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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 Fourth Quarter and Full Year 2025 Earnings Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. 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 fourth quarter and full year 2025 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 first 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 yesterday and today's presentation can be accessed on the Investor section of our website at ralliant.com. Please note that we'll be discussing certain non-GAAP financial measures 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, and unless otherwise stated, we will be comparing our fourth quarter 2025 results to the same period in 2024. 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 information statement filed with the SEC on 05/28/2025, our quarterly report on Form 10-Q filed with the SEC on 11/06/2025, and our annual report on Form 10-K for the year ended 12/31/2025 to be filed later with the SEC. With that, I'd like to turn the call over to Tamara Newcombe.
Thank you, Nathan. Good morning, everyone. Thank you for joining us for Ralliant's fourth quarter and full year 2025 earnings call. Before we get into the numbers, I want to take a moment to recognize our teams for the incredible work they have done to establish Ralliant as a standalone public company and position us well for the future. That progress sets the stage for today's discussion. I'll start with a high-level overview of our financial performance, share how we're building on our momentum, and discuss where we're investing for growth. I'll then turn it over to Neill to walk through the details of our results and outlook before I come back to close and, of course, open it up for questions. Let's turn to the key takeaways from the quarter on Slide five. 2025 was a pivotal year. We sharpened our long-term strategy, ramped innovation across the portfolio, and strengthened our culture to inspire growth and execution. In the fourth quarter, we exceeded our revenue guidance with stable to improving trends across most of our end markets. Adjusted EBITDA and adjusted EPS were both at or above the high end of our guidance ranges. Another clear demonstration of our operating discipline. We delivered strong free cash flow with a conversion above our long-term target. As we look ahead to 2026, we are well-positioned with secular growth drivers, a healthy balance sheet to create long-term value, and clear strategic priorities guiding where we invest. Drilling down into our Q4 financial results on Slide six. Revenue was $555 million, a 1% improvement year over year. Consistent with our expectations to start the year, we showed sequential improvement every quarter with 5% sequential growth in Q4. The Sensors and Safety Systems segment grew year over year across all end markets. A record quarter of revenue in our Defense and Space end market was driven by replenishment of missile programs. The utilities market continues to benefit from secular tailwinds and a multi-year CapEx cycle focused on energy grid expansion. Industrial manufacturing, while uneven, is improving as customers gain more confidence in their markets. In Test and Measurement, revenue sequentially improved again this quarter. Improvement was led by communications for data centers, defense, and research. Diversified Electronics has shown early signs of broad-based improvement with health signals from our distributor network. And our semiconductor revenue remains variable, dependent on customer-specific exposure. Adjusted EBITDA margin of 20.8% and adjusted EPS of $0.69 reflect revenue slightly above expectations and disciplined operational execution. We also generated robust free cash flow, finishing the year at a 117% conversion rate. We continue to have a healthy balance sheet with net leverage of 1.9 times adjusted EBITDA, in line with our target leverage range. Next, turning to Slide seven. The chart shows our revenue growth improvement over the course of the year. Let me discuss that by region. North America has trended positively with improvement across nearly all end markets. Western Europe saw notable improvement, particularly in Test and Measurement, returning to year-over-year growth in the fourth quarter. China macro leading indicators have shown signs of recovery, but we expect continued pressure from export controls in an uncertain environment. Rest of World was our best-performing region in the year, with outsized growth in Q4, primarily driven by customer wins in Korea, the Middle East, and Africa. This sequential revenue improvement is fueled by secular tailwinds in several of our core markets. On Slide eight, I will outline our 2025 end market mix and revenue growth. The final column reiterates the market growth expectations we shared at our June Investor Day. I'll start with the Sensors and Safety Systems segment, which is approximately 60% of our overall business. Industrial manufacturing is our largest end market, where millions of precision sensors are embedded in critical customer workflows and solutions. Despite uneven conditions, we saw selective areas of strength during the year, led by North America. We expect a gradual global recovery consistent with our Investor Day expectations. The defense and space market is poised to outperform long-term growth expectations this year. We are well-positioned to win future contracts as a key supplier on critical missile defense programs. The utilities market is supported by durable infrastructure investment in grid modernization and reliability, reinforcing growth above our long-term expectations. Shifting now to the Test and Measurement segment, which is about 40% of our revenue. Our largest end market is diversified electronics, representing approximately half the segment, and it is showing broad-based stabilization. Early indicators include improving quote activity and healthy distributor inventory levels, which we expect to further develop in 2026. The communications market has continued to improve sequentially as customers increase investment in our new high-performance oscilloscope platform and probing technologies that support research, data center, and aerospace and defense applications. Global semiconductor customer spending, while improving primarily in AI-related applications, remains uneven. In 2025, results benefited from a large customer project that completed its production cycle in the third quarter and is not expected to repeat this year. Excluding that dynamic, we are seeing pockets of improvement in the semiconductor market as we enter the year. To win across these end markets, we are committed to our profitable growth strategy, which I will cover on Slide nine. There are three pillars to our strategy. First, operating discipline through RBS everywhere. The Ralliant Business System is the foundation of how we run the company. It makes work visible, creates shared language, and reinforces accountability. We are enhancing our RBS toolkit with AI to accelerate learning and execution. Second, our stronghold position. We continue to deepen our leadership positions in target markets where we have an expansive customer installed base and longstanding loyalty. Third, is winning growth vectors. We are expanding our presence in attractive markets such as defense, energy, and electronics to contribute to higher long-term growth across the portfolio. Slide 10 highlights our competitive differentiation and how we are partnering with our customers across these winning growth vectors. In the defense technologies growth vector, PACSCI EMC achieved record revenue in the fourth quarter with continued backlog build, highlighting the strong demand in defense programs where we are an embedded supplier. Using RBS augmented by AI, we are reducing turnaround times on customer proposals, strengthening our supply chain, and automating and expanding our production. In the grid modernization growth sector, Qualitrol was selected by one of the world's largest cloud providers as a global standard to make its data center assets more reliable, visible, and resilient. This reflects both the capability of our technology and the growing need for deeper visibility into the health of critical assets. Our condition-based monitoring solutions combine sensors, data aggregators, monitoring software, and analytics into a fully integrated solution that enables customers to detect and manage early warning signals before affecting operations. In the power electronics growth sector, Tektronix has partnered with an AI robotics company that brings humanoids to life. This requires the validation of electronics that turn intelligence into motion, helping AI to move from software algorithms into real-time control of motors, actuators, and sensors. In effect, translating digital intelligence into precise physical action where performance, safety, and reliability are essential. These customer wins demonstrate that our technology innovation and RBS are clear differentiators to expand our presence in our winning growth vectors. On Slide 11, I'll share our investments that support our profitable growth strategy. As we shared at our last Investor Day and have since reiterated, our top capital allocation priority is organic investment to enhance our long-term growth. We mentioned last quarter that we expect CapEx to be 2% to 3% of revenue in 2026, up from about 2% historically as we invest in more growth CapEx. We've also taken growth investment into account in our incremental EBITDA margins that Neill will discuss shortly. This investment is focused on commercial, innovation, and manufacturing. First, I'll begin with commercial execution. Our competitive advantage is rooted in decades of domain expertise with over 90,000 customers. To better serve and reach these customers, we are investing in sales resources and augmenting with AI and a digital platform. Second, we are investing in innovation acceleration to shorten development cycle times, increasing the velocity of new products. We're deploying platform architectures that enable faster product refresh cycles and serve adjacent applications with less engineering investment. We are also innovating with new business models that have the potential to expand customer lifetime value. Third, we're investing in manufacturing agility. Following multiyear outsized growth with our defense and utilities customers, we've begun to selectively expand our footprint to increase capacity while we continue to leverage RBS to drive productivity in our existing footprint. Next, I'll turn it over to Neill to go over our financial results and provide guidance and insights on Q1 and the full year of 2026.
Thank you, Tammy. Good morning, everyone. Please turn to Slide 13. During Q4, we generated $555 million in revenue, up 1% year over year and flat on an organic basis. Healthy demand across the Sensors and Safety Systems segment, coupled with enterprise-wide pricing actions, mostly offset by lower Test and Measurement volume. Before I go through the remainder of the results, I want to briefly address the $1.4 billion noncash goodwill impairment that we recorded during the fourth quarter in connection with our annual goodwill impairment testing. As previously discussed, the EA Electroautomatique business was acquired in January 2024 as part of Fortive, has experienced electric vehicle demand headwinds and is now trending below previous expectations. As a reminder, EA was purchased for €1.6 billion or the equivalent of approximately $1.7 billion at that time. When you consider FX movement, since the time of the acquisition, the carrying value for EA included in the Test and Measurement segment was approximately $1.8 billion immediately prior to the impairment. Due to the slower than anticipated progression, and recent reduction in industry forecasts of future EV adoption, we revised our long-term revenue and operating profit expectations lower as part of our annual long-range planning process, which is leveraged in our standard goodwill impairment testing actions. The noncash charge has been excluded from the adjusted results presented in the press release and presentation published yesterday, which I will now discuss. Adjusted EBITDA margin in the fourth quarter was 20.8%. As expected, this was a year-over-year decline due to lower Test and Measurement volume and a step up in operating expenses, primarily related to standalone public company costs and higher employee costs such as healthcare. Sequentially, adjusted EBITDA margin increased 40 basis points driven by higher revenue and our cost savings program, partially offset by an increase in operating expenses. Our cost savings program is on track to achieve $9 million to $11 million run rate of annualized savings by 2026. In the fourth quarter, we delivered $1 million of savings, or an approximate $4 million annual run rate. Adjusted diluted EPS was $0.69, a 15% sequential increase driven mostly by operating leverage on higher revenue and lower than expected tax expenses. This was a year-over-year decline as expected, driven by lower adjusted EBITDA and an increase in interest expense which was not incurred prior to separation. Our free cash flow for the quarter was $92 million, driven by disciplined capital expenditures and net working capital management, leading to a conversion rate of 117% over the trailing twelve months, which remains above our long-term target of greater than 95%. On Slides fourteen and fifteen, I'll provide more color on our segment performance and end market trends. In Sensors and Safety Systems, Q4 revenue grew by 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 an increase in shipments while backlog continues to grow. Utilities grew 6% year over year, driven by secular growth and grid modernization and expansion driven by electrification and data center demand. Industrial manufacturing was up 6% year over year as we continue to see pockets of growth. We're seeing ongoing positive activity in North America, and saw improvement in Western Europe throughout the year. Adjusted EBITDA margin for Sensors and Safety Systems was 28%, a 280 basis point step down primarily due to higher employee costs. Turning now to Test and Measurement. Revenue for T&M was $217 million, a decline of 6% year over year. Sequentially, revenue grew 7%. Diversified electronics, which represents roughly half of T&M, declined year over year primarily due to more cautious customer CapEx spending in 2025. However, we saw revenue stabilize and start to gradually improve, leading to 10% sequential growth in the quarter. Communications grew 29% year over year, and 36% sequentially. In semi, as Tammy mentioned, we have worked through backlog on a product line related to a large customer project which we do not expect to repeat in 2026. Our Broadly and Semi orders have been stable to improving throughout the year. Test and Measurement adjusted EBITDA margin grew 200 basis points sequentially, with strong incremental margins and disciplined cost management. Year over year, adjusted EBITDA margin declined by 310 basis points, due to lower volume and higher employee costs. Turning to our balance sheet and cash flow highlights on Slide 16. We ended the quarter with $319 million in cash and cash equivalents, net of payments supportive of $34 million related to the separation. Despite these cash obligations, we kept our net leverage at 1.9 times adjusted EBITDA. Before turning to guidance, I want to remind everyone of our capital allocation priorities on Slide 17. Our top priority remains organic reinvestment. As Tammy mentioned, we are focused on investing in commercial, innovation, and manufacturing. Our next priority is returning capital to shareholders. Last week, our Board of Directors authorized our next quarterly cash dividend of $0.05 per share. We also have a $200 million share repurchase authorization fully remaining. 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 leverage target of 1.5 to two times adjusted EBITDA. And now turning to our outlook for the first quarter and full year 2026 on Slide 18. For the first quarter of 2026, we expect revenue of $508 million to $522 million or 5% to 8% year over year growth, including about two percentage points of FX favorability. The sequential step down from Q4 is in line with typical seasonality. As a reminder, Q4 is typically our highest revenue quarter, while Q1 is typically our lowest revenue quarter each year. We expect adjusted EBITDA margin of 17% to 18%. This step down year over year is mostly due to higher operating expenses and investments in our growth strategy, partially offset by the benefit of operating leverage on higher revenue. Sequentially, this represents a 330 basis point decline at the midpoint driven by the seasonal step down in revenue, a small increase in costs, and incentive compensation resets to target levels. As well as the initiation of organic investments. I'll note that our tariff assumptions are based on policy announcements as of January 30. With current policies, we expect to continue to fully offset the cost of known tariffs throughout the year. Adjusted EPS is expected to be $0.46 to $0.52 per share in the quarter. For the full year, we 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. I will note that we have included tables in the appendix of our presentation that show full year 2025 results for your comparison. This revenue range represents year over year growth of 2% to 6%, on track with our long-term organic revenue growth target of approximately 3%. Consistent with typical seasonality, we expect to see sequential quarterly increases in revenue throughout the year. Adjusted EBITDA margin of 18% to 20% reflects a 50 to 250 basis point decline year over year on a reported basis. Following the spin, we have had structural changes to our operating costs. Given the mid-year timing of our spin last year, I want to give a little color to help with year over year comparisons for modeling purposes. In 2025, we had a ramp in operating expenses. As we have discussed, these are now included in our run rate, and as such, we will be lapping lower pre-spin costs through 2026. This equates to an approximately 250 basis point year over year headwind for the full year of 2026. Excluding this headwind, we expect a 40% to 45% incremental adjusted EBITDA margin in 2026 on a like-for-like basis. This is above our long-term target of 30% to 35% incremental margin and is driven by strong operating leverage on revenue growth and continuing to ramp our cost savings program. I will note this includes the investment in our growth strategy that Tammy walked you through. We expect to continue to generate strong free cash flow, with conversion remaining over 95% on a trailing twelve-month basis throughout the year, inclusive of CapEx at 2% to 3% of revenue. With that, I'll turn it back to Tammy to reinforce our key takeaways for the quarter.
Thank you, Neill. Let me wrap our prepared remarks on Slide 20. 2025 was a pivotal year as we became a standalone public company and charted our course for outperformance. From the announcement of our separation in September 2024, to creating our leadership team and Board of Directors, to fulfilling our public company commitments. The team has stayed focused on ensuring we meet our customers' needs and create shareholder value. We completed our separation earlier than anticipated and immediately launched a focused cost savings program aimed at offsetting post-spin dis-synergies. We established a quarterly dividend, and our Board authorized $200 million share repurchases, reinforcing our commitment to returning capital to shareholders. During this time, we delivered on our financial commitments despite a year with a dynamic macro backdrop. We set guidance as a public company and delivered our first two quarters as a standalone enterprise with all metrics at or above the high end of our guidance ranges. We have confidence as we enter the year with the separation behind us, strong secular tailwinds at our back, and strategic clarity on growth investments. As I wrap, a big shout out to our approximately 7,000 employees around the globe for their ownership and grit to win as one team. Operator, please open the line for questions.
分析師問答
Thank you. The floor is now open for questions. Our first question is coming from Julian Mitchell of Barclays. Please go ahead.
Hi, good morning. Maybe wonder if you could flesh out the segment cost growth and how you see that playing out? Thank you very much. And what the main focus points are?
Thank you very much, Julian. I'll address your question in the context of the targets that we set at SPIN, which was our Investor Day in June, as well as our growth strategy. And to start, we remain confident in the targets that we shared at Investor Day, and just as a reminder, through cycle, we talked about revenue growth of 3% to 5%, 3% of that organic, and then low twenties to mid-twenties on adjusted EBITDA. That remains our target. And this year, our first capital allocation priority was around executing our growth strategy and investing in that organic growth. So as you heard in the prepared remarks, we're fueling some of that across innovation, manufacturing, and commercial. And then as I look out on the horizon and the annual guidance that we gave, we gave a range of year over year growth. And if you think about the mid of that range, about our Sensors and Safety Systems a little bit on the higher end of that range, and they have the stronger adjusted EBITDA margins. Also, where we're going to do most of the growth investments. And then think about our Test and Measurement a little below that expectation, which puts them in the mid-teens to low twenties on adjusted EBITDA. So that's what we're seeing over the next twelve months. Wanted to give that guidance to everyone.
That's very helpful. Thanks very much. And just try and understand how much reinvestment or top up is sort of contemplated here. You have the step up to stand up costs you talked about in midyear. Now we have this step up on the segment costs. Maybe just flesh out kind of what you learned and why we're hearing about this now.
Yes. So thanks, Julian. A couple of things on that. So if you go back and see kind of where we landed, obviously, we've only spun two quarters ago. We're gaining more experience running the company. And that's actually one of the reasons we wanted to give the full year guide to everyone here to help with modeling purposes to really kind of catch that investment as we start to look forward. As you think about the investment, it's more geared towards Sensors and Safety Systems, where we think about higher growth rates over time, thinking about utilities, thinking about defense, and areas where we feel we've got really nice tailwinds. So we'll continue to invest in those and look to increase the growth rates and get very nice returns on that. Narrowing that down to be a bit more specific, baked into that guidance for 2026 is about at a company level about 50 to 100 basis points of reinvestment back into the business and that's incorporated into the margin numbers that we talked about.
Thank you. The next question is coming from Deane Dray of RBC Capital Markets. Please go ahead.
Thank you. Good morning, everyone. I was hoping to get some clarification on this 250 basis points headwind. How does that spread across the quarters? Is it front-end loaded or should we be expecting it to be spread evenly across the year?
Yes. Great question. So I think if you look at the cost structure of the business, there's obviously a lot of puts and takes. Number of days in the quarter can change things in terms of what we see. Obviously, you can see a little bit of lumpiness there. I think what we're trying to say here is previously, back in the 2Q call, we talked about a run rate to leverage about $170 million a quarter. What we're saying now is that's about $175 million a quarter. So that gets you closer to $700 million or so of OpEx for the year. When you think about 2025 then as we move into 2026, I would only think about a modest increase as we're thinking about some of the reinvestment. We obviously leverage RBS everywhere. The teams are working on productivity programs related to operating expenses and our cost of sales on a regular basis. So I wouldn't see it stepping up much further from here. But I think that's the $175 million a quarter which gets you closer to the $700 million that includes our corporate stand-up costs as well. That's a better jump-off point as to how we think about leaving 2025 and going to 2026 and that would translate to the 250 basis points.
Got it. And then just in terms of putting the impairment in context, I mean, that's a sizable write-off for the investment in EA. Can you just take us through any other implications in the business? Are there other test and measurement businesses vulnerable here? It's just the magnitude of the write-off was really surprising given how recently the business had been acquired.
Yes. We went through this in the prepared remarks. So this was primarily related to EA. I wouldn't read into other parts of Test and Measurement as a general statement. Looking at the write-down, we obviously spun two quarters ago. We've had some time to evaluate the strategy and evaluate the business. We've been working through that and we saw some of the areas we've refined as we're looking forward into 2026. What changed recently was we saw the reduction in the EV subsidies in the U.S. I think to a certain extent that also translated into some significant write-downs with some large OEMs as it relates to EVs. That triggered us to reevaluate our own forecast. As we went through our forecast and strategy and the impairment procedures toward the end of the year, which we do every year, it became clear that we needed to take an impairment and execute that write-down.
Deane, the business fits nicely and folds into the T&M business. It's still best-in-class measurement technology, with a standout engineering team and an advanced manufacturing facility that we're taking advantage of. We expect the business at the new levels to be additive in 2026 for us. There is nothing else in the Test and Measurement portfolio that we expect to have issues with.
Thank you. The next question is coming from Ian Zaffino of Oppenheimer. Please go ahead.
Can you try to get a little bit more color on T&M and how to think about it throughout the year? We're seeing sequential growth but still down year over year. Maybe give us color on what to expect over the next few quarters from that, perhaps by subcategory—Europe, communications, diversified electronics. Any color would be helpful. Thank you.
Thank you very much, Ian. Test and Measurement is about 40% of our overall business. You saw Q4 down 6% year over year, but what's positive is if you look at Diversified Electronics, that's about 50% of that segment and it's showing improvement. A lift in semiconductors globally will help the Diversified Electronics space. Predominantly, our go-to-market there is through our distribution partners, and we've seen sequential improvement in that business—about a 10% improvement quarter over quarter as we come into this year. Our partners are seeing good quote activity, normalized inventory levels, and healthy point-of-sale. Those are very good signals. Communications is another piece, where customers are predominantly aerospace and defense and hyperscalers. We saw great growth in Q4—up 29%—and that's where new Tektronix products launched in Q4 are starting to gain traction. These are high-end instruments with longer sales cycles, but we are seeing traction in North America. The smallest piece is pure semiconductors, roughly 9% to 10% of the segment; there we are lapping a large customer project that completed in 2025, so we'll have some headwinds this year, although underlying semiconductor demand is improving.
Okay. Thank you. And maybe you could talk a bit about how you're thinking about M&A going forward? I know you're focused internally, but how are you viewing M&A this year? Will you sit back for now or pursue tuck-ins?
Ian, M&A is closely tied to how we think about innovation. We have a rigorous RBS process around looking at markets and doing market work. We are continually active looking for adjacent tuck-ins that fold nicely into the business. We remain confident in our tuck-in strategy and are focused on markets where we see structural growth over the next five to seven years.
From a capital allocation perspective, we prioritize organic investment, returning cash to shareholders, and selective tuck-in M&A. We will be disciplined capital allocators and focus on targets that deliver the right returns when the timing is appropriate.
Okay, great. Thank you very much for the color.
Our next question is coming from Joseph Giordano of TD Cowen. Please go ahead.
Hi, good morning. This is Chris on for Joe. Can you comment on order activity in the quarter for Test and Measurement and how orders trended sequentially? Maybe also the book-to-bill for the segment and overall?
Yes. Thank you very much, Chris. We like the positive signals in Test and Measurement. For the products piece, we see roughly a one-to-one book-to-bill. We monitor sales funnels closely; our direct sellers spend significant time with semiconductor and large communications customers, and we've seen sales funnels build. We need to see that convert into orders to sustain momentum. We have also seen strength in our distribution partners, who represent about 50% of the T&M business. They report increased quoting activity, normalized inventory, and improving demand, which are encouraging signs.
Great. And could you help us better understand the level and nature of the corporate costs embedded in the guidance and the fiscal outlook? Specifically, how large are the corporate costs and the cadence as we move through the year? Should we expect them to scale with volume or are they largely fixed?
Yes. So to frame it, we talked previously about ramping to about $170 million a quarter in 2025. We have now landed closer to $175 million a quarter, which includes corporate stand-up costs. Corporate costs annually are roughly $50 million to $55 million. There are also other embedded costs across the segments, such as healthcare and insurance for our roughly 7,000 employees. As we look into 2026, think about a modest increase from that run rate—perhaps in the range of $700 million to $720 million total OpEx for the year—reflecting some reinvestment. From a margin perspective, think of Sensors and Safety Systems and Test and Measurement separately: T&M's margin will be more volume-sensitive, so getting more volume is the primary way to expand margins in that segment.
And Chris, just to clarify, the $175 million adjusted OpEx run rate that Neill referenced excludes amortization. We averaged about $175 million in the second half of the year, which is the run rate entering 2026.
Thank you. Our next question is coming from Piyush Avasthy of Citi. Please go ahead.
Good morning, guys. Maybe one clarification on margin performance in Sensors and Safety Systems in Q4. Revenues were up sequentially from Q3 to Q4, but margins came down. Can you elaborate a bit on that? Was there a different mix in the quarter, any competitive or cost pressure, or higher investments? And can you frame how you're thinking of margin in 2026 for the segment in the construction of your 18% to 20% company margin guide?
Thank you very much, Piyush. If you look at Q4, I called out PACSCI EMC in the defense and space business, which had a record revenue quarter. That growth comes with a different margin profile compared to the segment average, which influenced the step-down in segment margin despite the revenue increase.
And as you look into 2026, think about Sensors and Safety Systems contributing above the midpoint of our overall revenue guidance, with solid growth in utilities and defense. The long-term margin target for the segment is in the high twenties. For 2026, given the mix—with defense growing and defense having somewhat lower margins than the segment average—and including the organic investments, we expect mid to high twenties as the framework for segment margins in 2026.
Gotcha. Helpful. And based on your Q1 and full-year guidance, can you comment on your major regions? Which regions have more visibility or easier comps? Any incremental color on geographic demand trends? Growth in Q4 was primarily driven by Rest of World while North America was a little flat. Anything to call out there?
North America and Europe make up about 65% of our business. We have strong secular tailwinds in defense and utilities that we expect to continue into 2026 and are baked into our guidance. Rest of World had outsized growth in Q4 driven by pockets of demand; we remain a global company with opportunities that vary by region. China is a distinct case: historically it was a large driver of electronics growth, but we have lowered expectations given export controls and macro uncertainty. We have seen some green shoots in sensors and industrial in China, and some strength in utilities, but overall our guide reflects more conservative assumptions for China.
I appreciate the color and good luck.
Thank you. Our next question is coming from Kevin Wilson of Truist Securities. Please go ahead.
Hey, good morning. In Qualitrol, can you expand on the award with the large cloud provider you mentioned? You said initial orders were received in Q4. Is this kind of win the first of its kind for Qualitrol, which typically sells to utilities and OEMs? Should we expect more Qualitrol activity specific to data centers above the general transmission infrastructure business?
Thank you for the question, Kevin. Traditionally, Qualitrol has sold to utilities that manage grid assets and to transformer OEMs. This cloud provider win represents a growing customer type: hyperscalers building their own grid infrastructure for data centers. This is a new customer space for Qualitrol and is something we've been seeing develop. It represents an additional and growing addressable market beyond traditional utility and OEM channels.
Thanks. That's helpful. And then on the Tektronix AI robotics highlight, particularly in validation, any more color on that engagement? Broadly, how do you view the market share opportunity in validation for Tektronix, and can you update us on customer adoption of the new product and platform introductions from last quarter?
There's a lot to unpack. The win signals AI moving into the edge, with electronics appearing in industries that historically did not have them—this is broadly positive for Test and Measurement. The MP5000 platform Tektronix launched in Q4 is the first purpose-built solution from Tektronix for automated testing. It's well received but will take time to ramp because it's a new go-to-market that involves system integrators who build validation systems. Tektronix has a small share in automated validation today, which typically uses bench instruments; the MP5000 is a greenfield opportunity and we have seen very positive feedback as customers begin to adopt it. We expect this to be a meaningful growth opportunity as adoption accelerates.
That's great. Thanks, Tammy.
Thank you. The next question is coming from Rob Jamieson of Vertical Research Partners. Please go ahead.
Hey, thanks for taking my questions. Just wanted to follow-up on Deane's question on EA. A lot of these EV headwinds were flagged earlier in the year. I'm trying to understand when you revised expectations. How much of the write-down was due to the reduction in the industry forecast versus EA-specific execution or competitive issues? What's the competitive landscape in high power load and supply test? Has EA's differentiation held or eroded?
In terms of timing, the substantial change over the last few quarters was the shift in EV subsidies and related actions by large OEMs, which led to their own adjustments. As customers changed their plans, it became clearer during our year-end evaluation that EA's long-term outlook needed to be revised. This, together with the annual impairment testing, led to the decision to take the write-down. The change is driven mainly by end-market shifts and the reduction in industry forecasts, rather than a broad weakening across other Test and Measurement businesses.
Many of the affected customers are the OEMs themselves. Some projects or promised projects disappeared, reducing the opportunity in automotive testing. The EA technology is still applicable to other energy storage spaces, and that's where we are redirecting the EA business.
Okay. No, thank you for that. You mentioned data center in T&M as well. Can you give more detail on what you're doing there — power or signal side? And how big is data center within communications? Also, for communications, how material is defense and government versus data center?
Staying within Test and Measurement, communications is roughly 70% to 80% aerospace and defense, with the remainder tied to hyperscalers and data center customers. The AI data center trend raises demand across the electronics ecosystem—communications, compute, memory, and storage—each requiring testing. So data centers drive activity across multiple test domains and increase overall demand for electronic test equipment and solutions.
Okay, great. Thank you.
Our next question is coming from Scott Graham of Seaport Research Partners. Please go ahead.
Hi, good morning. Thanks for taking my question. I'm hoping for additional color on the projected margin decline in 2026. I know you're investing in growth vectors and EA was written down. Which businesses are you investing in most? Which businesses needed investment because of prior underinvestment?
If you look at our annual guide, the company range is 18% to 20% adjusted EBITDA. Sensors and Safety Systems will contribute more toward the higher end of that range, while Test and Measurement, with the volume in our guide, will be more toward the low end. Our investments are concentrated in commercial, manufacturing, and innovation. Manufacturing is the most tangible: we've seen multiyear growth with defense and utilities and are selectively expanding our manufacturing footprint to increase capacity, adding shifts and equipment while leveraging RBS productivity. Commercially, we're adding targeted sales resources and augmenting with AI and digital tools. Innovation investments include platform development such as new Qualitrol solutions for arc detection and AI-enabled monitoring. Most of these investments are concentrated in Sensors and Safety Systems where we expect higher growth returns.
Very good. Thank you for that. Diversified Electronics was down 13% but up 10% sequentially. How much of that 10% sequential was seasonal, and any comment on January activity?
The sequential improvement was driven by higher quoting activity and distributor signals, which are good signs for stabilization and recovery in Diversified Electronics. There is seasonality in T&M with a typical step down in Q1, which we factored into our guide, but the quarter-to-quarter improvement throughout the year is encouraging and reflects normalization of inventories and improving demand signals.
Thank you. Our next question is coming from Chris Schneider of Morgan Stanley. Please go ahead.
Thank you. I joined a little late, but I wanted to ask about the Q4 to Q1 sequential progression. At the midpoint you guys are guiding down about 330 basis points, which seems steeper than normal. Is that all due to investments, or is there a mix effect in Sensors and Safety? Why is the step down so sharp?
Chris, great question. The transition from Q4 to Q1 is driven by seasonality—Q4 is typically our highest quarter and Q1 the lowest. Previously we discussed a 200 to 300 basis point decline into Q1 from Q4. We're guiding slightly below that range now. Factors include seasonality, compensation true-ups at the start of the year, a small initiation of organic investments, and modestly higher healthcare and other costs. So it's a combination of normal seasonality plus a few incremental cost items and the initial step-up of investments.
Thank you. And on the investments you're making, when do you expect them to have a positive impact on top-line? Are those benefits included in 2026 guidance, or do they pay off in 2027 and beyond?
We have embedded some of the expected benefits of those investments into the 2026 guide. However, many of the returns, particularly from commercial and manufacturing capacity investments, will realize more fully in 2027 and beyond as sales resources ramp and new production lines come online.
Ladies and gentlemen, 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.
Thank you for your questions and for being with us today. I'd like to wrap up the call with a few closing remarks. While public for only a short time, over the last several years, we've undertaken deliberate actions to create a sustained streamlined portfolio with world-class leaders. One of our greatest strengths is the passion and commitment of our employees to win as one team. We're executing against our growth strategy by leveraging RBS to compete across businesses, stronghold positions, and in secular high-growth vectors. Expect the RBS to continue to serve as a competitive advantage enabling customer innovation and operating efficiencies, ultimately enabling us to perform with financial discipline. Our teams have demonstrated operating rigor with the ability to profitably evolve our portfolio and deliver in any environment. We are resolute in our commitment to supporting our customers, inspiring employees, and delivering for our shareholders. Thank you for joining us today. I hope you have a great one.
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.