Teledyne Technologies Incorporated 2026 Q3 Earnings Call

Welcome to Teledyne's third quarter earnings call. Here's our first speaker, Mr. Jason VanWees.

Good morning, everyone. Thanks for joining us. This is Jason VanWees, Vice Chairman of Teledyne, and I'd like to welcome everyone to Teledyne's third quarter 2026 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 will ask for your questions. However, our attorneys have reminded me that before we get started, all forward-looking statements this morning are subject to various assumptions, risks, and caveats, as noted in the earnings release and our periodic SEC filings. Of course, actual results may differ materially.

In order to avoid potential selective disclosures, this call is simultaneously being webcast, and a replay by webcast and dial-in will be available for approximately one month. Here's Robert. Thank you, Jason, and good morning, everyone.

Our third quarter sales and operating earnings were the strongest in Teledyne's history. For the third quarter in a row, we're raising our full year 2026 sales and earning guidance. In January, we forecasted revenue of $6.37 billion, a 4.2% increase from 2025, and non-GAAP earnings of $23.65 per share. Today, our outlook for 2026 sales is $6.625 billion, a year-over-year increase of 8.3% and nearly double the growth rate projected in January. Earnings of $25.45 per share, which is $1.80 per share, or almost 8% higher than forecast in January, and a 16% increase compared to last year. For all of Teledyne, orders have exceeded sales for 12 consecutive quarters, and funded backlog is now approximately $5.3 billion.

In the third quarter, organic growth accelerated in our digital imaging segment and was led by sales of infrared detectors and subsystems for space and unmanned applications. Furthermore, each of our major commercial imaging businesses, such as industrial vision sensors and systems, as well as healthcare, increased year-over-year. Our third quarter performance reflected not only the strong execution of the backlog that we have been building for three years, but also the strength of our business portfolio and what Teledyne is today, a company with a broad set of sensors and vertically integrated platforms from space to deep sea. We also continue to enjoy robust free cash flow and recently made $224.6 million of opportunistic stock repurchases at a weighted average price of approximately $607 per share. We did the same in 2025 and 2024 when we felt Teledyne was undervalued.

During the past three years, we have deployed nearly $980 million to buy back shares of our company at a total weighted average price of $479 per share. Regarding the pending acquisition of Varex, we were following the company for more than six years. As healthcare and life sciences markets began to recover earlier this year, we felt the timing was finally right for us to pursue and then announce this highly complementary acquisition in the third quarter. The regulatory process is underway, and Varex's special stockholder meeting is scheduled for October 28th. We continue to anticipate closing early in 2027. Notwithstanding the stock repurchases and the pending acquisition, current leverage remains at the lowest level in six years, and we have more than ample flexibility to continue compounding earnings growth for years to come. George will now comment on the performance of our four business segments.

Thank you, Robert. In the digital imaging segment, third quarter sales increased 15% and 14.3% organically due to well-balanced growth among our defense and commercial businesses. Sales of infrared detectors for space-based imaging increased more than 25%, as did revenue from infrared subsystems and cameras for our customers, unmanned air systems, and unmanned maritime surface vehicles. In addition, segment sales increased in each of our larger commercial end markets. That is, sensors and cameras for industrial and scientific vision applications, X-ray products for healthcare, commercial thermography cameras, electronics for maritime navigation, geospatial sensors and software, and microelectromechanical systems, or MEMS. Finally, non-GAAP operating margin in the segment increased 376 basis points to 25.4%. In the instrumentation segment, which consists of our marine, environmental, and test and measurement businesses, third quarter sales increased 1.9% versus last year.

Overall sales of marine instruments increased 2%, primarily due to strong defense-related sales of interconnects for U.S. Virginia and Columbia submarines, as well as continued growth in the offshore energy exploration and production market. Sales of environmental instruments increased 7.1% due to increased sales of gas monitoring instrumentation, along with more modest growth in sales of laboratory and life sciences instruments. Sales of electronic test and measurement systems decreased 6.3%, due in part to the timing of orders, which increased 18% year-over-year for a record book-to-bill ratio of 1.23. Instrumentation non-GAAP operating margin in the third quarter decreased modestly due to product mix, but was sequentially higher for the second consecutive quarter. In the aerospace and defense electronics segment, third quarter sales increased 4.3%. Growth in defense electronics of 7.4% was partially offset by lower sales in commercial aerospace.

However, third-quarter bookings were very strong in both the defense and aerospace markets, with a segment book-to-bill ratio of 1.29. Non-GAAP segment margin increased 86 basis points year over year, even though there was a greater mix of defense electronics, which as a whole have a lower operating margin compared with commercial avionics. For the engineered systems segment, third quarter revenue increased 7.8%, driven primarily by greater sales of marine and other manufacturing programs. Segment operating margin was largely flat with last year. I will now pass the call back to Robert.

Thank you very much, George. To conclude, right now, virtually all of our businesses are moving in a positive direction simultaneously, and our growth remains balanced across many end markets and geographies and not due to any singular, potentially fleeting market driver. Given our backlog, the pending acquisition of Varex, our strong balance sheet, and outstanding operating discipline, I'm already looking forward to 2027. I will now turn 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 2026 outlook. In the third quarter, cash flow from operating activities was $352.5 million, compared with $343.1 million in 2025. Free cash flow, that is cash flow from operating activities, less capital expenditures, was $319.5 million, a third-quarter record, compared with $313.9 million in 2025. Cash flow increased due to favorable operating results in the third quarter of 2026 compared with 2025, partially offset by higher inventory purchases. Capital expenditures were $33 million in the third quarter of 2026, compared with $29.2 million in 2025. Depreciation and amortization expense was $84.7 million in the third quarter of 2026, compared with $84.5 million in 2025. We ended the quarter with $1.47 billion in net debt.

That is approximately $2.03 billion of debt, less cash of $562.4 million. Now turning to our outlook. Management currently believes that GAAP earnings per share in the fourth quarter of 2026 will be in the range of $5.68 to $5.83, with non-GAAP earnings per share in the range of $6.60 to $6.70. For the full year 2026, we believe that GAAP earnings per share will be in the range of $21.71 to $21.87, and non-GAAP earnings per share in the range of $25.40 to $25.50. I will now pass the call back to Robert.

Thank you, Steve. We would now like to take your questions. Rob, if you are ready to proceed with the questions and answers, please go ahead.

Thank you. We will now be conducting our question and answer session. To ask a question at this time, you may press star one from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, for our first question. Thank you. The first question today comes from the line of Zachary Walljasper with UBS. Please proceed with your questions.