Teledyne Technologies Inc (TDY) — Q3 2025 Earnings Call Transcript

Thank you, and good morning, everyone. This is Jason VanWees, Vice Chairman, and I'd like to welcome everyone to Teledyne's Third Quarter 2025 Earnings Release Conference Call. We released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Executive Chairman, Robert Mehrabian; President and CEO, George Bobb; EVP and CFO, Steve Blackwood; and Melanie Cibik, EVP, General Counsel, Chief Compliance Officer and Secretary. After remarks by Robert, George and Steve, we'll answer your questions. But of course, before we get started, attorneys have reminded me to tell you that all forward-looking statements made this morning are subject to various assumptions, risks and caveats as noted in the earnings release and our periodic SEC filings, and of course, actual results may differ materially. In order to avoid potential selective disclosures, this call is simultaneously being webcast and a replay via webcast and dial-in will be available for approximately 1 month.

Good morning, everyone, and welcome to our conference call. I am pleased to announce that we achieved record quarterly sales, non-GAAP earnings per share, and free cash flow. Sales rose by 6.7% compared to last year. Non-GAAP earnings increased by 9.2%, and free cash flow reached a record $314 million. Additionally, total company new orders set a quarterly record partly due to continued backlog growth at Teledyne FLIR. Given our robust performance in the third quarter, recovering commercial short-cycle businesses, and strong backlog growth, we are raising our full year earnings outlook at both the lower and upper ends of the forecasted range. Previously, we projected 2025 full year sales to be around $6.03 billion, but now we believe we might achieve sales of $6.06 billion. Our defense-related businesses, including our recent acquisitions, are performing exceptionally well, and we are actively pursuing several significant contract opportunities that have not yet been formally awarded or added to our backlog. However, due to the ongoing U.S. government shutdown, we are being cautious about new contract awards or the acceptance of shipments that require export licenses. Cash collections from the government will also be somewhat delayed. The last shutdown that took place in December 2018 and early 2019 lasted about 35 days, and we are currently on the 22nd or 23rd day of this shutdown. During that time, we did not experience any major impact, and we also do not anticipate much effect this time around, unless the shutdown extends for months or potentially until the end of the year. If that were to occur, it could impact approximately 25% of our sales related to the government, but any temporary effect on commercial sales dependent on U.S. government exports may be slightly impacted. Overall, I believe this will not significantly affect Teledyne. You may have noticed that China has listed Teledyne FLIR LLC as an unreliable entity. However, customers in China account for only 4% of our sales in 2024-2025, and sales from Teledyne FLIR LLC to China were less than 0.4%. Therefore, we do not expect much impact from that. Teledyne Brown Engineering was also added to that list in December 2024, but it has no sales to customers in China. Additionally, despite spending $770 million on acquisitions this year, our current balance sheet is the strongest since before the FLIR acquisition in 2021. We expect to finalize a small carve-out of TransponderTech from Saab very soon, having recently received the necessary approval from the government of Sweden. We are also pursuing various other acquisition activities. George will now provide a brief update on the performance of our business segments.

Thank you, Robert. In the Digital Imaging segment, third quarter sales increased 2.2%. Teledyne FLIR sales continued to grow, but this was also the first quarter in 2 years in which sales from our legacy DALSA, e2v businesses collectively increased modestly. For example, sales of our sensors and cameras for industrial and scientific vision systems increased year-over-year and accelerated for the second quarter in a row. However, this was partially offset by ongoing weakness in sales of X-ray detectors, especially for the more consumer discretionary dental market. Both the overall Teledyne FLIR Defense and Industrial businesses increased, with sales of unmanned systems, counter unmanned air systems and infrared components and subsystems being the strongest performers. Third quarter Digital Imaging book-to-bill was 1.12x. And as Robert mentioned, we continue to pursue a number of opportunities not yet awarded. These include, for example, unmanned aerial systems opportunities such as a full rate production order for our Rogue 1 loitering munition under the Marine Corps Organic Precision Fires-Light or OPFL program as well as a potential new award under the U.S. Army's Low Altitude Stalking and Strike Ordinance or LASSO program, for which we are competing. There also remain several unawarded contracts, both domestic and international for FLIR's airborne, land and maritime surveillance systems. Non-GAAP operating margin decreased 92 basis points, primarily due to greater cost reduction expenses, which we did not exclude from non-GAAP margins as well as 90 basis points of increased R&D expense. In the Instrumentation segment, which consists of our Marine, Environmental and Test and Measurement businesses, third quarter total sales increased 3.9% versus last year. Overall sales of marine instruments increased 3.2% due to strong sales of interconnects used in offshore energy production and for U.S. Virginia and Columbia class submarines. However, these were partially offset by difficult comparisons in offshore energy exploration and some reduced sales of products for hydrography and oceanographic research. Sales of environmental instruments increased nicely at 7.5%, this primarily resulted from higher sales for process gas safety and ambient air and emissions monitoring instrumentation due in part to demand for new natural gas-fired power plants and other energy infrastructure. Sales of electronic test and measurement systems, which include oscilloscopes, protocol analyzers and Ethernet traffic generators increased modestly both sequentially and year-over-year. In particular, sales of high-bandwidth oscilloscopes used by customers developing or testing high-speed networking devices increased nicely, but were partially offset by sales to customers in the automotive and consumer electronics markets. Instrumentation operating margin in the third quarter decreased slightly on a tough comparison. However, we continue to expect a slight increase for full year 2025. In the Aerospace and Defense Electronics segment, third quarter sales increased 37.6%, primarily driven by acquisitions and organic growth of defense electronics products. Commercial aerospace aftermarket sales increased and OEM orders for 2026 deliveries were strong in the quarter, but OEM-related shipments declined from last year given some continuing customer destocking. Overall, segment operating profit increased year-over-year, but GAAP and non-GAAP segment margins decreased slightly year-over-year due to comparatively lower current margins at recently acquired businesses. Nevertheless, overall margin increased sequentially for the second consecutive quarter since closing the acquisitions. For the Engineered Systems segment, third quarter revenue decreased 8.1% given an especially tough comparison with last year. However, despite the lower revenue and also a tough comparison, operating margin increased 30 basis points from last year.

Thank you, George. I want to wrap up by mentioning that we will always face short-term challenges, but we have a proven track record of overcoming them. Our portfolio is diverse across different markets, and no single market in our portfolio declines simultaneously. Similarly, not all markets experience growth at the same time. Despite this, our robust portfolio safeguards us against market fluctuations. The government shutdown presents difficulties for everyone, and we are experiencing some market volatility, but we remain resilient and well-positioned. We have several strong, growing markets with essential products and solutions, as George pointed out. For instance, in our unmanned air and subsea systems, as well as our space-based electronics and imaging sensors for both the U.S. government and NATO allies, our position is very solid. The ongoing demand for new energy sources and the renewal of power generation are positively affecting our Instrumentation businesses. Additionally, the development and inspection of advanced semiconductors rely on our electronic test and measurement instrumentation and our digital imaging solution. Regarding our M&A activities, we have a strong balance sheet and about $1 billion in free cash flow. We plan to be proactive, but we will also be cautious to avoid overpaying for assets that are significantly higher than our own valuation. To conclude, I want to congratulate George Bobb for joining our Board last night, and I would like to indicate that I intend to serve as Executive Chairman of the company for at least another three years. I will now hand the call over to Steve.

Thank you, Robert, and good morning. I will first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our fourth quarter and full year 2025 outlook. In the third quarter, cash flow from operating activities was $343.1 million compared with $249.8 million in 2024. Free cash flow, that is cash flow from operating activities less capital expenditures, was $313.9 million in the third quarter of 2025, a record for Teledyne compared with $228.7 million in 2024. Cash flow increased year-over-year in the third quarter, primarily due to favorable accounts receivable collections in the third quarter of 2025 compared with 2024. Capital expenditures were $29.2 million in the third quarter of 2025 compared with $21.1 million in 2024. Depreciation and amortization expense was $84.5 million in the third quarter of 2025 compared with $76.9 million in 2024. We ended the quarter with $2.0 billion of net debt. That is approximately $2.53 billion of debt less cash of $528.6 million. Now turning to our outlook. Management currently believes that GAAP earnings per share in the fourth quarter of 2025 will be in the range of $4.76 to $4.98 per share, with non-GAAP earnings per share in the range of $5.73 to $5.88. And for the full year 2025, we believe that GAAP earnings per share will be in the range of $17.83 to $18.05 and non-GAAP earnings per share in the range of $21.45 to $21.60.

Thank you, Steve. We'd like now to take your questions. Operator, if you're ready to proceed with the question and answers, please go ahead.

Last quarter, there was some uncertainty regarding the strong growth you experienced and whether it was accelerated. Could you go through the various segments and explain how things unfolded? In some areas, it appears that growth didn't resume as robustly as expected. How do you think things progressed?

Overall, we achieved 6.7% growth across our portfolio from acquisitions. Different businesses performed variably, as you pointed out. For instance, our Marine businesses continue to thrive, securing contracts in both the defense sector, such as our underwater vehicles, and energy development. In some areas of our instrumentation, there was variation among different Instrument businesses. Our Gas and Flame safety products are performing well, while we are experiencing some softness in our water products and those used in drug development. Additionally, we had some pull-ins into Q2, particularly in test and measurement, more so than in other sectors. FLIR's organic growth was 3%, and we saw stronger growth in some commercial FLIR segments as well as a 10% growth in our unmanned systems across air, ground, and other systems. There's a mix within our portfolio. As I mentioned earlier, we have a diverse portfolio; some areas are rising while others are falling, but overall, we are making positive progress based on what I observe.

Yes. Okay. And what about specifically in Digital Imaging, you made the comment, industrial automation or imaging equipment for that market. Presumably, that's machine vision starting to pick up. So maybe is that one area that grew last quarter nicely, but seems like sustained growth from here?

Well, I'll answer part of it and maybe George would want to add something to that. I think overall, the industrial and scientific vision systems grew about 3.4%, which to us is very attractive. Overall, DALSA, e2v which is the rest of the digital imaging rather than FLIR was relatively flat, both quarter-over-quarter and we expect year-over-year. But George has really taken some very strong actions to take cost out of the part of that business that has slowed down over the last 2 years. And as a consequence, he and I believe that what will happen is that the margins now will start improving going forward, and that business will pick up because we have streamlined it down to where it should be much more healthy. George, do you want to add anything?

I think the only thing I would add is in the industrial side, we saw sales increases year-over-year in both the Machine Vision Cameras business, where we're doing applications like semiconductor mask and wafer inspection, inspection of electronic components. And we also saw an increase year-over-year in our Machine Vision Sensors business where we make sensors for other OEMs.

Maybe just putting a finer point on Digital Imaging margins. I mean you called out some of the headwinds in the quarter between R&D and the restructuring. But I think in the past, you had talked about a 24% target. How do you think about the margin recovery into Q4 and maybe into next year for Digital Imaging?

I believe the margins for 2023 and 2024, particularly in the fourth quarter, are attainable. For the year, when we consider the first two to three quarters along with the fourth quarter, we should remain flat compared to last year, despite the significant costs we've reduced in the first three quarters, including the recently concluded third quarter. Given this context, if we can sustain the same margins as last year with the cost reductions, then I think achieving our goals for 2024 is possible.

And then maybe just to put a finer point on the revenue. So you raised the full year outlook by 0.5% to $6.06 billion. Is that all organic? And then it looks like maybe there's a $20 million step-up sequentially in Q4. Can you maybe talk about seasonality into the final quarter of the year and maybe which segments you expect to see a step-up versus maybe where there's a step down tied to just typical seasonality?

Well, first, let me start with Digital Imaging. $10 million of the $30 million comes from FLIR. We expect higher revenue in that area. $10 million of it comes from aerospace and defense organic and then another $10 million comes from our acquisition from Qioptiq. So it's a $30 million increase. It's not a big number, but there's also a little conservatism built into that, of course.

Just what I think you provided a book-to-bill number, and I wasn't sure if that was specific to the Digital Imaging business. If possible, could you provide a book-to-bill for the three major segments?

Sure. Happy to do that. Yes, the book-to-bill ratio I gave you was for Digital Imaging, 1.12. In the Instrumentation segment, we had a book-to-bill overall of 0.9, a little higher in T&M, for example, 0.98, Environmental closer to 0.95. Marine closer to 0.8, about 0.8. But keep in mind that's a longer cycle business, a little lumpiness in orders there. We have a lot of backlog in the Energy business. So not concerned about that short-term lower book-to-bill ratio. And then in Aerospace and Defense Electronics, again, longer cycle business, lumpiness in some larger orders, book-to-bill ratio was 0.84. And Engineered Systems was over 2x in the quarter. But again, that's a long cycle business. And so we tend to look at the longer-term view there, not one quarter at a time. Yes. And the overall book-to-bill ratio of 1.09.

Terrific. And you alluded to in the earnings announcement, the potential for significant contract opportunities. And I'm just wondering if you can give us some color on which areas of the Defense business there are some potential large contracts? And any idea about the time line just given the government shutdown?

Yes, I wouldn't want to opine too much on the time line of the government shutdown. What I would say is we have some near-term opportunities, particularly in the unmanned space. I mentioned a couple of them in the opening for our loitering munition program, both with the U.S. Marine Corps that's the Organic Precision Fire-Light program. We're looking for a full rate production order there. Again, I would think that would be relatively near term, hopefully in Q4 depending on the timing of the government operations. And that would be in the range of tens of millions of dollars. The LASSO program that I mentioned, the U.S. Army program, that initial order, again, hopefully near term that would be initially more kind of millions of dollars and grow from there. And overall, what I would say is unmanned systems, things like our Black Hornet drone, our sales into counter UAS systems of both of ourselves and where we're selling to other OEMs, integrated surveillance solutions for both border protection and defense, et cetera. So I think those are the strongest areas. Also, we continue to see a lot of strength in our Submarine business where we provide interconnections on the Virginia and Columbia class submarines.

On the 737 rate increase step-up, how are you guys thinking about that into 4Q and next year given the comments on some destocking?

Yes. This is George. So what I would say there is we expect that destocking really to continue through most of next year. So we won't see much of a benefit from the OEM Boeing 737MAX rate increase next year, although the demand there continues to be strong, and we received a large order for 737MAX 2026 delivery. So backlog is there. Just from a year-over-year comparison standpoint, we won't see much benefit from that slight increase in 2026 to the production rate.

We have a little exposure there. On the other hand, we've been very diligent to cover that exposure. So overall, I don't think that's going to affect us in the short term.

I was hoping to explore your comments about cameras and sensors showing year-over-year growth. Could you elaborate on that? What do you think is driving this improvement? Have you seen these trends continue into the fourth quarter?

Yes, I can share that the comparisons to last year are somewhat easier. Our cameras have increased by about 11%, and our sensors have grown by approximately 5%. Some of our specialized scientific cameras have seen a slight decline, likely due to export issues. Overall, when we look at everything together, we've seen a rise of about 3.4%. As I mentioned earlier, our aggressive cost reduction efforts in the DALSA and e2v businesses this year have helped stabilize them. I believe those divisions will experience growth, and margins are expected to improve over time. Therefore, we are optimistic about that. Initially, after we acquired FLIR, there were concerns about its performance. However, those issues have been resolved, and FLIR is performing well. FLIR Defense is meeting all the milestones we anticipated. Now with DALSA and e2v also stabilized, we have a very positive outlook for our Digital Imaging segment as a whole.

That's really helpful. And Robert, I just was wondering if you could maybe give us your perspective on the macro outlook. Are there any changes to your view since your last update? And I know it's early to be giving guidance for 2026. But just seeing where trends are, and if you were to ballpark today, where do you suspect kind of growth could line up in 2026 if the current conditions kind of remain?

We are very optimistic about our Defense business given the current geopolitical issues. For instance, Europe is set to boost its defense spending. Teledyne has 5,100 employees across various countries in Europe, where we manufacture drones in Sweden and other products in Norway. Our team is also involved in Ukraine and Denmark, where there's significant pressure to increase defense budgets. Overall, with our presence and the demand for local production, I foresee positive developments for us in Europe. Currently, we generate approximately $0.5 billion in revenue from European defense, and I anticipate this will grow. On a broader scale, George mentioned our loitering munitions, which can hover and target effectively. Unlike most competitors with fixed-wing aircraft, we utilize rotary or quad aircraft that can be launched from a tube and perform vertical takeoff and landing. We're optimistic about this innovation. Defense is poised to be an active sector in both Europe and the Far East. Additionally, our small nano drones, which are compact enough to be held in hand, are projected to reach sales of $0.5 billion by the end of next year, where we hold a strong position. In the commercial sector, we anticipate a recovery in machine vision and test and measurement, along with long-term opportunities in power generation. Overall, we expect 2026 to be a positive year for us, unless unexpected global events arise, which I do not foresee. We are currently preparing our plans for 2026 and remain very optimistic.

Robert, that was really helpful color on what you provided with European defense. And I just wanted to clarify a few things. When you said $0.5 billion, is that encompassing all of your defense exposure to Europe? Or is that specifically only on the drone exposure that you were discussing? And then also more broadly speaking, I guess my question is really trying to understand more your go-to-market for these things. When you're looking at the drone and counter-drone market, how are you thinking about being a prime and selling your nano drones versus your core competencies historically on sensors and those kinds of things? And how do you look at the opportunity set for those kind of different go-to-market?

Okay. Kristine, let me start from the beginning. The $0.5 billion pertains to two aspects. First, it reflects our total military sales this year in Europe. Additionally, if you consider everything we've sold, including all the nano drones we’ve sold or will be selling through next year, that accounts for another $0.5 billion. Therefore, only $60 million or $70 million of the initial $0.5 billion is attributable to the nano drones. So let's set that aside. We are functioning as both a prime contractor in defense and as a subcontractor. For instance, in loitering munitions, we are a prime contractor. In the case of nano drones, we are also a prime. For some of our counter UAS systems, we collaborate with partners. It’s a mixed approach, but our strong presence in all these countries is crucial, as both Europe and the Middle East are focused on producing their defense products locally, and we are well-represented in those regions. This strategy benefits us, particularly in Europe, where out of approximately 15,600 to 15,700 employees in our company, 5,100 are based there. That’s how we approach the market, and when necessary, we create new entities to facilitate our operations.

I would like to ask about the Digital Imaging margin. Based on your comments, it seems the Digital Imaging margin may be lower than expected due to R&D and severance costs. While there is a benefit from severance costs next year, is the increase in R&D a permanent adjustment funded by the reduction in costs? Looking ahead to 2026, in relation to Damian's question about the top line, what should we anticipate regarding the margin mix of Digital Imaging compared to FLIR, medical, and industrial sectors? What margin dynamics might we expect?

Let me take a piece of that and then see if George wants to add to it. First in R&D, there are very, very specific areas that we've decided to invest. For example, in our test and measurement systems, we've decided to invest especially in protocol analyzers and the marriage of our oscilloscopes and protocols as well as at our very high-end oscilloscopes, we've intentionally decided to do that. Switching over to digital imaging, there's an area of digital imaging that we think we can be extremely successful, and that's in our Sensor businesses. We've decided to invest a little more in our Sensor businesses. And frankly, that's worked for us because some of our sensors, whether they are for visual systems or for infrared systems are doing very well. Our infrared sensors, we're also investing in because we are the supplier of infrared sensors to almost everybody that flies a drone in the United States or produces a drone. So the investment in R&D is very specific for specific areas cut across all of our products. On the margin improvement for next year, I'll let George talk a little more about that.

Yes. What I would say is, first, as we mentioned before, obviously, we've taken the cost out. We're seeing the recovery in the short-cycle business. So it's early really to talk about really what the mix is going to look like next year, what 2026 numbers are specifically going to look like. But in general, as the machine vision margin comes back, that's positive. As we continue to grow in defense, that's a little perhaps negative in certain areas on the overall margin. So overall, I'd say mix is probably neutral headed into next year, but we certainly should benefit from the cost reductions that we took this year.

So you've commented already on unmanned. Demand signals globally are very strong, but there also seems to be substantial aspirations by customers of getting these capabilities at much lower cost. So you have great market positions in sensors and cameras, and you've already highlighted the prime opportunities that you have. But could you comment on how attractive is the potential to supply some of these components and drones at much lower prices, but substantially higher volume? And maybe comment on is there opportunities to invest more capital in this area?

Thank you very much for the question. I would say that our costs are much lower, and over time, I think people are currently willing to pay for accuracy and the ability to achieve specific targets. Many of our drones are low cost compared to competitors while being highly capable. For instance, our Rogue 1 quadcopter is the lightest in the market at around 10 pounds, which allows us to lower costs as we reduce size. We're very competitive in terms of price. The nano drones I mentioned earlier are also produced in high volumes and are cost-effective. I believe people may opt for lower-priced options, but that often requires sacrificing some capabilities. For example, taking down an armored vehicle might necessitate a larger warhead in a drone, while we can achieve the same accuracy with a smaller vehicle and a smaller warhead. It's a trade-off. Our experience in Ukraine has shown us that there isn't a single solution to the challenges faced there. They are succeeding, but they do not need highly advanced equipment to operate effectively. While cost is a factor, accuracy and weight will also be crucial.

Can you hear me?

Yes, sure, Joe.

Yes, we're discussing $450 million in the unmanned sector. That number seems a bit outdated. How can we reframe it for the next few years? We've mentioned potential opportunities, but looking 3 or 4 years ahead, what could that $450 million grow into if all goes well for you? How significant could that business really become?

Yes. I think we're around $500 million now versus $450 million that we talked about before. We're investing in that area. And we're gaining market share not just on drones that we've talked a lot about, but also underwater. As you may know, that we're probably unique as a company where we have products for air unmanned, ground unmanned and underwater unmanned. And I'll let George talk a little bit about the underwater domain because that's our growth domain right now, and we're very excited about that. So the $500 million will grow for sure. How fast? I'll know in about a month or 2 when we do our plan for the next couple of years, but grow it will.

Yes. I would add on the subsea unmanned side, we have both our Subsea Glider, which are kind of long duration, long endurance, can stay on station for a long time, useful, as you can imagine, in areas like anti-submarine warfare and other areas. We also have propelled AUVs, particularly out of our Iceland business, Teledyne Gavia. Those vehicles, shorter in time and duration, but bigger can carry more payloads, again, for things like mine countermeasures, anti-submarine warfare. So yes, I think we see growth both in the unmanned aerial side, the ground side, but also we're seeing significant demand with regard to the subsea vehicles, given needs in the Black Sea, Baltic Sea and Asia Pacific.

That makes sense. And just a follow-up. If you're thinking about your full year EPS growth year-on-year, how much would you attribute that to M&A? And how much would you say is organic this year?

For this year?

Yes.

For this year, I would say probably most of it is organic. We have a little bit from M&A because of our acquisition that we made. I'm going to say maybe $0.20, $0.25 from acquisitions, primarily because, as George mentioned earlier and I have before, when we make acquisitions, initially, it drives our margins down in reality because they don't have the margins that we enjoy. But as you look at our products, if you look at across all of our acquisitions, after a few years, the margins improved significantly. And so they kind of become the standards that we have for instruments, defense, otherwise. So the margins this year contribution from acquisitions are relatively light, but they'll improve next year. Thank you, operator. I'll now ask Jason to conclude our conference call.

Thanks, Robert. And again, thanks, everyone, for joining us this morning. Of course, if you have follow-up questions, please feel free to call me, and my number is on the earnings release. And all our earnings releases and a replay of this call via webcast is available on our website. Operator, if you could please give the replay information, that would be ideal. And again, thanks, everyone. Bye-bye.