Ralliant Corporation Q2 2026 Earnings Call

Hello, my name is Donna and I will be your conference facilitator this morning. At this time, I would like to welcome everybody to Ralliant Corporation's second quarter 2020 Earnings Results conference call. All lines have been placed on mute to prevent background noise. After the speakers remarks, we will open the call for questions. If you would like to ask a question, please press star then one on your telephone keypad. If you would like to withdraw your question, please press star two. I would like to turn the call over to Mr. Nathan McCurren, Vice President of Investor Relations. Mr. McCurren, you may begin your conference.

Thank you. Donna. Good morning, everyone, and thank you for joining Ralliant Second quarter 2020 earnings call. I'm Nathan McCurren, vice President of Investor Relations. Today, we'll walk through our results, highlight key operational progress and provide our outlook for the third quarter and full year 2026. I'm joined today by Tami 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 financial measures on today's call. A reconciliation of these measures to U.S. GAAP can be found in the appendix to our presentation during today's call, and unless otherwise stated, we're comparing our second quarter 2020 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 may differ materially from any forward looking statements we make today. Regarding these risks and uncertainties. Is available in our Annual Report on Form 10-K for the year ended December 31st, 2025, filed with the SEC on February 26th, 2026.

And in our form 10-q filed with the SEC on May 12th, 2026. And we filed after market today. With that. I'd like to turn the call over to Tami.

Welcome. Everyone, and thank you for joining us for our Q2 2026 earnings call. One. Year into our journey as an independent company, we're demonstrating that our strategy is working. And I'm incredibly proud of what our team has accomplished. Our progress is translating into growth, margin expansion and strong cash generation Today, I'll start with results on the quarter in strategic execution. Neill will then walk through the financial results before we open up the call for your questions. Let's start on slide four with the business in Outlook update. First. Our Q2 results exceeded the high end of our guidance ranges, and we are raising our full year 2026 outlook as both segments delivered double digit revenue growth and significant adjusted EBITDA margin expansion. Second, we're continuing to capitalize on favorable secular trends and electrification and defense. Our disciplined execution drove Q2 orders growth, resulting in a book to bill above 1.1 in both segments, and defense backlog remaining over $1 billion. Third, our DDS led enterprise Productivity program is gaining traction. We are moving from foundation building to execution and results, reinforcing our confidence in delivering 10 to $12 million of in year savings and 50 to $60 million of annual run rate savings by 2028.

Fourth, we continue to generate strong free cash flow, enabling us to execute our capital allocation priorities. We're investing in manufacturing capacity to support growing demand, and returned $161 million to shareholders in the first half of 2026, including the completion of our $100 million accelerated share repurchase program in Q2. Next, I'll summarize our Q2 financial results on slide five. In the second quarter, revenue was $568 million, up 13% year over year on both a reported and organic basis Both segments delivered double digit organic revenue growth with sensors and safety systems up 11%, and test and measurement up 16%. Adjusted EBITDA margin of 19.8% and adjusted EPS of $0.68 were both above the high end of our guidance ranges, reflecting strong operating leverage on higher volume. Disciplined execution and early benefits from productivity actions already underway. We generated $99 million of free cash flow in the quarter, contributing to a trailing 12 month free cash flow conversion of 114%. Now turning. To slide six. 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, where long standing customer positions and differentiated capabilities position us for elevated growth.

Complementing this, our stronghold positions are anchored in a broad customer base with more modest growth profiles. Where precision technologies delivered durable demand, attractive margins, and recurring revenue. Enabling our strategy is the AI infused Ralliant business system, or BSS. Which brings disciplined consistency and enterprise scale to how we operate and execute. The outcome is sustained growth in long term value creation for our shareholders. Turning to slide seven, I'll share how we are capitalizing on winning growth factors. Electrification is. A compelling growth opportunity where we are well positioned to win from keeping the lights on to enabling the next generation of intelligent products. We are aligned with the technologies powering an increasingly AI enabled world. We help utilities operate a more reliable grid through predictive monitoring of critical infrastructure. While our precision test and measurement instruments enable the electronics breakthroughs behind tomorrow's innovations. As AI accelerates demand for power compute, connectivity and intelligent devices, our solutions are becoming increasingly important. Defense is another compelling growth opportunity where we are well positioned to win our safety. Critical systems are embedded in many of today's legacy missile and munitions programs. While our precision test and measurement instruments enable the advanced electronics behind next generation communications, compute, storage and space applications.

As defense modernization accelerates. We build on our positions in trusted legacy platforms by also supporting the technology, shaping the future of national security, such as autonomous or unmanned air vehicles. Across both secular trends. We support customers from early stage innovation through full scale production and deployment, giving us a unique position at the intersection of infrastructure, electronics and innovation. Turning to slide eight and nine. My regional and in-market commentary will begin with the percentage of year to date total company revenue shown on the right side of the page, followed by the year over year organic revenue growth for Q2. North America represents 54% of revenue and delivered 13% growth, driven by continued momentum in test and measurement, utilities and defense. Looking forward, we expect elevated demand in North America from ongoing investments in the electric grid. Legacy defense programs and technology innovation driven by AI. Western Europe represents 13% of revenue and delivered 16% growth. As we executed well against pockets of opportunity in defense, industrial manufacturing and advanced research Still, the macro environment in Europe remains selective, with lower growth, expected going forward. China represents 16% of revenue and delivered 7% growth with increasing investments in AI, data center and energy infrastructure.

We saw an acceleration of activity in the first half, and we expect that to translate into increasing revenue growth in the second half of the year. The rest of World Region represents 17% of revenue and delivered 14% growth, driven by test and measurement and industrial customers transitioning to. Our end markets. I'll start with the sensors and safety systems segment. Together, the industrial, manufacturing, and other end markets represent approximately 30% of revenue, and both delivered double digit growth in the quarter. With a broadening recovery across most geographies and particular strength in applications within the AI data center, for example, our precision sensors are embedded within data center. Liquid cooling systems or customers are accelerating production volume. This is where BWS provides a competitive advantage. Most recently, the team doubled production throughput on humidity and temperature sensors, leveraging the same resources, achieving a 65% cycle time reduction. Defence in space represents 17% of revenue and delivered 14% growth. Our defense backlog remains over $1 billion, with continued multiyear demand on legacy missile programs. Where we are a trusted supplier. Over the past quarter, our defense customers have progressed from framework agreements to UN definitive contract. Actions. For yuccas.

Under the Department of Wars Acquisition transformation strategy. This represents the first full scale transition toward contract execution and provides increased confidence in elevated multiyear demand as a key supplier to the Pentagon's priority munitions programs, including Thad, Pac three and Tomahawk. We are scaling production across product lines at roughly 2 to 5 times historic levels and making targeted investments in manufacturing capacity to support reliable execution. Utilities represents 14% of revenue and delivered 4% growth. Q2 was another record quarter for orders and revenue. Although revenue growth was below expectations due to shipment timing, primarily related to delays into the Middle East. Shipment delays were approximately a four percentage point headwind to growth in the quarter. In the second half, we expect utilities growth of low double digits as first half orders significantly outpaced revenue, and we are further progressing our capacity expansion initiatives. Test. And measurement growth broadened across all end markets. Diversified electronics represents 21% of revenue and delivered 23% growth as customers increased innovation for electronics in energy storage systems, electric vehicles, medical devices, consumer electronics, and emerging AI enabled edge devices. The convergence of higher compute requirements. Greater energy efficiency needs, and longer battery life expectations is driving a new wave of innovation across these applications.

Energy storage systems exemplify the innovation driving growth in diversified electronics. Customers are rapidly increasing system power levels in developing new ways to connect energy storage to the grid and critical infrastructure. Including data center backup. Tektronix DC power supplies, and customized power racks help validate these next generation architectures In Q2, we secured a production win with a leading energy storage provider, creating an opportunity to scale alongside the customers future capacity expansion. Communication represents 11% of revenue and delivered 9% growth, reflecting continued technology innovation in advanced communications for AI infrastructure, aerospace and defense, and research laboratories. In the quarter, we had a customer win where engineers are using our test and measurement instruments to measure electrical signals with pinpoint accuracy to validate that optical laser chips are working precisely. This supports the build out of optical infrastructure, which is a technology that underpins data hungry AI, cloud computing, and high speed connectivity. Semiconductor represents 7% of revenue and delivered 5% growth. Our high precision instruments are at the forefront of enabling engineers to develop and validate the next generation of semiconductors that enable communication networks, intelligent devices, and advanced electronic systems. During the quarter, we saw broad based acceleration as semiconductor technologies enable new product innovation across industrial energy, data center and defense markets across our.

Test and measurement end markets. Customer demand remains robust in our pipeline continues to support confidence in elevated activity levels through the second half. While the business remains inherently. Short cycle and visibility beyond 90 days is limited. We are encouraged by current demand trends and we're actively managing supply availability and capacity to support customer requirements. Next on slide ten, we leverage across the enterprise for both growth and productivity. As I shared earlier, the RBS led enterprise Productivity Program is on track to achieve 10 to $12 million of in-year savings and 50 to $60 million in annualized run rate savings by 2028. In defense and space, our multiyear RBS led productivity initiatives have doubled production output within our existing manufacturing footprint to further increase production going forward. Tax EMC was awarded $27 million by the Department of War and has expanded into one of our existing manufacturing sites in Ohio. In utilities, we continue to see robust demand supported by multi-year grid modernization and resiliency initiatives In July, we broke ground on expanding our precision sensor facility in upstate New York to support the historic orders growth. Next, Neill will review our financial results and provide additional perspective on our guidance.

Thank you. Tami. Good morning everyone. Please turn to slide 12. Q2 results were above our guidance ranges across all metrics driven by increasing customer demand and strong execution. Q2 revenue of 568 million was up 13% on a reported and organic basis. As revenue growth accelerated across our end markets and regions. Both segments delivered double digit organic growth year over year, led by continued execution against our greater than $1 billion of defense and space backlog acceleration in industrial manufacturing and other end markets, and continuation of broad based customer wins across test and measurement. As I. Shift to adjusted EBITDA and EPS, I will be speaking to our comparisons against normalized adjusted metrics for 2025. As a reminder, we have normalized the first three quarters of 2025 results to reflect our fully ramped post spin costs, which provides a more like for like comparison for 2026 results. Adjusted EBITDA margin in the second quarter was 19.8%. On a normalized basis. This represents a 390 basis point improvement from the prior year, driven by operating leverage on revenue growth and productivity savings realized from the enterprise Productivity Program. Actions. Margin expansion was partially offset by costs associated with standing up. Our enterprise Productivity Office and higher variable compensation on improved operating results.

Adjusted EPS of $0.68 increased 58%, driven by revenue growth. Adjusted EBITDA margin expansion and the benefit of share repurchases. Free cash flow was 99 million in the quarter, driven by higher fall through on increased EBITDA and supported by disciplined working capital management Trailing 12 month free cash flow conversion was 114% above our target of greater than 95%. I'll go through. Segment performance starting with sensors and safety systems on slide 13. Due to revenue of $347 million, increased 12% on a reported basis and 11% organically, driven by double digit revenue growth across defense and space. Industrial, manufacturing and our other end markets Adjusted EBITDA margin for sensors and safety systems was 29.4%. A 350 basis point improvement on a normalized basis, driven by operating leverage on higher revenue, favorable mix from elevated industrial manufacturing, and other contribution and better than expected defense margins based on favorable program mix. In the quarter. Highlights. Of our test and measurement results are on slide 14. Test and. Measurement delivered a strong quarter with revenue of 221 million, up 15% on a reported basis and 16% organically. This was driven by strong orders and revenue growth across all three end markets. As we saw a broadening of customer investment across test and measurement I'll note that in the semiconductor end market, we continue to have year over year headwind from lapping a large customer project in 2025.

But given project timing, this was less pronounced in Q2 than in the prior two quarters, or what we will face in Q3. Test and measurement adjusted EBITDA margin was 14.7% and improvement of 750 basis points on a normalized basis due to strong operating leverage on higher revenue and the ramping of productivity savings. Slide 15. I want to provide a brief update on our enterprise productivity program. As previously announced, we expect 50 to $60 million of annual run rate savings by 2028, inclusive of the 20 million we've already actioned in Q2. We began to realize these savings with $3 million of savings in the quarter, and we are on track to deliver 10 to 12 million of. In your savings in 2026. Combined with a. Strong baseline incremental margin, we expect the enterprise Productivity Program to contribute to approximately 50% incremental adjusted EBITDA margins through 2028. This level of incremental margins assumes an organic revenue growth framework of approximately 5% in 2027 and 2028. This framework would lead us to deliver the midpoint of our through cycle adjusted EBITDA margin, target range of low to mid 20s by 2028. However, we are not providing guidance for 2027 or 2028 at this time. Turning to our balance sheet and cash flow on slide 16.

We ended the. Quarter with $271 million in cash and cash equivalents and $1.15 billion of debt, with $99 million of free cash flow in the quarter. Our cash generation is funding our capital allocation priorities. And at the same time has enabled us to maintain net leverage of approximately 1.9 times within our long term target range. We returned $161 million of capital to shareholders through the first half of 2026. Mostly driven by $150 million of share repurchases, inclusive of our completed $100 million. Accelerated share repurchase program. This resulted in the repurchase of 2.8 million shares at an average price of $54.74 per share. Shifting to slide 17 to cover our expectations for the third quarter and the full year. In Q3, we expect revenue of 570 to 590 million, adjusted EBITDA margin is expected to be between 20.5% and 21.5%, with year over year normalized margin expansion driven by operating leverage on higher revenue and savings from our enterprise productivity program, adjusted EPS is expected to be between $0.72 and $0.78, driven by revenue growth, margin expansion, and a reduction in share count. We expect Q3 weighted average diluted shares outstanding of approximately 112 million. Based on our Q2 performance and increased confidence in continued customer demand in our short cycle businesses.

In the second half, we are raising our full year 2026 guidance. We now expect full year revenue of 2.25 billion to $2.3 billion. Adjusted EBITDA margins of 20 to 21% and adjusted EPS of $2.76 to $2.90. This is inclusive of a small benefit from tariff refunds received through Q2 that will be recognized in cost of sales. From a corporate perspective. We now expect corporate and other