Executive Summary / Key Takeaways

• Ralliant Corporation (NYSE:RAL), recently spun off from Fortive (FTV), is strategically positioned as a precision technology leader in an increasingly electrified and digital world, focusing on high-growth vectors like defense technologies, grid modernization, and electrification.
• The company delivered strong Q3 2025 results, with revenue of $529 million at the high end of guidance and a 5% sequential increase, driven by robust demand in Sensors & Safety Systems and stabilization in Test & Measurement. Adjusted EBITDA margins expanded sequentially to 20.4%.
• Ralliant's technological differentiation, exemplified by new product launches like the DPO7000 oscilloscope and MP5000 modular test system, provides a competitive edge in critical R&D and validation workflows for next-generation technologies such as AI, robotics, and quantum systems.
• Strong free cash flow generation, with a Q3 conversion rate of 185% and a trailing 12-month average of 124%, significantly exceeds the long-term target of over 95%, underscoring operational efficiency and disciplined capital allocation.
• While facing headwinds in Western Europe and China, and R&D deferrals in semiconductors, Ralliant's growing backlog in Defense (over 2x annual revenue) and double-digit growth in Utilities present compelling long-term opportunities, supported by planned organic investments and a disciplined cost savings program.

The Dawn of a Precision Powerhouse

Ralliant Corporation (NYSE:RAL) emerges as a focused global technology company, specializing in the design, development, manufacture, and service of precision instruments and highly engineered products. Spun off from Fortive Corporation on June 28, 2025, Ralliant is now charting an independent course, empowering engineers with critical technologies essential for breakthrough innovation in an electrified and digital world. The company's strategic segments, Test and Measurement and Sensors and Safety Systems, house well-known brands that hold prominent positions across a diverse range of attractive end markets.

The industry landscape Ralliant operates within is characterized by accelerating demand for high-performance, data-driven equipment, fueled by megatrends such as electrification, digitization, and artificial intelligence (AI). Global annual defense spending is projected to increase from $1.8 trillion to $3 trillion by 2030, representing approximately a 40% growth rate. Concurrently, utility companies are undertaking significant expansion and upgrade investments, with power demand growth expected to be six times higher over the next five years compared to the prior two-decade average, and over 70% of U.S. power transformers exceeding 25 years in age. These broad industry trends create a fertile ground for Ralliant's specialized solutions.

Ralliant's foundational strength lies in its differentiated technology and a culture deeply ingrained in precision expertise and the Ralliant Business System (RBS). This system serves as the engine for innovation, scale, and profitability, driving disciplined execution and customer-centric innovation across the enterprise. The company's strategic focus is built on three pillars: "RBS everywhere," "stronghold positions" through differentiated services and robust product roadmaps, and "winning growth vectors" in defense technologies, grid modernization, and electrification.

Technological Edge: Unveiling the Invisible and Automating Precision

Ralliant's competitive moat is significantly bolstered by its core differentiated technology, particularly within its Test and Measurement segment. The company's oscilloscopes, for instance, are designed to capture and analyze signals with ultra-low noise and high Effective Number of Bits (ENOB), enabling engineers to discern signals that were previously invisible. This level of precision is critical for developing next-generation technologies such as AI, robotics, quantum systems, and ultrafast serial communications. The tangible benefit for customers is accelerated innovation, allowing them to bring advanced technologies to market faster and more efficiently.

Recent R&D initiatives have culminated in two significant new product launches that underscore Ralliant's commitment to technological leadership. The DPO7000, a high-performance precision instrument, is squarely aimed at the R&D space. It features a scalable architecture, promising future velocity as higher levels of bandwidth are introduced. This platform approach ensures long-term relevance and adaptability to evolving technological demands. Complementing this, the MP5000 series modular precision test system expands Tektronix's portfolio into the validation workflow. This system offers new levels of flexibility to automated testing, with a modular design that allows engineers to add or reconfigure testing modules in minutes. This purpose-built solution for validation and production workflows represents a strategic adjacency, enabling Ralliant to capture new opportunities and gain market share in automated test environments.

For investors, these technological advancements translate into a stronger competitive position, potentially leading to higher average selling prices (ASPs), improved margins, and sustained market relevance. By enabling customers to solve their toughest challenges, Ralliant reinforces customer loyalty and secures its role as a critical partner in cutting-edge technological development.

Financial Performance: A Resilient Debut

Ralliant's financial performance in its first full quarter as an independent entity demonstrates resilience amidst a mixed macroeconomic environment. For the third quarter ended September 26, 2025, the company reported revenue of $529.10 million, which was flat year-over-year but represented a 5% sequential increase over Q2 2025. This sequential growth was primarily driven by higher shipments in the Defense business and a seasonal step-up in Test & Measurement. Adjusted EBITDA margin expanded by 60 basis points sequentially to 20.4%, reaching the lower end of the company's long-term target range. Adjusted EPS for the quarter was $0.60, aligning with the top end of management's guidance.

Profitability metrics reflect both strategic investments and market dynamics. The overall operating profit margin for Q3 2025 was 9.80%, a decrease from 20.90% in the comparable period of 2024. This decline was primarily influenced by a 425 basis point impact from a stock-based compensation modification related to the spin-off, a 270 basis point reduction from volume declines, 250 basis points from public company standalone costs, and 200 basis points from higher salaries and wages. These were partially offset by 180 basis points from price increases. Notably, Ralliant successfully offset the net impact of tariffs through countermeasures, ahead of its year-end goal.

The company's cash flow generation is a significant highlight. Ralliant generated $127 million in free cash flow in Q3 2025, translating to an impressive conversion rate of 185%. Over the trailing 12 months, the free cash flow conversion rate averaged 124%, substantially exceeding the long-term target of over 95%. This strong cash generation underpins Ralliant's ability to fund organic growth, manage its capital structure, and return capital to shareholders.

Segmental Dynamics and Strategic Growth Vectors

Ralliant's two segments exhibit distinct performance trajectories and strategic opportunities.

The Sensors and Safety Systems segment delivered robust growth, with Q3 2025 revenue increasing 11% year-over-year to $326 million and 5% sequentially. This performance was fueled by strong demand in key growth vectors. Defense & Space revenue surged 18% year-over-year, driven by higher shipment levels and a continuously growing backlog. Ralliant's PacSci EMC safety systems are integral to 12 critical defense programs, and the company's backlog in this area now stands at over two times its annual revenue, providing significant revenue visibility. Utilities revenue also grew 11% year-over-year, capitalizing on the global trend of power grid modernization and expansion. Even Industrial Manufacturing showed a 9% year-over-year increase, breaking a six-quarter streak of stable revenue, with growth in data center applications for liquid and air cooling sensors being a notable driver. The segment's operating profit margin remained strong at 27.60% for the quarter.

Conversely, the Test and Measurement segment faced headwinds, with Q3 2025 revenue declining 14% year-over-year to $203.10 million, primarily due to cautious customer capital investment and challenging prior-year comparisons. However, the segment demonstrated sequential stabilization, with revenue growing 6% over Q2 2025. While the communications market saw a year-over-year decline due to lapping large projects, Q3 2025 marked its highest revenue and order quarter for the year. Semiconductor revenue grew year-over-year and sequentially as the company worked through its backlog, but orders remain low as customers defer R&D lab investments to prioritize AI infrastructure. The segment's operating loss margin was 0.80% for the quarter, reflecting volume declines and higher post-spin employee costs.

Competitive Landscape and Strategic Positioning

Ralliant operates in a highly competitive environment, where its specialized focus and technological prowess differentiate it from larger, more diversified players. In the Test and Measurement space, Tektronix is recognized as a top 5 player. While direct quantitative comparisons with all competitors are not publicly detailed, Ralliant's technological advancements, such as the DPO7000's ultra-low noise performance, provide a distinct edge in niche, high-performance applications.

Compared to diversified industrial conglomerates like Honeywell International Inc. (HON), Ralliant's offerings in precision instruments and sensors emphasize specialized, high-reliability solutions for space and defense. This focus allows Ralliant to potentially offer greater efficiency and superior performance under extreme conditions, such as in space environments, compared to Honeywell's broader portfolio. However, Honeywell's extensive global reach and diversified revenue streams provide a scale advantage.

Against major defense and aerospace players like Raytheon Technologies Corporation (RTX), Lockheed Martin Corporation (LMT), and Northrop Grumman Corporation (NOC), Ralliant's subsystems for space and defense applications may offer materially greater precision in measurement systems and notably faster development cycles in specialized sensors. These larger competitors, however, benefit from extensive defense networks, large-scale integration capabilities, and dominant positions in major government programs, which often translate into stronger overall financial metrics like revenue growth and cash flow generation. Ralliant's competitive advantage lies in its agility for custom solutions and superior technological innovation in niche areas, which can appeal to specific high-value markets.

Ralliant's strategic partnerships and customer relationships, particularly in defense, are crucial. The company's ability to secure multi-year contracts and maintain a growing backlog in its PacSci EMC business demonstrates strong customer loyalty and a recognized value proposition in mission-critical applications. The company's focus on expanding its footprint with strategic wins, including major motor producers, steel suppliers, and pioneers in direct air capture technologies, further solidifies its stronghold positions.

Outlook, Risks, and Capital Allocation Discipline

For the fourth quarter of 2025, Ralliant anticipates revenue between $535 million and $550 million, indicating continued gradual improvement. This outlook is supported by consistent shipment delivery in Sensors & Safety Systems and a typical seasonal step-up in Test & Measurement. Adjusted EBITDA margin is projected to be between 20% and 21%, in line with Q3, and adjusted EPS is expected to range from $0.62 to $0.68. While Q4 free cash flow is expected to be down sequentially after an outsized Q3, the full-year conversion rate is still forecast to exceed 95%.

Looking into 2026, management highlighted typical seasonality, with a mid- to high single-digit sequential revenue step-down from Q4 to Q1, usually resulting in a 2 to 3 percentage point sequential decrease in EBITDA margin, particularly in the more seasonal Test & Measurement business. The company plans to ramp capital expenditures from approximately 2% currently to between 2% and 3% of revenue in 2026, focusing on high-return organic investments, including expanding production capacity in Defense. A cost savings program, targeting $9 million to $11 million in annualized savings by the end of 2026, is already underway, with benefits expected in the latter half of 2026.

Key risks include continued customer cautiousness in Western Europe and geopolitical headwinds in China, which have led to a 6% year-over-year revenue decline in both regions. In the semiconductor space, customers are deferring R&D lab investments to prioritize AI infrastructure, impacting order levels. However, Ralliant's proactive measures, such as restructuring its China team and investing in new markets like India and Southeast Asia, demonstrate strategic adaptability.

Ralliant's capital allocation strategy prioritizes organic investment, followed by returning capital to shareholders through dividends and share buybacks, and then selective tuck-in acquisitions. The company's Board of Directors has authorized a quarterly cash dividend of $0.05 per share and a $200 million share repurchase authorization. With $264 million in cash and equivalents and $1.15 billion in term loan debt, resulting in a 1.9x net leverage ratio, Ralliant maintains a disciplined approach to its balance sheet.

Conclusion

Ralliant Corporation's debut as an independent public company showcases a resilient business model anchored in precision technology and a clear strategic vision. Despite facing macroeconomic headwinds in certain geographies and industry segments, the company's strong performance in its Sensors and Safety Systems segment, particularly in Defense and Utilities, provides a compelling growth narrative. The strategic focus on "winning growth vectors" aligned with electrification, digitization, and AI, coupled with a commitment to innovation as evidenced by new product launches, positions Ralliant to capitalize on long-term secular trends.

The company's robust free cash flow generation and disciplined capital allocation strategy provide a solid financial foundation. While Ralliant operates in a competitive landscape against larger, more diversified players, its specialized technological advantages and agile approach in niche markets offer a distinct competitive edge. Investors should closely monitor Ralliant's execution against its cost savings program, its ability to convert its growing defense backlog into revenue, and the eventual rebound in semiconductor R&D spending, all of which are critical indicators for sustained shareholder value creation in the years to come.