TELEDYNE TECHNOLOGIES INC Q4 2025 earnings call

Good morning, everyone, and thank you for joining the earnings call. This is Jason VanWees, Vice Chairman, and I'd like to welcome everyone to our Fourth Quarter and Full Year Earnings Release Conference Call, and 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 take 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, risk factors, 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. Both via webcast and dial-in will be available for approximately one month. Here is Robert.

Thank you, Jason. We concluded 2025 with the largest quarterly orders, sales, and non-GAAP earnings, as well as operating margin in the company's history. Consequently, I'm optimistic about 2026, both due to the performance of our businesses in 2025, as well as the new leadership in place with George Bobb as CEO and multiple senior executives with added responsibilities in our business segments. Getting back to 2025, fourth quarter sales increased 7.3% from last year, while non-GAAP earnings increased 14.1%. For the full year, sales increased 7.9%, and non-GAAP earnings increased 11.5%. Throughout Teledyne, our defense businesses remained healthy, and our short-cycle commercial businesses continued to recover, with most product families increasing either sequentially or year over year. In digital imaging, Teledyne FLIR performed very well, with particular strength in unmanned and other defense surveillance systems, while within marine instrumentation, we achieved record sales of autonomous underwater vehicles.

In terms of capital deployment, 2025 was our second largest year in history, with over $850 million spent on acquisitions throughout the year and $400 million for stock repurchases within the fourth quarter. Nevertheless, having generated approximately $1.1 billion in free cash flow for two consecutive years, we ended 2025 with a leverage ratio of just 1.4 times. Last week, we continued our String of Pearls strategy with the acquisition of DD-Scientific, a UK-based manufacturer of high-performance electrochemical gas sensors. Gas sensors are not only a critical technology component used in our environmental instruments, but such sensors are also an attractive consumable business with high recurring revenue. Turning to 2026, while it's still early, we are reasonably confident in our current outlook for both revenue and earnings.

That is, we believe full year 2026 revenue will be approximately $6.37 billion, and non-GAAP earnings at the midpoint will be approximately $23.65, both of which are consistent with current consensus estimates. As in 2024 and 2025, we expect normal seasonality in 2026, with approximately 48% of sales and 46% of earnings in the first half of the year. George will now comment on the performance of our four business segments.

Thank you, Robert. In the digital imaging segment, fourth quarter sales increased 3.4% despite a tough comparison, primarily due to strong sales from Teledyne FLIR. Specifically, infrared imaging components and subsystems, many of which are used in our customers' unmanned systems, increased over 20%, while sales of FLIR surveillance products and complete unmanned air systems also grew. FLIR maritime sales were also a record due in part to imaging systems for unmanned surface vessels and continued positioning of the business to industrial and defense markets. Sales of sensors and cameras for industrial machine vision applications increased year over year, but were offset by lower sales of X-ray detectors and scientific cameras. In the fourth quarter, we were awarded our first production rate contract in the loitering munition market under the Marine Corps Organic Precision Fires-Light, or OPF-L, program.

Also, on December 19th, the Space Development Agency awarded four prime contracts for 72 Tranche 3 Tracking Layer missile warning and tracking satellites, and we were selected to supply space-based infrared detectors to three of the four primes. This continues our very strong participation across each of SDA's Tracking Layer programs and positions us well for future Ground Domain related contracts. Non-GAAP operating margin in the segment increased 180 basis points to 24.7%, a record for the segment since fully incorporating FLIR in 2021. In the instrumentation segment, which consists of our marine, environmental, and test and measurement businesses, fourth quarter total sales increased 3.7% versus last year. Overall sales of marine instruments increased 3.3% due to strong sales of interconnects used in offshore energy production and for U.S. Virginia-class and Columbia-class submarines, as well as the record sales of underwater autonomous vehicles that Robert mentioned earlier.

However, these were partially offset by some reduced sales of products for hydrography and oceanographic research. Sales of environmental instruments increased 6.1%. This primarily resulted from higher sales for gas safety and ambient air and emissions monitoring instrumentation, combined with stabilization in sales of laboratory and life sciences instruments. Sales of electronic test and measurement systems, which include oscilloscopes, protocol analyzers, and Ethernet traffic generators, increased 1.4% year over year, but greater than 10% sequentially from the third quarter. Instrumentation non-GAAP operating margin in the Fourth Quarter decreased slightly on a tough comparison. However, it increased 36 basis points for the full year 2025 to a record 28.4%. In the aerospace and defense electronics segment, Fourth Quarter sales increased 40.4%, primarily driven by the optics and Micropac acquisitions, as well as organic growth of other defense electronics and commercial aerospace products.

Non-GAAP segment margin decreased year over year due to comparatively lower current margins at the recently acquired businesses. For the engineered systems segment, fourth quarter revenue decreased 9.9% due in part to delayed contract awards originally anticipated in the fourth quarter. However, despite the lower revenue, segment operating margin increased 259 basis points due to better performance on fixed-price contracts. I will now pass the call back to Robert.

Thanks, George. In conclusion, I want to reflect on our performance over the last couple of years and the path forward. In 2023 and 2024, '23 and '24, the strength of longer cycle businesses, including Teledyne FLIR, marine instrumentation, and aerospace and defense electronics, was largely masked by declines in certain short-cycle markets, such as industrial machine vision, electronic test and measurement, and laboratory and life sciences. I believe our results in 2025 proved the balance and the resilience of our business portfolio, allowing us to cut costs, improve earnings, and significantly grow free cash flow and deleverage, while simultaneously deploying capital on acquisitions and opportunistic stock repurchases.

Throughout 2025, as comparisons eased in some industrial markets and others began a nascent recovery and the strength of our longer cycle businesses began to show through, today we remain confident in executing our strategy of operational excellence, focused acquisitions, and stock repurchases when we believe the market does not reflect the broad base of our technologies and competitiveness. As we enter 2026, we believe growth again will be led by our long-cycle business. However, unlike the recent past, we currently believe that none of our short-cycle businesses will contract on a full year basis. In addition, our leverage ratio remains at the lowest level in years, providing ample financial flexibility to continue our strategy. 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 First Quarter and Full Year 2026 outlook. In the Fourth Quarter, cash flow from operating activities was $379 million, compared with $332.4 million in 2024. Free cash flow, that is, cash flow from operating activities less capital expenditures, was $339.2 million in the Fourth Quarter of 2025, a record for Teledyne, compared with $303.4 million in 2024. Cash flow increased year over year in the Fourth Quarter, primarily due to favorable operating results in the Fourth Quarter of 2025 compared with 2024. Capital expenditures were $39.8 million in the Fourth Quarter of 2025, compared with $29 million in 2024. Depreciation and amortization expense was $84.6 million in the Fourth Quarter of 2025, compared with $77.2 million in 2024.

We ended the quarter with $2.12 billion of net debt, that is, approximately $2.48 billion of debt less cash of $352.4 million. Now turning to our outlook, management currently believes that GAAP earnings per share in the first quarter of 2026 will be in the range of $4.45-$4.59 per share, with non-GAAP earnings in the range of $5.40-$5.50. For the full year 2026, we believe that GAAP earnings per share will be in the range of $19.76-$20.22, with non-GAAP earnings per share in the range of $23.45-$23.85. I will now pass the call back to Robert.

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