anything happening with mix or cost phasing that explains the more muted second-half margin expansion year-on-year?
Julian, when you consider margin performance, the key drivers are revenue growth, mix, and the execution timing of our enterprise productivity program. We do have some headwinds from mix and we are executing productivity actions to drive cost optimization. Those three factors — revenue growth, mix, and productivity phasing — explain the pattern you see in the second half.
The next question is coming from Chris Snyder of Morgan Stanley. Operator provided instructions.
I wanted to ask about Defense & Space within the Sensors & Safety segment. 21% organic growth is really good. Based on the backlog build in the quarter, it seems demand may be even higher. Can you talk about how you expect growth there to play out as the year goes on? Could it step higher as capacity comes online? I know comps get harder. Also, you said in the release that given visibility there, it positions Ralliant for above-target growth. Was that comment referring just to 2026, or is it expected to remain the case in 2027 and 2028 because this is a very long cycle at play?
I'll start with backlog. The $1 billion we cited is a multiyear backlog — think roughly two to three years of backlog. We work closely with customers to meet their requirements for on-time delivery. We have begun capacity expansion and have been investing for over two years to keep up with demand. Much of the initial capacity expansion has come from productivity initiatives and strategic sourcing. Looking toward 2027 and 2028, we do see the need to expand physical capacity and are executing against that. From a growth standpoint, at Investor Day we talked about 3% to 5% through the cycle. Where we stand today, near-term to midterm, we are at the high end of that on an organic basis and higher than that in 2026 as shown in our guide. Out years, with increases we've seen in both defense and utilities, we expect to be towards the high end of that 3% to 5% range on an organic basis without M&A.
To add, defense is seeing higher growth rates — double-digit growth in 2026 and likely double-digit in the near term. Beyond 2026, we expect defense to settle toward mid-single digits as you get outside the trough. Defense can have a margin mix impact because defense products tend to be at margins below the company average, and that mix effect is part of how we are balancing our outlook.
I appreciate that. Following up, you incurred mix headwinds in the Sensors segment. Defense up 21% and Utilities only up 1% — Utilities is on the more premium margin side as I understand it. Was Q1 margin strength due to volume leverage, or did you start realizing productivity benefits already?
It's a bit of both. There is some mix challenge given the faster growth in defense, which is great for backlog and revenue but dilutive to margins relative to company average. We also had elements of the cost savings program come into Q1. Volume leverage helped as well. Defense can be lumpy quarter-to-quarter in both revenue and margins as we transition to a larger backlog focused on missiles and munitions. Q1 was positive for us, but throughout the year you may see some quarters where margins are lower; overall, we expect margin expansion year-over-year with Test & Measurement particularly helping as that cycle improves.
The next question is coming from Deane Dray of RBC Capital Markets. Operator provided instructions.
Congrats on a strong quarter. Can you help us understand the applications the defense sensors are going into? On the utility side, how much of the business is tied to the transformer sensor business, and how long is the backlog versus build? That context would be helpful.
Thank you. For defense, the backlog build is predominantly in legacy production programs — missiles and munitions replenishment that have been in use for decades and are now in a replenishment cycle; that represents the majority of backlog dollars. Another component is customer-funded innovation in defense modernization, which has increased with the number of programs up almost 60% over the last two years. On the utilities side, our precision sensors and analytics solutions are used to keep critical grid assets running and extend their life — that is the precision sensor business. Our Test & Measurement solutions are used to bring new power storage solutions to market and support new energy technologies like nuclear. Those are the primary areas where we play in defense and utilities.
I appreciate that color. Just following up on free cash flow: what was the timing issue this quarter? Do you have a framework or guidance for full year 2026 conversion or margin given the commitment to return half of free cash flow to buybacks? Just confirming the 95% plus conversion framework hasn't changed for the out years?
Yes. The 95% plus free cash flow conversion target has not changed. Q1 is normally a lower free cash flow quarter seasonally — we have employee payments like variable compensation and other payments that typically go out in Q1. It's also a lower revenue quarter seasonally versus Q4, and we had a very strong Q4 last year, so timing explains the step down to $10 million in Q1. Looking forward, we don't expect the conversion target to change, and our buyback plans are consistent with the roughly 50% of free cash flow return to shareholders; based on current visibility it may be a little north of 50% this year. So seasonality explains Q1 and we expect strong cash flow performance through the remainder of the year.
The next question is coming from Kevin Wilson of Truist Securities. Operator provided instructions.
Great quarter. Can you speak to how capacity expansion and other growth investments in Qualitrol are playing out? You mentioned a facility expansion later in 2026. Could you quantify how much capacity or throughput that expansion provides, the investment amount, and when that capacity will come online and translate to revenue?
If you think about capacity, it's been an ongoing effort over several years to increase throughput. Much of it comes from our RBS playbook and productivity improvements. We've added shifts — moving from one shift to two or three shifts — and amplified strategic sourcing capabilities. Those actions have increased throughput in existing facilities. Looking to 2028 and beyond, we see the need to add physical space for some businesses, and we'll start investments this year to expand physical capacity.
To add, in terms of CapEx for the year, at Investor Day we referenced about 2% of revenue; we've expanded that to be closer to 2% to 3% of revenue to support capacity expansion in certain areas. Tammy and I review incremental capital closely. Every dollar goes through a strict process and needs to clear a high bar. This capital competes across commercial, innovation velocity and capacity expansion, and we believe investments in the utilities business are good opportunities with excellent returns.
That's helpful. One more: can you update segment and margin assumptions embedded in the guide? Last quarter you implied Sensors & Safety near the top end of the company range and Test & Measurement around the midpoint. It sounds like this year's raise is mainly Test & Measurement driven. Any updates to that framework?
Yes, that's correct. The 2026 raise is driven by Test & Measurement. For 2026, Test & Measurement is expected to be more toward the high single digits, and Defense & Space is in the double digits driven by the backlog build.
The next question is coming from Piyush Avasthy of Citi. Operator provided instructions.
On Diversified Electronics within Test & Measurement, you experienced strong year-on-year growth in Q1. There are a few end markets in that vertical. Can you drill down on the trends in autos and consumer electronics? Sequentially, should we expect this performance to continue and what's baked into your full year guidance for this vertical?
Diversified Electronics is about 50% of Test & Measurement and its diversity provides durability. End markets connected to AI — infrastructure going into data centers, semiconductors, electronic subsystems for compute, memory and power modules — are strong. AI is also manifesting in robotics across home, workplace and manufacturing. Those electronics fall into our diversified portfolio and have been strong, which gives us confidence in the durability of that business.
You raised full year margin guidance to 19.5% to 20.5%. Can you frame margins by segment? Previously expectations were Test & Measurement in mid- to high-teens and Sensors & Safety in mid- to high-20s. With Test & Measurement's stronger performance, should we expect margins more in line with long-term averages? And similar question for Sensors & Safety after a strong Q1?
To reiterate our Investor Day context: Ralliant's overall through-cycle adjusted EBITDA margins are low to mid-20s. Test & Measurement is typically mid- to high-teens adjusted EBITDA margins, and Sensors & Safety Systems is typically mid- to high-20s.
For the year, Test & Measurement improvement could place margins in the mid-teens to low 20s range — perhaps a bit below midpoint for the year depending on revenue. Sensors & Safety around mid- to high-20s is reasonable, though it may be a bit lumpy quarter-to-quarter. Q1 had positive defense mix; that may shift in other quarters. Overall, with the growth and backlog we believe the full year will align with those ranges.
The next question is coming from Ian Zaffino of Oppenheimer. Operator provided instructions.
On the Test & Measurement side, can you give color geographically — North America versus China versus Western Europe? And on semiconductors, how should we think about lapping the large customer order from last year — what have you done and how should that grow?
Geographically in Test & Measurement, North America has been the strength, largely driven by anything tied to AI where innovation cycles are accelerating — including moves to higher-volt architectures in data centers and power storage validation. In Europe, we've seen green shoots in defense-related test and measurement. In China this quarter, government investments in energy and AI-related initiatives contributed to growth. Regarding semiconductors, you may see a near-term headwind on the headline semi number for the next couple of quarters as we lap the large customer project, but we expect to be fully lapped by Q4.
Yes, on semiconductors, a bit of a headwind for the next few quarters, with the lapping complete by Q4.
On Sensors & Safety, when should we expect the utilities business to inflect higher? How do orders translate into revenue there?
Utilities has been a strength for multiple quarters and even multiple years. This quarter you saw record orders but softer revenue due to shipment timing. We expect that timing issue to be largely a one-quarter lumpiness and for shipments to normalize as we move forward.
The next question is coming from Joseph Giordano of TD Cowen. Operator provided instructions.
Are you able to give more color on the timing and conversion cadence of the $1 billion Defense & Space backlog and how you expect that to ramp relative to current defense revenue profile?
Think of that backlog as multiyear over the next two to three years, and we will continue to receive orders that build on it as we ship products. Within this year, we expect the Defense business to maintain a double-digit plus growth rate and to be lumpy; our RBS playbook helps us execute against that backlog.
Could you update us on recent product launches in Test & Measurement — what end markets and applications you're prioritizing and where you're seeing early adoptions and wins?
Test & Measurement is an area where we control product velocity. The announcements we made last year — about six announcements, with three major new platforms — are getting solid traction in 2026. New products give the sales team opportunities to engage customers and drive portfolio demand. Much of the innovation we see is in defense and AI-related activity — anywhere customers are innovating around electronics. We're focused on being close to customers and helping them solve their toughest challenges.
The next question is coming from Scott Graham of Seaport Research Partners. Operator provided instructions.
Congratulations on the quarter. I wanted to ask about tariffs. You noted you expect to offset them. What does the tariff cost look like currently? When you say you can offset, is that purely price or do you need productivity to offset?
Tariffs are an area we've managed well over several years. Our RBS playbook supports this with a combination of actions: value-engineering products, negotiating with suppliers as volumes increase to get better pricing, and applying pricing methodologies that capture value for the company. The combination of these levers is how we've continued to offset tariffs.
To put a number on it, last year tariff impact was about $30 million to $40 million. For 2026, based on countermeasures and some changes in tariffs, we're forecasting closer to about $25 million. The offset is a mix of pricing and other countermeasures like supply chain actions and value engineering. Within our playbook, we typically see about 1.5% to 2% of price in a given year; for 2026 we have slightly more priced in to get ahead of inflationary pressures. The team is actively managing this through RBS and supply chain work.
Thanks. Quick follow-up: there's a lot of talk about using AI internally to enhance productivity. Are you starting to incorporate AI into day-to-day productivity improvements?
Yes. After the spin, we developed an AI Foundry as part of the Ralliant Business System office. This supports citizen-led AI productivity projects and is being integrated into the enterprise productivity program. The enterprise program provides visibility, program management, governance and hard targets, while RBS is how we scale improvements across the enterprise, remove unnecessary steps and leverage 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.