Ralliant (RAL) Q3 2026 – Zusammenfassung des Earnings Calls

Wichtigste Erkenntnisse

• Der Umsatz im 3. Quartal stieg im Jahresvergleich sowohl ausgewiesen als auch organisch um 17 % auf 620 Millionen US-Dollar, mit einem zweistelligen organischen Wachstum in beiden operativen Segmenten.
• Die bereinigte EBITDA-Marge erreichte 23,5 %, was auf normalisierter Basis einem Anstieg um 400 Basispunkte entspricht. Ohne Zollerstattungen weitete sich die Marge nach Angaben des Managements um etwa 290 Basispunkte aus.
• Das bereinigte Ergebnis je Aktie stieg um 64 % auf 0,93 US-Dollar. Der freie Cashflow lag bei 102 Millionen US-Dollar, während die Free-Cashflow-Konversionsrate der letzten 12 Monate 94 % erreichte.
• Der Umsatz im Bereich Sensors and Safety Systems stieg um 15 % auf 376 Millionen US-Dollar, während der Umsatz im Bereich Test & Measurement ausgewiesen um 20 % und organisch um 21 % auf 244 Millionen US-Dollar zulegte.
• Das Book-to-Bill-Verhältnis blieb in beiden Segmenten über 1,1. Der Auftragsbestand im Bereich Defense and Space überstieg 1,5 Milliarden US-Dollar, da erste Bestellungen im Rahmen mehrjähriger Raketenabwehrprogramme eingingen.
• Das Management hob die Prognose für das Gesamtjahr 2026 auf einen Umsatz von 2,34 bis 2,36 Milliarden US-Dollar, eine bereinigte EBITDA-Marge von rund 21,5 % und ein bereinigtes Ergebnis je Aktie von 3,10 bis 3,16 US-Dollar an.

Wichtigste Finanzdaten

Eine in den Umsatzkosten verbuchte Zollerstattung in Höhe von 7 Millionen US-Dollar trug 115 Basispunkte zur Ausweitung der bereinigten Bruttomarge im 3. Quartal bei. Die Entwicklung des Nettoumlaufvermögens war schwächer, da das Unternehmen die Lagerbestände gezielt aufstockte, um die Lieferfähigkeit zu sichern.

Seit Jahresbeginn führte Ralliant 167 Millionen US-Dollar an die Aktionäre zurück, davon 150 Millionen US-Dollar in Form von Aktienrückkäufen und 17 Millionen US-Dollar an Dividenden. Das Unternehmen kaufte 2,8 Millionen Aktien zu einem Durchschnittspreis von 54,74 US-Dollar zurück.

Geschäfts- und operative Entwicklung

Sensors and Safety Systems

Der Umsatz stieg um 15 % auf 376 Millionen US-Dollar, was etwa 60 % des Gesamtumsatzes des Unternehmens entspricht. Die bereinigte EBITDA-Marge kletterte um 270 Basispunkte auf 30,5 %, unterstützt durch Volumeneffekte, Preisgestaltung, höhere Margen im Rüstungsbereich, Produktivitätseinsparungen und den Großteil des Vorteils aus den Zollerstattungen des Quartals.

Der Bereich Defense and Space machte 18 % des Gesamtumsatzes des Unternehmens aus und wuchs um 21 %. Erste Aufträge im Zusammenhang mit den mehrjährigen Raketenabwehrprogrammen von Lockheed Martin trugen dazu bei, den Auftragsbestand in Defense and Space auf über 1,5 Milliarden US-Dollar zu steigern. Das Management gab an, dass die aktuelle Fertigungspräsenz die erwartete Nachfrage bis 2027 abdecken kann, während der geplante Standort in Solon, Ohio, zusätzliche Kapazitäten schaffen würde.

Der Bereich Utilities machte 14 % des Umsatzes aus und wuchs um 16 %, wobei Rekordwerte bei Auftragseingang und Umsatz verzeichnet wurden. Die Nachfrage wurde durch Investitionen in Stromnetze, Rechenzentren und Elektrifizierung gestützt. Ralliant baut seinen Standort in Fairport, New York, aus und rechnet damit, dass eine neue Anlagenerweiterung gegen Ende 2027 verfügbar sein wird.

Die Endmärkte Industrial Manufacturing and Other machten 29 % des Umsatzes aus und wuchsen zusammen um 11 %. Das Management verwies auf eine stärkere Aktivität in Nordamerika und ausgewählten europäischen und asiatischen Märkten sowie auf Marktanteilsgewinne in den Bereichen Rechenzentrumskühlung, Halbleiterausrüstung und kritische Umgebungen.

Test & Measurement

Der Umsatz stieg ausgewiesen um 20 % und organisch um 21 % auf 244 Millionen US-Dollar. Die bereinigte EBITDA-Marge verbesserte sich um 670 Basispunkte auf 19,3 %, was die operative Hebelwirkung, die Preisgestaltung und unternehmensweite Produktivitätseinsparungen widerspiegelt.

Der Bereich Diversified Electronics, der 21 % des Unternehmensumsatzes ausmacht, wuchs um 48 %, da die Kunden ihre Investitionen in Rechen- und Energieinfrastruktur erhöhten. Communications legte um 4 % zu, während Semiconductor aufgrund eines Vergleichs mit einem im 3. Quartal 2025 abgeschlossenen Großprojekt um 7 % zurückging. Ohne dieses Projekt stieg der Umsatz im Bereich Semiconductor im hohen Zehnprozentbereich.

Zu den Produkteinführungen gehörten ein rückspeisefähiges Testsystem für Rechenzentren mit höherer Spannung, ein 8-Kanal-Oszilloskop und eine Erweiterung der automatisierten Testplattform NP5000 zur Charakterisierung von Hochvolt-Halbleitern und zur Validierung optischer Komponenten.

Regionale Entwicklung

Prognose des Managements

Für das 4. Quartal 2026 erwartet das Management:

• Umsatz von 620 bis 640 Millionen US-Dollar
• Bereinigte EBITDA-Marge von 23,5 % bis 24,5 %
• Bereinigtes Ergebnis je Aktie von 0,93 bis 0,99 US-Dollar
• Gewichteter Durchschnitt von etwa 113 Millionen verwässerten Aktien

Für das Gesamtjahr 2026 hob das Management die Prognose an auf:

• Umsatz von 2,34 bis 2,36 Milliarden US-Dollar, was einer Anhebung des Mittelwerts um 75 Millionen US-Dollar gegenüber der vorherigen Prognose entspricht
• Bereinigte EBITDA-Marge von rund 21,5 %
• Bereinigtes Ergebnis je Aktie von 3,10 bis 3,16 US-Dollar

Der Ausblick für das Gesamtjahr enthält positive Effekte aus Zollerstattungen auf die Umsatzkosten von etwa 2 Millionen US-Dollar in Q2, 7 Millionen US-Dollar in Q3 und 5 Millionen US-Dollar in Q4.

Ralliant erhöhte die erwarteten unternehmensweiten Produktivitätseinsparungen für 2026 von 10 bis 12 Millionen US-Dollar auf 16 bis 18 Millionen US-Dollar. Das Management geht nun davon aus, das Jahr 2026 mit einer aufs Jahr hochgerechneten Einsparungsrate von 30 bis 35 Millionen US-Dollar zu beenden, verglichen mit dem Ziel von 50 bis 60 Millionen US-Dollar bis 2028.

Das Unternehmen gab keine formelle Prognose für 2027 ab. Das Management erklärte jedoch, dass ein hoher Auftragsbestand, normale Lagerbestände in den Vertriebskanälen und positive Kundensignale ein anhaltendes Umsatzwachstum stützen. Zudem bezeichnete das Management bereinigte EBITDA-Margen im hohen 20-Prozent-Bereich für Sensors and Safety Systems sowie eine Marge von über 20 % für Test & Measurement als angemessene Ziele für 2027.

Risiken und wichtige Beobachtungspunkte

• Das Management beschrieb das Umfeld in der Lieferkette als zunehmend herausfordernd, geprägt von erhöhter Inflation und eingeschränkter Verfügbarkeit einiger elektronischer Vorprodukte.
• Für 2026 werden Preiserhöhungen von mehr als 3 % erwartet, allerdings ist eine anhaltende Umsetzung beim Preis-Kosten-Verhältnis erforderlich, um die Margen zu schützen.
• Die Margen im 3. Quartal profitierten von Zollerstattungen, die sich laut Management im Jahr 2027 nicht wiederholen werden.
• Westeuropa entwickelte sich weiterhin uneinheitlich, insbesondere bei deutschen Kunden aus dem Maschinenbau.
• Der Umsatz im Bereich Semiconductor war mit einer schwierigen Vergleichsbasis aus dem Vorjahr konfrontiert, wenngleich das Management davon ausgeht, dass die zugrunde liegende Nachfrage im 4. Quartal deutlicher sichtbar wird.
• Die Inbetriebnahme neuer Rüstungskapazitäten erfordert Kundenfreigaben für Standorte und Produktionslinien, was sich auf den Zeitplan auswirken kann.

Wichtigste Punkte aus der Fragerunde mit Analysten

Das Management erklärte, dass sich die Nachfrage im Versorgerbereich trotz des Rekordumsatzes im 3. Quartal beschleunigt habe, wobei der Geschäftsbereich sein höchstes Book-to-Bill-Verhältnis im Jahr 2026 verzeichnete. Zudem bieten die Kunden eine höhere Transparenz bezüglich ihrer Anforderungen für das Folgejahr.

Im Verteidigungsbereich bezeichnete das Management den aktuellen Aufbau des Auftragsbestands als in einer frühen Phase befindlich. Der Auftragsbestand umfasst feste Bestellungen, während zusätzliche potenzielle Nachfrage aus siebenjährigen Programmen erst dann aufgenommen wird, wenn die Kunden verbindliche Bestellungen aufgeben.

Im Bereich Test & Measurement führte das Management die Nachfrage auf KI-bezogene Hardware, Kommunikation, Stromnetzinvestitionen, Rechenzentren und Edge-Anwendungen zurück. Vertriebspartner bauen Bestände ab und erteilen neue Aufträge, was das Unternehmen als positiven Indikator für die Nachfrage wertet.

Das Management bekräftigte, dass organische Reinvestitionen die höchste Priorität bei der Kapitalallokation bleiben, gefolgt von Kapitalrückzahlungen an die Aktionäre und gezielten Ergänzungsakquisitionen. Mögliche Übernahmen würden auf Technologien abzielen, die auf Elektrifizierung und Verteidigung ausgerichtet sind, mit dem Ziel einer zweistelligen Rendite auf das eingesetzte Kapital bis zum dritten Jahr.

Vollständiges Transkript des Earnings Calls

Vollständiges Transkript der Telefonkonferenz

Ausführungen des Managements

Operator

Hello. My name is Donna, and I will be your conference facilitator this morning. At this time, I would like to welcome everyone to Reliant Corporation's Third Quarter 2026 Earnings Results Conference Call. I would now like to turn the call over to Mr. Nathan McCurran, Vice President of Investor Relations. Mr. McCurran, you may begin your conference.

Nathan McCurren

Thank you. Good morning, everyone, and thank you for joining Raliant's Third Quarter 2026 Earnings Call. I'm Nathan McCurran, Vice President of Investor Relations. Today, we'll walk through our results, highlight key operational progress and provide our outlook for the fourth quarter and full year 2026. I'm joined today by Tammi Newcom, our President and Chief Executive Officer; and Neil 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 valeant.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 are comparing our third 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 in our quarterly reports on Form 10-Q filed with the SEC on May 12, 2026, and July 30, 2026, and to be filed after market today. With that, I'd like to turn the call over to Tammy.

Tamara Newcombe

Welcome, everyone, and thank you for joining us for our Q3 2026 earnings call. I'll start by thanking our team. We are benefiting from attractive market tailwinds, but it's their disciplined execution that is turning those opportunities into growth, margin expansion and strong cash generation. Today, I'll highlight our performance in the quarter and the progress we are making against our strategy before Neil takes you through the financials. Let's start on Slide 4 with a summary of our Q3 performance. First, our execution across multiple growth vectors delivered 17% revenue growth and our book-to-bill remained above 1.1 in both segments, reflecting continued broad-based demand. Second, our operating rigor, led by the Rallyiant Business System, or RBS, expanded normalized adjusted EBITDA margin by 400 basis points as we accelerated savings from our enterprise productivity program. Third, our targeted investments in innovation and manufacturing capacity are strengthening our positions in defense systems, power grid solutions and AI enablement from the data center to the edge. And fourth, our disciplined cash management delivered more than $100 million of free cash flow, supporting our organic investments and the return of capital to shareholders. Turning to Slide 5. In the third quarter, we delivered on all metrics above the high end of our guidance ranges with the Sensors and Safety Systems segment growing 15% and the Test & Measurement segment growing 21% organically. Orders outpaced revenue and demand signals in our short-cycle business accelerated during the quarter. The expanded backlog provides better visibility and reinforces our confidence in the durability of underlying demand. Based on these indicators, we're raising our full year 2026 guidance by more than our Q3 beat. We expanded both gross and adjusted EBITDA margins despite facing higher inflation as disciplined execution led to strong operating leverage and the acceleration of our enterprise productivity program. Combined with revenue growth, this resulted in adjusted EPS growth of 64% on a normalized basis. Turning to Slide 6. Our profitable growth strategy is gaining momentum. Our winning growth vectors position us to capture long-term investment cycles in electrification and defense. Starting with electrification. Rising global power demand is driving investment in grid and energy infrastructure. Our intelligent sensing solutions improve grid reliability and resilience, while our advanced test capabilities support innovation in energy storage and power distribution. At the same time, AI is accelerating technology innovation from the data center to the edge. Engineers are designing more complex power electronics to improve efficiency, performance and reliability, increasing the need for advanced test and measurement. Turning to defense. Replenishment and surge demand remain elevated. Framework agreements are converting into customer orders and backlog, providing visibility to multiyear demand. And the defense opportunity extends well beyond replenishment. Modernization and the evolution of next-generation defense systems create a broader longer-term growth opportunity for our precision energetics and advanced test and measurement capabilities. Turning to Slide 7 and our performance by region. North America is our largest region at 54% of total revenue and grew 18% in the quarter with broad-based momentum across all end markets. High-quality backlog and healthy channel inventories show continued growth runway. China is 16% of total revenue and grew 39% this quarter due to increasing investments in data centers and the power grid. Strong book-to-bill gives us confidence in elevated revenue growth continuing in Q4. Western Europe is 12% of total revenue and declined 3% this quarter. We are encouraged by improving macro indicators and growing orders in the region. Demand has been concentrated in grid modernization, defense, semiconductor and data center investment, while general machine building OEMs remain more cautious. Rest of World is 18% of total revenue and grew 15% this quarter, led by utilities and ongoing investment in power and energy infrastructure across Korea, Japan and Southeast Asia. Transitioning to our end markets on Slide 8. The Sensors & Safety Systems segment is approximately 60% of total revenue and grew double digits in the quarter. Defense and Space end market is 18% of total revenue, grew 21% in the quarter on the back of double-digit growth in Q3 last year. PASight EMC, our Defense and Space business has received undefinitized contracts supporting Lockheed Martin's FAD and PAC-3 programs. Lockheed Martin received 7-year undefinitized contract actions for FAD interceptor production and PAC-3 Missile Segment Enhancement, or MSE production, supporting the Department of Water's efforts to expand critical missile defense production capacity. We began to receive orders against these contracts in the quarter, which helped fuel our multiyear Defense and Space backlog to now surpass $1.5 billion. We are partnering with our customers to meet ramping production requirements through productivity, capacity expansion and initiatives to secure supply. We are also securing design wins on emerging defense technologies across lower-cost affordable mass munitions, autonomous air vehicles and counter UAS systems, confirming our status as a critical supplier across the multi-tiered defense architecture. Utilities end market is 14% of total revenue and grew 16% in the quarter. We delivered another record quarter of both orders and revenue. Market growth further accelerated with the rising power demand from data centers, electrification and aging grid infrastructure. Even with a large step-up in revenue growth in the quarter, we continued to build significant backlog with a high book-to-bill. Our deep customer relationships are central to how we capture that demand. We partner with leading transformer OEMs to develop intelligent sensing solutions that improve grid reliability and resilience, while our relationships with utilities and hyperscalers give us direct insight into their evolving requirements and investment plans. Our operating execution and investment are supporting that growth. Productivity improvements are increasing manufacturing output, and we broke ground in July on a facility expansion to support future demand. Industrial manufacturing and other end markets are 29% of total revenue and grew 11% on a combined basis. After several years with cautious customer spending, demand is broad-based, supported by strong secular trends and healthier general industrial activity in North America and selectively across Europe and Asia. Our customer focus, combined with RBS-led manufacturing execution is our competitive advantage in these markets. With trusted brands and strong lead time performance, we're responding faster to customers and gaining share across data center cooling, semiconductor equipment and critical environments. Test and measurement is approximately 40% of revenue and grew 21%, driven by our investment in innovation, intersecting with strong secular demand. Our customers are designing increasingly complex power systems that must handle higher voltages with greater efficiency and reliability, and we help engineers test and validate these increasingly complex systems. Our Q3 product launches are focused on addressing this growing power design challenge. First, we introduced a high-capacity regenerative test system that simulates the electrical loads of next-generation higher voltage data centers. Instead of wasting that energy as heat, the system returns it to the grid, helping customers lower the cost of testing in development and scaled production. Next, we launched the world's first 8-channel oscilloscope aimed at multichannel RF, high-speed digital and system-level debug, helping engineers ensure power stays stable and clean across increasingly dense and complicated systems. Finally, we extended the NP5000 automated test platform by introducing a new module to support higher voltage semiconductor characterization and optical device validation. These new products demonstrate our technology leadership and how we are helping customers solve increasingly complex power and performance challenges across a broad range of applications. Our innovation velocity is translating into results. Diversified Electronics is 21% of total revenue and grew 48% in the quarter. Market growth further accelerated as the pace of technology innovation increased. Engineers need increasingly sophisticated tools to see, understand and validate electrical systems across the applications supported by each new generation of semiconductors. That plays directly to our strength in oscilloscopes and advanced test and measurement instruments. Communications is 11% of total revenue and grew 4% in the quarter. We continue to see strong demand across both commercial and defense communications. In defense, orders outpaced shipments and the opportunity pipeline continued to build. Our new high-performance oscilloscopes are gaining traction in high-speed communications. In Q3, we secured significant customer wins, expanding our position in a market where we have historically had lower penetration and see meaningful opportunities to gain share. Semiconductor is 7% of total revenue and declined 7% in the quarter, reflecting the expected comparison to a large customer project completed in Q3 of 2025. Excluding that project, revenue grew in the high teens with broad-based demand acceleration. Growing adoption of optical interconnects is driving increased investment in R&D and production, where we are expanding our position in testing high-speed optical modules. Next on Slide 9, we're investing behind the opportunities where we see the greatest potential to extend our profitable growth. In Utilities and Defense, we are supporting customer demand by expanding our Fairport, New York site and adding a site in Solan, Ohio. In addition, we are leveraging AI to deepen digital customer engagement and accelerate software development and new product innovation. As we look to 2027, we like our setup for continued strong revenue growth. We have elevated backlogs, healthy channel inventories, positive customer demand signals and targeted investments underway to support the growth ahead. I'll now turn it over to Neil to go deeper on our results and guidance.

Neill Reynolds

Thank you, Tammy. Good morning, everyone. Please turn to Slide 11. Q3 revenue of $620 million was up 17% on a reported and organic basis, while both segments delivered double-digit organic growth. Growth was broad-based across end markets and regions, and disciplined execution is creating wins and converting demand into strong revenue. Our backlog continues to grow across both segments, giving us confidence in elevated demand in our short-cycle businesses. As I shift to adjusted EBITDA on both the consolidated and segment levels and adjusted EPS, I will again be speaking to our comparisons against normalized adjusted metrics for 2025. As a reminder, we have normalized the first 3 quarters of 2025 results to reflect our fully ramped post-spin costs, which provides a more like-for-like comparison to 2026 results. Adjusted EBITDA margin in the third quarter was 23.5%. On a normalized basis, this is a 400 basis point improvement from the prior year, driven primarily by strong operating leverage on higher sales volume, pricing and accelerated enterprise productivity program or EPP savings, which I will update you on shortly. Adjusted gross margin expanded 190 basis points to over 53%, reflecting the strong pricing power of our portfolio and execution of our teams. The supply chain environment is increasingly challenging with elevated inflation and limited availability on certain inputs. Our teams are using RBS to secure supply and manage inventory, and we are successfully deploying pricing and productivity measures to protect and expand margins. I also want to note this was partially driven by a tariff refund benefit of $7 million recognized in cost of sales, which drove 115 basis points of the margin expansion. Excluding the benefit of IEFA tariff refunds, adjusted gross margin expanded 75 basis points and adjusted EBITDA margin expanded approximately 290 basis points. Relative to expectations, corporate and other expenses of $16 million were lower than our estimated $20 million to $23 million. As we accelerated EPP and centralized more of our enterprise support functions, we are allocating costs to the businesses they are centrally supporting, reflecting the full cost of each segment. Adjusted EPS of $0.93 increased 64%, driven by revenue growth and adjusted EBITDA margin expansion. Free cash flow was $102 million in the quarter. Trailing 12-month free cash flow conversion was 94%. Cash conversion in the quarter reflected softer working capital despite strong earnings and lower capital expenditures as we strategically position inventory to support supply availability. Turning now to segment performance, starting with Sensors and Safety Systems on Slide 12. Q3 revenue of $376 million increased 15% on both a reported and organic basis with broad strength across all end markets. Growth in Defense and Space was primarily driven by increased production capacity with continued demand lifting backlog above $1.5 billion. Utility delivered another quarter of record revenue, driven by RBS-led production increases, supporting our customers' ongoing grid investment. Adjusted EBITDA margin was 30.5%, an increase of 270 basis points, driven by operating leverage on higher volume, pricing, stronger defense margins and productivity savings. The majority of the IEPA tariff refund was realized in this segment during the quarter. Test & Measurement highlights are on Slide 13. Q3 revenue was $244 million, an increase of 20% on a reported basis and 21% organically, driven by broad-based improvement across the segment. Diversified Electronics continued to benefit from strong customer investment across compute and power infrastructure, while communications growth was primarily led by commercial communications demand. As expected, semiconductor demand continued to improve, and we expect this underlying strong demand to be better reflected in reported revenue next quarter as we move past a tough comp from the large customer project we have been lapping this year. Test & Measurement adjusted EBITDA margin was 19.3%, an improvement of 670 basis points. This was due to strong operating leverage on the revenue beat, pricing and the ramping of EPP savings. While there were some IEPA tariff refund benefits in Test & Measurement, it was minimal compared with Sensors and Safety Systems. On Slide 14, I want to provide an update on the enterprise productivity program. When we announced the program in Q1, we identified drivers of savings across both G&A and cost of sales by optimizing labor, materials and other facility-related costs. After announcing the program at the beginning of the year, we are already seeing a significant impact on margin expansion. Using RBS tools, we have been able to accelerate EPP ahead of our initial plan. Our teams have already delivered strong results across vendor consolidation and negotiations, optimizing our enterprise G&A support and applying AI to drive productivity. This has led us to increase our estimate of 2026 in-year savings to $16 million to $18 million, up from $10 million to $12 million as previously expected. We now expect to exit 2026 at $30 million to $35 million of annualized run rate savings, which is already over halfway to our target of $50 million to $60 million of annualized run rate savings by 2028. This structural productivity savings is supporting our path towards the midpoint of our through-cycle adjusted EBITDA margin target range by 2028. Turning to our balance sheet and cash flow on Slide 15. We ended the quarter with $366 million in cash and cash equivalents and $1.15 billion of debt, resulting in net debt of $784 million. Net leverage declined to 1.5x and is at the low end of our long-term target range of 1.5 to 2x. Year-to-date, we have returned $167 million of capital to shareholders, including $150 million of share repurchases and $17 million of dividends. Shifting to Slide 16 to cover our guidance for the fourth quarter and the full year. In Q4, we expect revenue of $620 million to $640 million, adjusted EBITDA margin between 23.5% and 24.5% and adjusted EPS between $0.93 and $0.99. We expect Q4 weighted average diluted shares outstanding of approximately 113 million. Based on our Q3 performance and the demand trends Tammi described, we are raising our full year 2026 guidance across all metrics. We now expect full year revenue of $2.34 billion to $2.36 billion, an increase of $75 million at the midpoint compared to our prior guidance. We expect adjusted EBITDA margin to be approximately 21.5%, and we expect adjusted EPS of $3.10 to $3.16. This guidance is inclusive of a benefit to cost of sales from EBA tariff refunds of approximately $2 million in Q2, $7 million in Q3 and $5 million in Q4. Finally, I want to provide an update on our capital allocation priorities on Slide 17. Our top priority remains organic reinvestment. We are funding it through RBS and AI-driven productivity and investing in capacity expansion in defense and utilities to serve identified demand, targeting returns in excess of our cost of capital. Second is returning capital to shareholders. Year-to-date, we have repurchased 2.8 million shares for $150 million at an average price of $54.74 per share, and we continue to target repurchases of approximately 50% of free cash flow over time. Third is focused tuck-in acquisitions. We continue to have a robust pipeline of attractive tuck-in targets and aim for double-digit ROIC by year 3 for these acquisitions with opportunity for operating synergies.

With that, I'll turn it back to Tammy to wrap before opening it up for questions.

Operator

Today's first question is coming from Alexander Bergo of Evercore.

Fragen und Antworten

Alexander Virgo

I wondered if you could talk a little bit more about the order intake. If I've done my math correctly, it looks like it's a double-digit growth Q-on-Q. So you're accelerating. And I wondered if you could give us a bit more color about where that's coming from across the business and what the cadence of delivery of that backlog might be and the visibility that it gives you. And as a follow-up, I wondered if you could just pick up a little bit on the utility growth. I think you had some delayed shipments in Q2, which dragged on the growth last quarter. So how much of the Q3 here is a sort of a catch-up for that, although obviously, with record orders, it suggests that things are very strong there. So I just wondered if you could give us a bit more color around the utility business as well.

Tamara Newcombe

We did see demand accelerate in the quarter. And the growth, the underlying demand is supported by several secular trends we're seeing across the business where we're well positioned, driven by electrification and defense, which is core to the strategy and the progress we're making on our strategy. When I think about the growth drivers, we're well positioned in what I'm seeing as a generational demand and surge in defense technologies in our Defense and Space business. In utility, what you talked about, we are seeing record demand for our intelligent sensing solutions. And the industrials continued to broaden. We saw real strength a quarter ago, and that continued to broaden. And then AI and technology innovation is really driving higher demand in the T&M spend. So signals are strong in the underlying demand, both from a backlog standpoint, which we called out, we were remaining over 1.1 in our backlog with really strong backlog in Defense and Space. And customer indications still give us confidence that this has some legs into the new year. I think if you asked specifically about utilities, this was a record quarter for the team. It was our highest book-to-bill for the year, and that's on a record revenue quarter in Q3. The investment that we're seeing in the global power grid, and that's driven from the OEMs that build the critical infrastructure that we work directly with as well as utility and hyperscaler customers are continuing to step up orders and give us longer visibility into the needs out into next year. So our focus here is really around execution. And we are continuing to get more out of the footprint that we have and that we've meaningfully expanded production here since the beginning of the year. We also broke ground on a new facility that should come on towards the end of next year and give us some expansion.

Operator

The next question is coming from Piyush Avi of...

Unknown Analyst

Tammy or Neil, with the understanding that you're not providing '27 guidance, I still want to get your thoughts on loose construct for '27. It doesn't seem that the demand environment is slowing for you guys and you are accelerating your productivity program. So it would be helpful if you could give us your -- some early thoughts, any reason why top line growth should not be meaningfully above your long-term algo in '27?

Tamara Newcombe

Yes, thanks for the question. We are seeing positive signals across the board. And not only backlog above $1.1 billion, but in our defense business, where we've got multiyear visibility with a $1.5 billion backlog that's all positive. And we stay close to customers across the business. as both funnels, close rates are good indicators as well as our channel inventories remain normal for what we would expect. So those are all good indications that this continues into 2027. And from a margin standpoint, really proud of the team and the work that we've done on the enterprise productivity program. The team is performing well ahead of the targets that we laid out. And in addition, it's quite an inflationary environment out there. And this is where our Reliant business system and our operating rigor really gets after that price cost value that we need to balance, but it's done a nice job. And I think you see that show up in the gross margins we were able to deliver this quarter.

Unknown Analyst

Very helpful. And a quick follow-up on the last comment. Like you did pull forward your $30 million to $35 million savings in '26 from '27, but you maintain the $50 million to $60 million target by 2028. Is it -- I understand the inflationary headwind comment, but is it also you guys being a little conservative with the target? Like ultimately, what I'm trying to get at is that could those savings happen faster as well? And last quarter, I think there was a slide that kind of showed 50% incrementals in '27 and '28. And with these accelerated savings hitting in 2026, like what does that mean for incrementals in '27, '28? I don't know if you have some additional color there.

Neill Reynolds

Thanks, Piyush. I think that's really, really good question. So first of all, let's start framing up. We finished 2026, I think, with an accelerating back half of the year. You look at the revenue in 2026, normally, we're 48% first half, 52% second half. This guide assumes 47%, 53%. So we clearly have seen an acceleration. And that's with orders, too, as you kind of talked about that. So as we start looking into 2027, I think we have a better kind of setup in terms of the amount of backlog that we'll have heading into '27. So that brings us to the margin question. Clearly, I think there's 3 elements here that are going to drive margin as you move out beyond this year. The first is volume leverage. So given the fact that we're leaving with a strong backlog position, that should set us up for some nice revenue growth as we get into next year. We'll give an update in the next earnings call exactly what we think that is with more specificity, but it does set up for solid growth going into next year and volume leverage. Second thing is that Tami talked about it, the work on the price/cost side of things, this is a dynamic supply chain environment, and our team is executing very, very well. Tami talked on the gross margin. So I think that's the second piece. And then the third piece is around the enterprise productivity program savings. As you mentioned, the team has executed leveraging, I think, doing a great job leveraging the RBS tools to pull this forward. We talked about $16 million to $18 million now within 2026, and that would leave us with another $14 million to $17 million in next year of the total $30 million to $35 million that we've talked about having a run rate ready by the end of the year. So as you look out into next year, we've talked previously about 50% margin incrementals going into '27 and '28. So I think that sets us up nicely to achieve those types of goals as we go into 2027. I will say we did get some AEPA tariff benefits in this year. So excluding that, that might bring that number down a little. Just to be clear, we have the benefit this year that won't repeat in 2027. But the underlying framework for the margin returns going into '27 is clearly intact.

Operator

The next question is coming from Joe Giordano of TD Cowen.

Joseph Giordano

We talked about this a little bit last quarter. But when you think about Test & Measurement and the strength you're seeing there, how does the magnitude of the spend that's happening in some of those underlying markets and the duration of that impact the duration of how you see a cycle in T&M moving into next year?

Neill Reynolds

Joe, good to hear your voice on the call here. We're certainly benefiting from attractive market tailwinds in this space. anything AI-related, especially hardware and communications benefiting power grid, data center and the AI edge are driving a higher T&M spend. So all positive. But we're well positioned here. We're also well positioned with power electronics. I talked about the suite of categories we play in. And across the board, the brands from oscilloscopes to the Keisley portfolio and the recent addition of ElectroAutomati, all are specialized in power, which is one of the challenges that we're facing here with electrification and defense. So I'd say a combination of strong market tailwinds new products that we're driving. You saw a nice stream of new products. I think there were 3 announced last quarter. They've got another one teed up for this month. I don't want to preannounce it for the team, but stay tuned. We got another product coming out. So innovation continues. And in that business, besides the underlying demand, they've just done a nice job on structural margin improvement.

Joseph Giordano

So if we -- just switching over to margins and mostly in sensors here. I know we're not going to get into specific guidance for 2027. But if we strip out tariff benefits from this year and think about the defense growth pacing things most likely into next year, is it reasonable to think that margins in sensors ex tariffs can increase? Forget about the magnitude, but can they increase if that mix picks up. I'm just curious, when you mentioned like the FAD orders and with Lockheed and all this, like what's the margin profile there relative to what you're printing? And just I think that's a real debate around where margins -- what direction they can go next year just with revenue being as strong as it's going to be.

Neill Reynolds

Yes, it's a really good question. So when you look at Sensors and Safety Systems, obviously, we achieved over 30% EBITDA margins in the quarter. And part of that was related to execution by our defense team, both on the output, we had kind of record revenue in that business. And some margins obviously came along with that as well in terms of how the team has executed. As you look at Sensors and Safety systems, though, you got to think about several different pieces here. One is on defense, we've talked about it before, the defense margins are a little bit lower from a product perspective than the rest of the segment. albeit better, maybe a little bit better than we thought previously. We're a little bit further in terms of understanding what these longer-term agreements are going to look like and what the margin profile may look like over time. So maybe not what we had thought before, maybe a little bit better than that, but we still got to work through that, as you said, for 2027. So as you look at those margins out beyond this quarter, you back out, as you mentioned, there's some IEPA benefits and from refunds in this quarter, you exclude that, you think about Sensors and Safety Systems in the high 20s. And as I think as you look out to 2027, in conjunction with the work we're doing in defense, I think you're seeing stronger industrial revenue, which is a positive mix for us. We're seeing the utilities business grow substantially. And as Tammy mentioned, accelerating really, which also has, from a product perspective, better margins as well. So I think that some of those things says, look, could you see a Sensors & Safety Systems business at kind of those high 20 EBITDA margins in 2027? I think that's entirely reasonable.

Operator

The next question is coming from Kevin Wilson of Truist Securities.

Kevin Wilson

Congrats on the quarter. I wanted to ask on defense capacity with backlog now above $1.5 billion and orders now on the surge programs. I guess how are you thinking about capacity in this business? Is the Ohio expansion you've talked about still a late '27, early '28 event? And do you think you'll need to accelerate the fourth site that you've talked about or lift CapEx above the rate we've been running here?

Tamara Newcombe

Yes. We think about the business, Kevin, in sort of the near term, midterm, long term. The good part is we've got multiyear visibility into customer timing. So we can see into that in 2027. And the footprint that we have right now, independent of turning up Solen Ohio gets us through 2027. Anything we turned up in Solen would be on top of expectations, our expectations. So the team has done a great job just in the footprint we have, driving productivity for near-term demand. And then midterm to long term, yes, Solin is coming online. Obviously, this set of customers, there's a lot of work with our customers to approve and sign off on a new facility, new lines. And we are continuing knowing that this is a 7-plus year cycle that we're in, sort of unprecedented, we will consider a fourth site at some point.

Kevin Wilson

And for my follow-up, I just wanted to follow up on the comments on price cost and supply availability. I guess any numbers you can put around cost inflation and pricing, maybe what businesses are seeing the biggest hit from supply availability? And any comments on what you're expecting in terms of price cost in the fourth quarter or 2027?

Tamara Newcombe

The team has done a nice job staying ahead on this, working through supply chain. We'll see from a pricing standpoint somewhere above 3% price this year and continue to navigate a tough environment, both inflationary and electronics, especially the supply chain has been challenging. Our position in -- with working capital and allowing the teams on spot places very selectively to add some inventory to ensure supply has been a great strategy for us. We've actually -- there's places in our business that we have been able to take competitive share because of our lead times. Our lead times being competitive, and that's due to how we're navigating both inflation and the supply chain.

Operator

The next question is coming from Ian Zaffino of Oppenheimer & Co.

Unknown Analyst

Just wanted to ask on Test and Measurements. Maybe talk about what you're seeing on the validation side. How big of a bucket has this now become in test and measurements? And maybe the greater question I'm trying to get at here is you described test and measurements as short cycle, and I get it, it's kind of like 1 year on, 1 year off. But are you seeing any kind of underlying trends or just demand just in general that would maybe lengthen that period of time, so not a year, but maybe a couple of years. Really just any color there would be helpful.

Neill Reynolds

Yes, Ian, I would reflect on the cycles in T&M being unique and individual every time we have seen one. We had a good run post-COVID sort of late '20 through early 2024, pretty strong high single-digit, double-digit run in test and measurement. We'll see. What I can tell you is a quarter later, that business continues to be really strong. And we have got another quarter of insights, and I'm very encouraged by the positive demand signals that we've seen, especially in our channel. Channels are selling through and then directly placing orders, which is always a level of confidence for us. And there's multiple trends that are driving this business. It's kind of the AI list of technology innovation starting in the grid where our electrical automatic has announced some new products that help with energy storage systems and the test and measurement around those. You get into the data center, and we're a critical component in ensuring that the 800-volt power shelves can be delivered. We're doing test and measurement there from validation into production. And then our traditional portfolio around supporting the electronics for the data center, which is compute, memory, networking, communications, solid-state transformers and then to the edge. And the edge is really where the volume, it aligns nicely to our diversified electronics. You saw a real strength in that end market for us. And that's where all of the innovation is happening around delivering AI out to all of us, whether it's humanoids, new medical technologies, new consumer devices, industrial robots for manufacturing, but that's really the lift that we're seeing, and it's strong right now.

Tamara Newcombe

Yes. Let me just add to that, too. I think the other component to that in terms of the demand and the volume that we're seeing is not just the backlog that we're generating, but how that translates into margin expansion for our Test and Measurement business. As you've seen, it's fairly highly levered from an operating perspective in terms of how we've been driving margin improvement. So as you look out into the next year with another year of revenue growth going into 2027, we'd expect to expand margins in Test & Measurement as well. And we've been kind of in that -- you've seen us get to the high teens. I think for the year, the guide would imply somewhere around mid mid-teens plus. But getting to a margin in 2027 with the 2 handle on it is something, again, that is -- we think is reasonable and something that's achievable in 2027.

Unknown Analyst

Okay. And very good color there. On the capital allocation side, nice to see you guys returning a lot of cash to shareholders. So thank you for that. How are you also thinking about maybe tuck-ins? Any type of technology that you think that you're missing that you would like to add to or maybe just the overall environment in general?

Tamara Newcombe

Yes. We've been executing against the first 2 levers of our capital allocation strategy, delivering some innovation that you're seeing come from our organic investments as well as returning cash to shareholders. On the tuck-ins, it will align to our strategy. So I go back to the focus of our strategy around where we're seeing secular growth, long-term growth in electrification and defense. And we've called out a number of areas there. I think to your point of a technology tuck-in would be right up the middle of the fairway, something that is -- we can accelerate with a global sales organization or we've got a lot of great operating rigor to be able to help with the operating leverage in a smaller business. So we're active. We're active in the market. We will continue to progress there and continue with our strategy around tuck-ins.

Operator

The next question is coming from Scott Graham of Seaport Research Partners.

Scott Graham

Congratulations on the earnings. I wanted to ask you, Tammy, about your channel inventory commentary. It was very refreshing. I just kind of wanted to know how you do that exactly? And how much of sales are you able to really track in the channels? Because I know you also serve OEMs, which are obviously a lot harder than distributors. So maybe just a little bit on how you do that and the percent of sales that, that covers? And then I have a follow-up.

Neill Reynolds

Yes. There's 3 ways we look at this, Scott. First is our direct customers where we're doing -- working directly. That's about 50% of our business where we have salespeople directly working with with customers. In there, especially in our industrials business, some of our customers build something, so they keep some inventory that they also sell. So we work with those customers on what inventory levels they have. This was a real learning from COVID is to understand that there was another level of inventory at some of our OEM customers. So we do a good job of paying attention to that. And then the third is our distributors or channel partners around the globe. And they have been open. We've stayed with a pretty loyal, strong channel for decades here. And we've got good metrics as far as understanding not only inventory levels, but getting to see the point of sale of where they're selling to. And then the positive part is when they're directly placing reorders. And what we're seeing now is their confidence in the channel to place reorders when they sell through.

Scott Graham

That's very clear. My follow-up is simply around the geographics. So it looks like Rest of World accelerated. It looks like Europe decelerated. Just kind of hoping you can give us a little more color around each.

Tamara Newcombe

Yes. I would say that we -- we've seen the most strength and the most momentum is North America. It's about 54% of our overall business and high double-digit growth there and really across almost every end market. Western Europe has been more lumpy. Last quarter, it was stronger. We had indicated last quarter that we expected that wasn't a trend. It was sort of episodic. So Western Europe, we saw a decline this quarter. And Generally there, especially Germany, the machine builders are a little soft still. We haven't seen that pick up as much. And then rest of world, which is one you called out, is really being driven by AI investment and a moderate industrial manufacturing recovery. We're seeing good strength in our utility space in rest of world and continue to see that be strong.

Operator

The next question is coming from Jacob Levinson of Melius Research.

Unknown Analyst

Tammy, you mentioned solid-state transformers and passing earlier. I know there certainly seems to be a lot of excitement there about that technology. Can you just give us a sense of how does the content for qurol change when you go from traditional oilfield transformer to solid state? And then I guess on the flip side, I assume there's some opportunity as well in the power electronics and needing to test that. So just -- I'm not sure quite how to think about that.

Tamara Newcombe

Yes. My comment that I made, Jake, was related to test and measurement. and the role that electroautomatate plays, that's a significant opportunity for that part of the business. And then -- and so that's where my commentary came from was specific to a growth vector in test and measurement, one that's new to us, one we have not had in the past. When we talk about different cycles here, I think this gives us a little more diversity in the portfolio. In the utility space, the focus right now and the demand that the majority of the demand is coming from your traditional transformers. And we're seeing very little so far in solid state on the horizon, but what's being deployed today is definitely overweighted to more traditional critical infrastructure and transformers.

Unknown Analyst

Okay. That's helpful. And just on a different topic, you mentioned some wins in some of these newer defense technologies around smaller munitions and counter drone technology. Is that work typically cost plus? Or do you have better pricing power because it's merchant pricing?

Tamara Newcombe

Yes. This is an area that's sort of not been a big talking point because the legacy programs have had such a surge in demand. But as you think out to the future of the health of this business, securing these new design wins where we're extremely advantaged in some of the fastest-growing areas of defense, which, as you called out, are these lower-cost missiles and munitions. We've got customers developing affordable mass solutions and low-cost containerized munitions. And they'll become a larger part of the portfolio as we move through the years. But the early indicator, which is securing design wins and knowing that we have a competitive advantage is the first seed that you want to plant, and then we'll start to see the volumes come in over the years.

Operator

The next question is coming from Brandon Nutson of Morgan Stanley.

Brandon Knutson

Congratulations on the quarter. I just want to start on defense. So you had really strong results in the quarter and backlog is now over $1.5 billion. When you look across all of the possible missiles and munitions programs you're targeting, has the majority of these already been determined and are in the backlog? Or are we still in the early innings of this? Any extra color on where we are there would be great.

Tamara Newcombe

Yes, Brandon, I would definitely call it the early innings in the backlog is what I consider a major milestone, which is the undefinitized contracts that we've been talking about that have a 7-year line of sight the first year purchase orders have begun to flow. That's what's in our backlog is firm purchase orders that customers are starting to place. So that's -- I think over the last 6 months, 9 months or so, you've seen the backlog go from about $1 billion to $1.5 billion as we've been shipping, and that's due to the first POs. So there's definitely some upside out there that we continue to work scenarios with our defense customers. And if that shows up in firm POs, we will add it to our backlog.

Neill Reynolds

Yes. And the other thing there, too, as you look at that defense backlog, I mean, one thing that we're seeing there, and we're seeing out over time is this is giving us really nice visibility into what our revenue outlook is from a defense perspective. But on the flip side, we're also seeing better visibility in the short-cycle businesses as well. So as we start to look into '27, that's that certainly gives us more confidence as we head into the new year, and we'll give more update on that as we get into '27. And just a reminder, as you look at 4Q to 1Q, we talked about revenue, I mentioned it earlier, 48% in the first half, 52% in the second half normally better than that this year. But as we go from 4Q to 1Q, then you'd see a normal kind of seasonal decline, both in revenue and margins. However, with the backlog position we have now, we anticipate that we can do a little bit better than we have done historically, but there will be some of that transition most likely as we move into the new year. But that would give us solid growth rates and I think margin expansion regardless as we look into the new year. And we'll give a better update and more detailed update on that as we get out to the end of the year and give the next update on the call.

Brandon Knutson

Great. And then for my follow-up, I want to touch on the cost savings program. How much of this that you brought forward this year is an acceleration of what you previously had planned versus finding new savings that you didn't anticipate when you gave the cost savings program in Q1?

Neill Reynolds

I think it's both. I think the team has really rallied around this. I think there's a lot of momentum around how we're driving performance in the business. And I think our teams understand it's not just about driving bottom line performance. It's also about how do we reinvest and drive growth into the business. And I think what this is allowing us to do is really focus on our margin expansion framework while reinvesting in the business and being competitive. You saw some of the products that Tammy talked about, new releases that we have today. I think the EPP program is allowing us to invest and release these things as well. So I think we're hitting on both sides of this. I think we're driving the margin improvement. We're seeing new funnels of opportunities come in. Some of these are AI-based ideas that the team has that we're driving through productivity through our functions and through our supply chain. So I think all of that is contributing to the savings and the performance and how we've increased the timing of the program.

Operator

This brings us to the end of today's question-and-answer session. I would like to turn the floor back over to Ms. Newcomb for closing comments.

Tamara Newcombe

Thank you. The team is progressing our strategy and delivering strong growth and structural margin improvements across the business. We appreciate your interest in Rally's and hope you have a great day.

Operator

Ladies and gentlemen, thank you for your participation. 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.