Executive Summary / Key Takeaways

• Ralliant's June 2025 spin-off from Fortive created a pure-play precision instruments company with a fundamental split: Sensors & Safety Systems is accelerating on a defense supercycle and grid modernization wave, while Test & Measurement faces cyclical headwinds that dragged segment operating margins from 12.4% to -0.8% in Q3 2025.

• The Sensors & Safety segment's 10.5% year-over-year growth and defense backlog exceeding twice annual revenue provide a durable growth engine, but Test & Measurement's 14% decline and geographic weakness in China and Western Europe create a drag that management must offset through cost discipline and new product launches.

• Management's Ralliant Business System (RBS) is already delivering tangible results: tariff costs were fully offset in Q3 ahead of schedule, a cost savings program targets $9-11 million in annualized savings by end of 2026, and the company absorbed standalone public company costs while maintaining 20.4% adjusted EBITDA margins.

• Valuation at 18.1x EV/EBITDA and 13.9x price-to-free-cash-flow sits below key peers like Keysight (32.2x EV/EBITDA) and Teledyne (18.3x EV/EBITDA), reflecting market skepticism about the Test & Measurement turnaround, but this discount could prove conservative if defense and grid momentum accelerates faster than expected.

• The critical variables to monitor are the pace of Test & Measurement stabilization—Q3's 6% sequential growth is encouraging but fragile—and execution of the cost savings program to expand margins beyond current levels, particularly as lower-margin defense products grow within the higher-margin Sensors segment.

Setting the Scene: A Tale of Two Businesses

Ralliant Corporation, incorporated in 2024 and headquartered in the United States, began trading as an independent public company on June 30, 2025, after separating from Fortive Corporation (FTV). This spin-off transformed a collection of precision instrument businesses into a standalone entity with a clear strategic focus, but it also exposed a fundamental tension: the company operates two segments heading in opposite directions. The Sensors & Safety Systems segment serves defense, utilities, and industrial markets with highly engineered products that benefit from secular tailwinds, while the Test & Measurement segment faces cyclical pressure from cautious customer capital spending and geographic headwinds.

The industry structure explains the divergence. Global defense spending is projected to surge from $1.8 trillion to $3 trillion by 2030, a 40% increase that creates a supercycle for safety systems and sensors. Utilities are making record capital expenditures—estimated at $174 billion in 2024, rising to $202 billion in 2025 and $211 billion by 2027—to modernize aging infrastructure, with over 70% of U.S. power transformers more than 25 years old. Meanwhile, data center electrification is driving 6x higher power demand growth over the next five years compared to the prior 20-year average. These trends directly benefit Ralliant's Sensors & Safety segment.

Ralliant's competitive position sits in the middle tier of the precision instruments market. Unlike Teledyne Technologies (TDY), which maintains broad diversification across instrumentation and digital imaging, or Keysight Technologies (KEYS), which dominates electronic test with elite 62% gross margins, Ralliant operates as a specialized player with niche strength in space and defense sensors. This specialization provides differentiation but limits scale, resulting in a $5.76 billion market capitalization that is modest compared to Teledyne's $24.52 billion and Keysight's $36.17 billion. The spin-off's immediate focus on the Ralliant Business System (RBS) aims to close this scale gap through operational excellence rather than acquisition-driven expansion.

Technology, Products, and Strategic Differentiation

Ralliant's moat in Sensors & Safety stems from proprietary sensor designs and deep regulatory certifications that create barriers to entry. The PacSci EMC safety systems are integrated into the majority of 12 identified critical defense programs, and the segment's backlog now exceeds twice its annual revenue. Defense qualification cycles typically span two to five years, locking out new entrants and giving Ralliant pricing power in long-term contracts. The company's ability to scale production within existing manufacturing footprint while planning future organic expansion demonstrates operational leverage that competitors like Mercury Systems (MRCY), with its recent governance issues, struggle to match.

In Test & Measurement, Ralliant's Tektronix brand launched two high-performance instruments in Q3 2025: the DPO7000 oscilloscope and MP5000 modular precision test system. These products target next-generation technologies like AI, robotics, and quantum systems, but they face a challenging demand environment. Semiconductor customers are deferring R&D lab investments to focus on AI infrastructure, while communications market revenue declined over 30% year-over-year due to lapping a $15 million project from a single customer. These products expand Tektronix into the validation workflow, a $500 million addressable market, but their impact will be muted until capital spending recovers.

The Ralliant Business System serves as the company's core operating model, driving continuous improvement across both segments. In Q3, RBS enabled the company to fully offset tariff costs ahead of its year-end goal, and management expects pricing countermeasures to result in only a 50 basis point gross margin headwind on a run-rate basis. This operational discipline is critical because it allows Ralliant to absorb the 250 basis point margin impact from standalone public company costs while still delivering 20.4% adjusted EBITDA margins. Compared to OSI Systems (OSIS), which faces geographic concentration risks, Ralliant's RBS provides a more resilient operational framework.

Financial Performance & Segment Dynamics

Ralliant's Q3 2025 results illustrate the divergent paths of its two segments. Consolidated revenue of $529 million was flat year-over-year but grew 5% sequentially, masking a 14.1% decline in Test & Measurement ($203.1 million) and a 10.5% increase in Sensors & Safety ($326 million). The organic revenue decline of 1.4% was driven by volume drops of 5.2%, partially offset by 3.8% pricing gains. This pricing power demonstrates Ralliant's ability to maintain value even in weak demand environments, a key differentiator from Mercury Systems, which reported net losses despite 9% revenue growth.

Segment profitability reveals the core challenge. Test & Measurement swung to a $1.7 million operating loss (0.8% margin) from a $29.3 million profit (12.4% margin) a year ago, driven by 18.1% volume declines in oscilloscopes and high-power solutions. In contrast, Sensors & Safety delivered $90.1 million in operating profit at a 27.6% margin, essentially flat year-over-year as positive volume leverage offset higher post-spin employee costs. This divergence shows the Sensors segment can fund the company's overall profitability while Test & Measurement restructures, but it also creates a margin headwind as lower-margin defense products grow within the higher-margin Sensors mix.

Cash flow generation remains a bright spot. Year-to-date operating cash flow of $296 million increased 1.9% despite a $55.6 million decrease in net earnings, reflecting strong working capital management. Trailing twelve-month free cash flow of $420.2 million converts at over 95% of net income, meeting management's long-term target. This conversion rate is superior to Teledyne's implied cash flow metrics and provides Ralliant with strategic flexibility to fund organic investments, pay a modest dividend ($0.05 per share), and maintain a $200 million share repurchase authorization. The balance sheet holds $264.2 million in cash against $1.15 billion in debt, resulting in 1.9x net leverage that sits within the company's 1.5-2x target range.

Outlook, Management Guidance, and Execution Risk

Management's Q4 2025 guidance calls for revenue of $535-550 million, adjusted EBITDA margins of 20-21%, and EPS of $0.62-0.68. This implies modest sequential improvement but acknowledges that Q4 is typically the highest revenue quarter, followed by a mid-to-high single-digit sequential decline in Q1. Management expects Test & Measurement to deliver a typical seasonal step-up, but the segment's year-over-year recovery remains uncertain. Semiconductor customers continue deferring R&D investments, and China demand remains pressured by export controls and tariffs.

The 2026 outlook hinges on three factors: capital expenditures ramping to 2-3% of revenue, the cost savings program delivering $9-11 million in annualized savings by year-end, and defense backlog conversion accelerating. The Sensors & Safety segment is scaling production capacity within existing facilities to address its >2x revenue backlog, a move that should improve asset efficiency compared to Mercury Systems' acquisition-driven capacity expansion. However, defense products typically run at the lower end of the segment's margin range, creating a trade-off between growth and profitability.

Execution risks are concentrated in Test & Measurement. While Q3's 6% sequential growth and communications market momentum are encouraging, the segment faces tough comparisons against large 2024 projects and continued weakness in diversified electronics, particularly in China and Western Europe. Keysight's recent launch of AI-augmented testing tools and HDMI compliance solutions demonstrates competitive pressure in the electronic test market, where Ralliant must prove its DPO7000 and MP5000 can capture share. The company's ability to maintain RBS discipline while integrating standalone functions will determine whether margins can expand beyond the 20-21% range.

Risks and Asymmetries

The most material risk to the thesis is a prolonged downturn in Test & Measurement that overwhelms Sensors & Safety growth. If semiconductor capital expenditures remain frozen and communications spending fails to recover, the segment's 14% year-over-year decline could deepen, dragging consolidated margins below 20% despite cost savings. This risk is amplified by geographic concentration, with China down 6% and Western Europe down 6% in Q3, as export controls and cautious demand create structural headwinds that pricing power alone cannot offset.

A second critical risk is margin dilution from defense growth. While the Sensors & Safety backlog provides revenue visibility, defense products carry lower margins than utility or industrial applications. As this business grows, it could compress segment margins from the current 27.6% level, creating a headwind to consolidated EBITDA expansion. This dynamic contrasts with Teledyne's diversified defense portfolio, which maintains higher margins through digital imaging and instrumentation mix.

Upside asymmetries exist if grid modernization accelerates beyond the projected $211 billion in 2027 utility capex. Ralliant's sensors for critical power grid assets are positioned to capture share as utilities face 6x higher power demand growth, and any federal infrastructure spending could create a step-function increase in utility revenue. Additionally, if Test & Measurement's new products gain traction in AI and quantum research applications, the segment could return to growth faster than the 2026 timeline implied by management's commentary.

Valuation Context

Trading at $51.10 per share, Ralliant's valuation reflects market skepticism about its dual-segment challenges. The company trades at 18.1x EV/EBITDA and 13.9x price-to-free-cash-flow, a discount to Keysight's 32.2x EV/EBITDA and 25.6x P/FCF, and roughly in line with Teledyne's 18.3x EV/EBITDA but with a superior free cash flow yield. This discount suggests investors are pricing in a prolonged Test & Measurement recovery, creating potential upside if the segment stabilizes faster than expected.

The balance sheet metrics support a stable capital structure: net leverage of 1.9x sits within the 1.5-2x target range, and the current ratio of 1.49 provides adequate liquidity. The modest dividend yield of 0.39% and unused $200 million share repurchase authorization indicate management is prioritizing organic investment in defense capacity and Test & Measurement product development over immediate capital returns. This approach contrasts with OSI Systems' acquisition-driven growth and Mercury Systems' governance overhang, positioning Ralliant as a more disciplined capital allocator.

Peer comparisons highlight Ralliant's relative attractiveness on cash flow metrics but also its growth deficit. While Teledyne, Keysight, and OSIS delivered 6-11% revenue growth, Ralliant's flat year-over-year performance reflects the Test & Measurement drag. However, Ralliant's 50.5% gross margin exceeds Teledyne's 42.7% and OSIS's 33.6%, demonstrating pricing power in its niche markets. The key valuation question is whether the market will reward Ralliant's free cash flow generation and defense moats or penalize its slower growth until Test & Measurement proves it can return to expansion.

Conclusion

Ralliant Corporation stands at a critical inflection point six months post-spin-off, with its Sensors & Safety segment firing on all cylinders while Test & Measurement navigates cyclical turbulence. The defense supercycle and grid modernization megatrend provide a durable growth engine that competitors cannot easily replicate, given Ralliant's proprietary sensor designs and >2x revenue backlog. However, the company's overall trajectory depends on executing its cost savings program and stabilizing Test & Measurement before segment declines erode consolidated margins.

The investment thesis hinges on two variables: the pace of Test & Measurement's recovery, evidenced by Q3's fragile 6% sequential growth, and management's ability to deliver $9-11 million in cost savings while scaling defense production without margin dilution. At 13.9x free cash flow, the market prices in significant execution risk, but this could prove conservative if Ralliant's RBS discipline and niche moats enable it to outgrow larger but less focused competitors. For investors, the story is not about navigating headwinds, but about whether a leaner, more focused Ralliant can turn its defense and grid tailwinds into sustainable outperformance while its test and measurement business finds its footing.