Ralliant (RAL) 2026 年第三季法說會摘要

重點摘要

• 第三季營收在列報（reported）與有機（organic）基礎上均年增 17% 至 6.2 億美元，兩個營運部門皆實現雙位數的有機增長。
• 調整後 EBITDA 利潤率達 23.5%，在正常化基礎上上升 400 個基點。管理層表示，若扣除關稅退稅，利潤率約擴增 290 個基點。
• 調整後 EPS 成長 64% 至 0.93 美元。自由現金流為 1.02 億美元，過去 12 個月自由現金流轉化率達到 94%。
• 感測器與安全系統部門營收成長 15% 至 3.76 億美元；測試與測量部門營收列報成長 20%、有機成長 21% 至 2.44 億美元。
• 兩個部門的訂單出貨比均保持在 1.1 以上。隨著多年期飛彈防禦計畫下的初始採購訂單開始湧入，國防與航太積壓訂單突破 15 億美元。
• 管理層上調 2026 全年財測，營收預計為 23.4 億至 23.6 億美元，調整後 EBITDA 利潤率約為 21.5%，調整後 EPS 為 3.10 至 3.16 美元。

核心財務數據

在銷貨成本中認列的 700 萬美元關稅退稅，為第三季調整後毛利率擴增貢獻了 115 個基點。營運資金表現較弱，因公司選擇性增加庫存以確保供貨穩定。

今年迄今，Ralliant 已向股東回饋 1.67 億美元，其中包括 1.5 億美元的股票回購和 1,700 萬美元的股利。公司以平均每股 54.74 美元的價格回購了 280 萬股股票。

業務與營運表現

感測器與安全系統

營收成長 15% 至 3.76 億美元，約占公司總營收的 60%。在銷量槓桿效益、產品定價、國防業務毛利率提升、生產力改善帶來的節省以及本季大部分關稅退稅效益的支撐下，調整後 EBITDA 利潤率上升 270 個基點至 30.5%。

國防與航太業務占公司營收的 18%，成長 21%。與洛克希德馬丁（Lockheed Martin）多年期飛彈防禦計畫相關的初始訂單，推動國防與航太積壓訂單突破 15 億美元。管理層表示，目前的製造佈局可支持至 2027 年的預期需求，而計劃中的俄亥俄州索倫（Solon）據點將進一步擴增產能。

公用事業業務占營收的 14%，成長 16%，訂單和營收均創歷史新高。電網、資料中心和電氣化的投資支撐了需求。Ralliant 正擴建其紐約州費爾波特（Fairport）據點，預計新設施擴建將於 2027 年底投入使用。

工業製造及其他終端市場合計占營收的 29%，成長 11%。管理層提及北美以及部分歐洲和亞洲市場的業務活動更趨強勁，同時在資料中心散熱、半導體設備和關鍵環境領域的市占率有所提升。

測試與測量

營收列報成長 20%、有機成長 21% 至 2.44 億美元。調整後 EBITDA 利潤率提升 670 個基點至 19.3%，反映了營運槓桿效益、產品定價及企業生產力節省成本。

多元電子業務占公司營收的 21%，隨著客戶增加對運算與電力基礎設施的投資，該業務大幅成長 48%。通訊業務成長 4%，而半導體業務則因 2025 年第三季完成的大型客戶專案基期較高而下降 7%。若扣除該專案，半導體營收實現接近 20%（high teens）的成長。

推出的新產品包括用於更高電壓資料中心的再生測試系統、8 通道示波器，以及用於更高電壓半導體特性分析與光學元件驗證的 NP5000 自動測試平台擴充版。

區域表現

管理層財測

針對 2026 年第四季，管理層預期：

• 營收為 6.2 億至 6.4 億美元
• 調整後 EBITDA 利潤率為 23.5% 至 24.5%
• 調整後 EPS 為 0.93 至 0.99 美元
• 加權平均稀釋後股數約為 1.13 億股

針對 2026 全年，管理層上調財測至：

• 營收為 23.4 億至 23.6 億美元，較先前財測中位數增加 7,500 萬美元
• 調整後 EBITDA 利潤率約為 21.5%
• 調整後 EPS 為 3.10 至 3.16 美元

全年展望包含關稅退稅對銷貨成本的正面挹注，第二季約 200 萬美元，第三季約 700 萬美元，第四季約 500 萬美元。

Ralliant 將 2026 年預期企業生產力節省金額從 1,000 萬至 1,200 萬美元上調至 1,600 萬至 1,800 萬美元。管理層目前預期 2026 年結束時將達到 3,000 萬至 3,500 萬美元的年化跑率節省額，而 2028 年的目標為 5,000 萬至 6,000 萬美元。

公司未提供正式的 2027 年財測。然而管理層表示，處於高位的積壓訂單、正常的通路庫存及積極的客戶訊號將支持營收持續成長。管理層還指出，將感測器與安全系統部門的調整後 EBITDA 利潤率設定在 20% 高段（high-20%），以及測試與測量部門利潤率設定在 20% 以上，是 2027 年的合理目標。

風險與關注焦點

• 管理層指出供應鏈環境日益嚴峻，通膨高企且部分電子零組件供應受限。
• 預計 2026 年價格將調漲 3% 以上，但仍需持續有效執行價格與成本控制以維護利潤率。
• 第三季利潤率受惠於關稅退稅，管理層表示該項收益在 2027 年將不會重複出現。
• 西歐市場表現依然不均，尤其是德國機械製造客戶。
• 半導體營收面臨較高的去年同期基期挑戰，不過管理層預計潛在需求將在第四季更加明朗。
• 啟用新的國防產能需要取得客戶對設施和生產線的認證核准，這可能會影響時程。

分析師問答亮點

管理層表示，儘管第三季營收創新高，公用事業需求仍加速增長，該業務創下 2026 年最高的訂單出貨比。客戶也對延伸至下一年的需求提供了更高的能見度。

在國防業務方面，管理層將目前的積壓訂單成長描述為處於早期階段。積壓訂單包含正式採購訂單，而七年期計畫下的其他潛在需求僅在客戶下達具約束力的訂單時才會納入。

針對測試與測量業務，管理層將需求歸因於 AI 相關硬體、通訊、電網投資、資料中心及邊緣應用。通路夥伴正在去化庫存並下達新訂單，公司將其視為強勁需求的積極指標。

管理層重申，有機再投資仍是其資本配置的首要任務，其次是股東回饋與針對性的小型併購。潛在的併購標的將針對與電氣化及國防相關的技術，目標是在第三年實現雙位數的投入資本回報率。

法說會完整逐字稿

完整財報電話會議逐字稿

管理層陳述

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.

分析師問答

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.