Teledyne Technologies Incorporated (TDY) Earnings Call Transcript & Summary

Okay. All right. We're going to get started here. Thanks, everyone, for joining us. My name is Joe Giordano. I'm the industrials analyst at TD. Excited to have Teledyne with us today. We got George and Jason, and we're just going to jump right into the conversation. If anyone has any questions, just raise your hand, I'm happy to stop and we can do that. Otherwise, I'll just kick it off.

Guys, thanks a lot for being here. Appreciate it. Maybe just given the theme of the conference, and we're going to dive into like the components of it, maybe just frame out for everybody what your -- how your A&D exposure is, and then we'll dive into like the subcomponents and all.

Sure, sure. So there's about 30% of our business is defense, and I can break that down at some point. About 5% of the business is commercial aviation and another, call it, 6%, 7% is space.

So I wanted to dive into the unmanned stuff because that's where we're getting a ton of questions. So you've said this, it's $500 million. It's growing maybe 10% in '26. What's driving that right now? Yes.

So probably good to understand what makes up that $500 million. Let's do that, right? So about $200 million of that $500 million is unmanned aerial systems like our Black Hornet drone, our SkyRaider, our Rogue 1 loitering munition. About $150 million of that is components that go primarily on to unmanned aerial systems built by other people or on to unmanned surface vehicles or subsea vehicles, for example. Then maybe about $100 million round numbers is subsea vehicles that we make, including our autonomous gliders and our Gavia self-help vehicles and then about another $50 million of ground robots basically. What's driving that is obviously the Black Hornet sales, the Rogue 1 loitering munition, which we just got our first production contract on and then selling a lot of components to others who are making unmanned aerial vehicles. And then finally, subsea, places like the Black Sea, the Baltic Sea, U.K. Royal Navy purchasing a pretty significant number of our subsea vehicles.

It strikes me as a conservative estimate here. So like is it one? Or is there things that we should consider as headwinds from a funding standpoint anywhere?

Well, I think we're probably always prudent in guidance, right, particularly as it relates to government funding and timing of government funding. So...

Yes. What are the key things like the programs that we should all be tracking for you?

So I mentioned the Organic Precision Fires-Light or OPFL, which is a U.S. Marine Corps contract. We just got our first production contract for the Rogue 1 loitering munition. So that has entered production. Then there's an Army program called LASSO, a similar program that we think will be more development this year, production next year.

Yes. Okay. Yes. So we were at -- we were just talking, we were at one of the production facilities 2 days ago. They seem very bullish on Rogue 1. So can you maybe talk about the outlook there and the opportunity? And what are the competitive dynamics with that program?

Sure. I mean it's a very versatile platform, right? It's -- we compete, for example, on the OPFL, we're competing with companies like Anduril and AeroVironment. It has the ability to be recalled, right? So it's not just a one-way munition. It can actually be recalled up to very, very close to when it strikes. Good, and it's been a robust platform. It's pretty lightweight. It weighs about 10 pounds.

And is that program -- I think DoD budgeting is almost for like a $50 million increase just in '26 for just Rogue 1, right? Is that the right number?

So for us, in 2026, it's probably more like $30 million.

Yes. I mean, technically, the ceiling on that initial contract was a $250 million ceiling. The initial development contracts were all small. I think it was like $10-ish million for Aero environment and/or Teledyne. I think we're the only production contract so far that I've seen, but it's only 42. So it could be more because the contract ceiling is there, but how much and when TBD, but also on programs, I mean unmanned is clearly significant. It's about $500 million a year of business. But another area where there actually is a larger program that's been in the news is roughly the $400 million of space business we have, where December 19, the next -- the latest version, Tranche 3 Tracking Layer was awarded. We're on 3 of the 4 prime teams, and we were basically on all of the teams to that date on Tranche 0, Tranche 1, Tranche 2. So space-based imaging, either the current version of tracking layer or whatever the future architecture for a golden dome may be, that's a good area for us.

And we're definitely going to dive into that. I just wanted to finish off on some of the unmanned first and then I want to delve into space for sure. You mentioned LASSO. How should we think about the potential for something like that compared to the Marine Corps program and where that could be?

Yes. I think it's a very similar kind of similar track. So if you look at the Marine Corps program, it was a year of development, relatively small amount then into production. I think LASSO looks pretty similar, maybe later this year, development phase, development/testing, followed by production phase in 2027.

And is there like -- how should we read the success on one versus like into foreshadowing success elsewhere? I mean I assume that they're looking for the same characteristics.

I would think so. We're getting good feedback. Yes.

Okay. We spoke with the team on site about the drone dominance program. It was an interesting discussion, right? So you guys are selling camera cores, right, into these things and not making the drones themselves. They seem pretty bearish on the actual devices that are being...

Yes on the systems.

Correct. Correct. Like as being viable in the field. So maybe what -- how should we think about Teledyne's exposure to something like that? And like what is like the optimal way of this playing out?

So I think it's important to know when we think about business that we are going to pursue, right, what do we normally think about? We're going to think about a business that, a, we're confident we can technically do; and b, is going to have relatively limited competition, right? We're competing with 1 or 2 or 3 other competitors, not 25, right? So to the extent we're talking about drone dominance and driving drones down to $3,000, $5,000, $1,000 a unit, that's not a space that we're interested in competing in. To the extent that some of those at some level would need uncooled IR cores, for example, could benefit us. But in general, we're providing higher-performance drones, right, in that kind of $10,000 to $100,000 plus range.

So is the way that we should think about that is if those -- if families of platforms like that in that few thousand dollars can succeed, you probably sell some components there. And if ultimately, they don't and the end game is something more sophisticated, that's where you can come in as a platform.

Well, I still think you're going to need. So take our SkyRaider, for example, right, that has imaging devices and can have chemical biological, radiological nuclear detectors. You're not going to do that with a $1,000 drones, right? So there's always going to be a market for that. Think about our Black Hornet that can fly in a GPS-denied environment. It's got great imaging capability, et cetera. Again, you're going to need a more robust platform to do some of those things. So yes, I think the niches we're in, we feel good and they're sustainable to the extent there's a mass proliferation of lower-cost devices -- then we can supply those.

Yes, I think it's fair to say that I think of us as a low-cost producer of highly capable drones. Again, if you want to order like George said, $10,000 to $100,000 GPS denied environment, all have thermal, not just visible. But yes, if you're looking for a DGI replacement, that's first person view, maybe not thermal imaging, only visible, maybe no radio, maybe a fiber optic tether, thousands dollars might -- we don't want to be in that business.

I mean even the cores would be half the price of the drone at that point, something like

Hundreds to $1,000. Something like that.

Okay. We also got the CD counter UAV there, which was interesting. How large is that specifically? And where can that go? It seems like it's a less fully like fully fleshed out.

Yes. So I'd say for us, that's probably right now in the mid-tens of millions of dollars a year. What are we doing? We're providing imaging devices and radars primarily. But we've got our own integrated kind of detection classification device for that. And then we're also selling to partners that are pairing our kind of eyes and ears with their kinetic device, right? So again, that's a -- there are a lot of people playing in that complete integrated solution, right, with whatever modality they're using to defeat the drone. And so much like the rest of our business, we're open to selling to all those people, our infrared devices, our radar devices. We do have -- I mean, again, we do have kind of an integrated device for that, but we're not -- at the moment, we're not playing in the full system ourselves with the kinetic solution.

Is that interesting to you to have the full solution?

Again, I think there are a number of people in that space. So it's interesting, but we'd be very methodical about whether or not we thought we had a real advantage that would be sustainable over time and not be in a very crowded space.

So my view is that there's probably too many market participants. And I mean there are people who have kinetic solutions like towards end the day shoot the drone. There's people who have electronic warfare drop the drone. There's other people who have directed energy, microwave the drone, but there's probably too many. Clearly, counter drone is going to be a growing market. I mean all you have to do is not just look at Ukraine, Israel, Houthis, Red Sea. I mean, clearly, there's a need for those type of products. But there's a lot of market participants. So at the moment, we've taken, if someone wants to do the last mile solution, Kinetic, directed energy, microwave, EW, that's fine, but they need to see it. They need to identify it, they need to classify it. Is it bird? Is it drone, what am I going to do? We're happy to sell gear at that level right now.

And are you exclusive like when you pick up -- I think they mentioned something like I think it was BAE for one and Kongsberg for...

Not exclusive.

Not exclusive?

Not exclusive.

So -- and they mentioned that there is no partner currently for like directed energy. If you make something like -- if you do something like that, you make a partnership, it's just -- that's all it is. It's just go-to-market framework and you can keep selling to other players and...

That's same thing typically.

Okay. That makes sense. A couple of other things from the trip that I thought was interesting. I wanted to talk. They mentioned that the teams there when they're building these drones and designing these drones, they don't really use a lot or as much as they should from like the rest of the Teledyne portfolio. I think maybe just talk us through what the potential is for that? And how do you break behavior? Because these are legacy FLIR, like they've been doing this a long time. Like how do they get either the knowledge of the totality of the portfolio or like get comfortable using it?

So I'd say a couple of things. I mean one, we do have -- we do expose people to the broader portfolio on a regular basis. We have quarterly operations reviews, lots of people come in from around the business. But the other thing we have done even just recently is the FLIR Defense business, JihFen Lei, who runs that business, now also has responsibility for our Aerospace and Defense Electronics business, for example. So those teams are a lot more connected or getting more connected on understanding what they do and areas that they could perhaps cooperate in.

They also mentioned like I would have thought that you're almost doing like an offense versus defense scrimmage, right, like at these buildings where you have guys -- you have people making drones and you have people stopping drones. And like how can I -- what makes your life miserable I want to focus on. And they said that there isn't as much sharing on that as you would think. And that struck me as somewhat odd. What can you do as like a leadership team to push that kind of behavior, incentivize that type of behavior?

Sure. No, I think it's important. Look, we've acquired -- we've acquired 75, 76 companies over the last 25 years, right and really built scale in a couple of these areas. It is -- certainly, it's more about bringing these groups together so that they kind of collaborate more across them. Having said that, you always have to separate out what's the theoretical collaboration that could happen with what's actually the specific thing that could add value to the business.

Fair. We're talking about big potential growth in some of these things, budgets, people are talking 50% increases. Who knows where that shakes out. But if it is on the larger side, do you feel like you have capacity? And if you need to ramp significantly for some of these things, if you win, like what does that entail from a spend standpoint?

Yes. No, I think we do. I mean if you take space imaging, for example, that's still a relatively low-volume application. We've invested CapEx there. The government has invested CapEx there. So when it comes to infrared detectors for space, for example, we've got the capacity to do that. When we think about missiles and munitions, where we provide a variety of electronic components. There are a lot of those factories where we do that, we have the ability to add shifts, for example. Where we do camera cores, we're investing more CapEx in that business, invested more last year, invest more this year to ramp. So again, I think it's -- we can adjust in many of our facilities, we certainly have the ability just to start by adding additional shifts.

And maybe just last on this topic, like how should we think about your business to U.S. DoD versus like allies and the rest of the world?

So the 30% defense is about 22% of that is U.S. and about 8% is rest of world.

And what do you think like -- where can that go on the rest of the world type applications? Like how penetrated do you feel like you at some of these?

Sure. I feel like we've got good opportunities continuing in border surveillance, in ground vehicle sensors, for example, in Europe, a lot in the Middle East, certainly APAC as well. So it's been a growing area. I think it will continue to grow.

And some of those -- would those be the same solutions that you're selling like DHS for some border control and things like that?

Yes. If anything, some of the pockets of faster growth like unmanned, they're probably a little bit more weighted rather than that 228, they're probably a little bit more European weighted in part because things like our drones are actually not made in the U.S., made in Canada, Norway, Iceland, some of the specialty sonars, some of the other subsea infrastructure stuff is made in the U.K. and/or Denmark. So it's been -- it has been an area for growth, but it's been an area for growth in the growthier areas as well.

There seemed like there were some regulatory elements to where can you -- what amount of a particular arm you can manufacture overseas and then you have to bring it here to complete certain elements of it?

So you're probably referring to in our R70, R80 drone, which is a larger quadcopter. There are certain elements that make it ITAR control. So produced in Canada but then imported in the United States, features added to it then for the U.S. government.

Okay. And that's all -- like that's all purely regulatory-based where you're...

Correct.

Yes. Okay. All right. Let's move over to space. You mentioned it's $400 million. Maybe you want to flesh out the -- what brings out.

Yes. So it's mostly imaging devices, infrared and visible imaging devices, again, primarily used for things like missile tracking, earth observation, climate studies, for example. It's become much more defense weighted compared to historically, it was kind of probably more NASA deep space missions, astronomy, things like that. It's been much more about earth observation. And then we provide a variety of other electronic components, space glass for satellites, things like that. But primarily imaging is what's driving it and what's driving the growth.

And within that, like which are the specific programs that are driving the majority of that?

Yes, it's really the Space Development Agency tranche programs have been very big for us and certainly the largest programs that we have.

Yes. And so -- and you mentioned Tranche 3 now. What does that imply for the expansion of that program from like current levels to next level.

Yes. I mean look, I would -- keep in mind, this is tranche 3. There was a tranche 1, tranche 2, right? So it's been kind of a continuing business. It tends to be a little bit kind of over a 2- to 3-year period. We tend to deliver on the earlier side of that. So again, the tranche 3 is worth more than $100 million to us in total. And maybe some incremental in 2026 just based on timing.

Okay. And so as we move forward towards like Golden Dome, like a fully fleshed out Golden Dome, like what does that mean for you?

Well, I think when we get the details on what fully fleshed out Golden Dome actually means, then that will be an easier question to answer. But having said that, look, we've been pretty dominant in space-based imaging, particularly for missile tracking. So that's one element to it. And then to the extent that some of it is more tactical earth-based, whether it's drones, whether it's more like an iron dome missile shield, for example, then certainly, our imaging capabilities and other capabilities would play there.

And what about on the commercial side? Like what have been the developments there? And then we're talking about the huge constellations, people talking about million satellite constellations, talking about moon colonies. Like where can you play as these things.

Yes. Again, so we provide imaging devices, both the kind of exquisite ones that look down at earth, but others that could be used for what I call space situational awareness, if you want to know what's around you, for example, on a satellite, a variety of hardened rad-hard semiconductor solutions, electronics, things like that. So to the extent you've got growth in space, it's good for us. To the extent it's defense exquisite imagers, it's very good for us. Generically, growth in space is good for us.

Is there a major difference in like the margin profile of stuff you're doing on the defense side versus things you might do on the commercial side?

No. I mean, in general, we're selling pretty standard products with tweaks.

I'd say our share of wallet is greater on a missile tracking satellite that needs infrared to see heat or see through clouds and say, a visible sensor on the Planet labs. I mean they're all generically good for us, but our dollar content on the infrared side would be more.

And what about the NASA business, like DOGE implications and where are we?

So of that $400 million, that does not include -- we do have a space services contract at the Marshall Space Flight Center. That's about $60 million a year. That really -- I mean, maybe it was $70 million, now it's going to be $60 million. We haven't taken much of an impact there. It's a low-margin business. On the space hardware side on that $400 million, not really seeing much of an impact there. Most of what we're doing even on the civil side is more like NOAA weather satellites, things like that.

Yes. It seemed like there was maybe more fear earlier in '25 about what those businesses might look like.

At least for us, it hasn't. Yes.

It just hasn't materialized.

No.

Okay. Maybe we shift a little bit more broad to the rest of the portfolio. Do you want to give us maybe an update on the non-aero defense markets, where we stand and what you're thinking?

Sure. So yes, I mean, if you look at the corporation as a whole, about half of it is that longer cycle, which is aerospace, defense, space. The other piece of that probably to call out is energy. That part of the business continued to be strong. It's on the order of, call it, $250 million, $280 million a year for us. That's where we're providing connectors for subsea data and power to subsea trees and oil production continues to be strong. If I switch over to the short-cycle side, so the other half of the business, really been a story of recovery over the last few quarters and stabilization. So industrial and machine vision, we're seeing kind of starting to see some growth there. Our environmental business, where we're doing -- selling lab equipment, we're selling process air quality and safety equipment, so air quality monitoring equipment, safety equipment to find gas leaks, for example. Again, that business has been growing. It's grown over the last kind of 3 quarters year-over-year. And then test and measurement business as well, where we're selling oscilloscopes and protocol analyzers, kind of 5 consecutive quarters of very modest but quarter-over-quarter growth. So what I would say about all of those short-cycle businesses, and I'll come back to one, we see kind of modest growth, and we're thinking about low single-digit modest growth in 2026. Health care, where we provide x-ray sensors, both for surgical x-ray and dental and also some radiotherapy equipment, there, it's kind of flat in 2026. But overall, what I would say, if I went back to last year when I was sitting here, I think there was a lot more uncertainty on the short-cycle side. Now short cycle by its nature, there is uncertainty in it, right? But when we listen to our customers, see the order flow, look at what's happened over the last few quarters, that short-cycle business has really started to recover at a modest pace, which I think is giving us more confidence in the overall picture, which is the long-cycle business remains strong. We're in good spots, right, unmanned, all the things we talked about. short-cycle business, we're not filling any holes. We're not seeing any holes that we're going to need to fill. So we're starting to see more of that long-cycle strength come through.

On the short-cycle side, I know there's still a lot of debate out there to like where we are. Does it strike you? So I mean, within the understanding that it's a guidance, you're being prudent here. But like is low single-digit growth coming off of like kind of a multiyear kind of sluggishness, it doesn't feel like much. Does it feel like a normal cycle to you? We're seeing this everywhere, right? It just seems like we've had this lull and like we're not coming out very forcefully out of it.

Yes. All I can do. I guess all I would say is all we can do is listen to our customers and look at our order flow and look at our pipelines, and that's how we generate the guidance, and then we can hope things are going to be better than that. I would certainly say there's still a lot of caution in the market, right, when it comes to placing orders for CapEx, be it test equipment, be it something else. And people are still in this pattern where they're probably more likely to wait than to lean forward and place an order. Having said that, the order flow has been pretty good, and we're seeing that kind of low single-digit year-over-year growth.

So when you look at that, which areas of those markets do you think have like, if you were wrong, have the most upside bias and which ones maybe have the most downside bias?

Yes, it's a good question. I think that the industrial and machine vision business, which is a good business for us, did go through a trough, has started to recover. It's a higher-margin business. given that we've got some semiconductor inspection exposure there and things like that and electronics inspection exposure, perhaps that's got some upside potential, but it's all theoretical, right? I'm not -- from a downside perspective, there's no individual one of those markets I look at, and I'm more worried about than the other.

What do you think -- what's required to get some of those medical businesses moving again?

Yes. So really, the downturn we had in that medical business was related to dental x-ray, where some of that is really extraoral dental x-ray. And some of that was just probably related to higher interest rates, making small dentist office not want to spend as much money. There was some competition there. So I think from this point, from where we are, we'll see reasonably steady growth once we get through 2026 in the core kind of things we do, which is x-ray for large surgical equipment, cancer radiotherapy.

Maybe we could just talk quick on the test and measurement piece. Can you just walk us through kind of like where you play in that? Because I think there's been a lot of differing reads, right, from Ralliant versus National Instruments, and we'll see what Keysight says. But like maybe walk us through the competitive landscape there and where you're targeting?

Sure. So the business is about half oscilloscopes, half protocol analyzers. On the oscilloscope side, we're selling into high-bandwidth applications where we compete with the Keysight, for example. That business has been pretty good for us over the last year. We also are selling into certain power applications like people building power supplies for data centers, for example, and in-vehicle networks. So moving data around the vehicle, additional cameras, et cetera, right? So development of all those things. So for us, and I know some of the comparisons, right, people have suffered a little bit when they were probably heavier weighted to electric vehicles, for example. That really didn't impact us as much because we still had that mix of high bandwidth plus mid-range oscilloscopes that were playing in that some in the EV, but really, we've been able to pick a lot of that up in the power supply development, et cetera. On the protocol side, that's really about protocols like PCI Express and HDMI and Bluetooth and WiFi. And what we've seen there is we're a little bit between kind of product cycles that -- the pace of that business has a lot to do with when chips are released in the next-generation chips. So seeing a little bit of a, I'd say, a gap there kind of in between product cycles. There we're primarily competing with VIAVI, for example. But we feel good about our position there, and it's a good business, right? If we're talking about moving more data, managing power, moving data, lower power, et cetera, it's good for us.

So fair to think the orders for the oscilloscope business should be tracking like well above revenues kind of like these other competitors?

I think the oscilloscope side has been a little stronger over the last year, for example.

What about on the marine energy side? It's been a great business. It's been strong. I feel like we've almost been waiting for it to weaken and it really hasn't. And what's the outlook there? Has it changed post some of these developments.

No, it's interesting. I mean that is an area, obviously, that we keep a close eye on, right? And what we're hearing from our customers and what we're seeing in commentary, and we really look at the number of trees that are going to be awarded that, that number over the next 2 to 3 years looks like it's going to be stable or increasing. And so yes, the business grew dramatically, say, from 2023 to 2025. I don't think it grows at the same rate 2026 and beyond. But certainly in the next year or 2, at least, based on everything we're seeing and hearing from our customers, it doesn't feel like the business is going to decline.

Yes. And it felt like maybe a year or so ago, maybe we were thinking, that could, right? Like is that...

Yes, I think we were getting a little -- look, as you saw oil prices come down a little bit, kind of naturally thinking about where that's going to go. I think the oil price is in the 60s. Again -- and we've got close relationships. We've got good customers there, close relationships with our customers. I feel like the outlook is good, again, at least as far as we can see.

Yes, that's fair. I wanted to touch on AI a little bit. Maybe first, we start about what you're doing internally to harness it and use it as a tool.

Yes. So we've spent the last, I would say, 1.5 years on what I'd call prototyping and projects, right? So we've had just a number of disparate teams because we run a fairly decentralized organization, just testing various applications, right? So for code development, marketing generation, customer support, technical support, things like that. We're kind of reaching the phase now where it's about implementation. But like everything we do, it's going to be like a methodical, very methodical approach, of, okay, we've had a few business units demonstrated capability in code development, for example. Now how do we take that, create a blueprint for that, put it across the corporation, do it in a way that we know we're going to get return on it and that it makes sense for us, right? And then we can manage all the risk. So I'd say we're exiting what I'd call that prototyping and test and evaluation phase and stepping into that next phase. But like everything we do, we don't do -- like we're not a company that does like some big bang of like now this is all going to happen everywhere all at once in every international facility that makes no sense, right? We're going to just take a methodical approach and make sure that we're getting a return for whatever that investment is.

And who owns this? Like do you want AI to look differently across all the elements of Teledyne?

I think from the internal functions, it should look pretty similar. I mean where we see benefit in the things I said, which are the primary areas, I think that we're going to benefit from on the first go. I think we want to see similar utilization for code development and things like that.

Yes. So it's like idea generation is maybe coming from the BU side and it's scaling from the corporate.

That's exactly right. So and that's the beauty of a company like Teledyne right with the diversification. You can have all these teams doing all this kind of testing, see what works, then that's right. Then at the corporate level, we bring it in, we look at it and we lay out a plan, working with the people in the business unit, you got champions, whatever, right, to go do it, again, without moving either too slow or too quickly, I think it's kind of thing we have to be prudent about, but we have seen some opportunity there.

Have you had to create new roles within the organization for this? Or is it outside of the expertise of?

Yes, we've actually -- we've brought a couple of people in who have experience and then we've had some people who are highly capable within the organization who know the organization and kind of know the lay the land, who I think will be able to manage it.

What about external threats from AI from a competitive standpoint?

Look, I know, obviously, that's a topic, right? But for us, we don't see it as much as a threat to us. Why is that? Because primarily, we're providing hardware. We do -- we provide software with our hardware. Typically, we're not charging for that software. It just comes with the hardware. And if anything, we're a sensor provider. We're providing not just the ability to see, but often coupled with a processor that then allows somebody to put their solution on it, right? So we're kind of thinking about it a couple of ways. One is make sure we embed the right AI tools in our products for target recognition, target tracking, license plate reading from gimbals, whatever it is, but then also making sure the architecture we're creating for our customers allows them to very easily use our sensors to run whatever application they want to run, right? Because I think if you're a sensor provider, you understand you can't possibly solve every problem that your sensor could be used for, and you'd be foolish to go off and try to do all those things. So we want to provide the best sensor with the right architecture that allows other people to go do that niche thing they're trying to do with the sensor.

And the thought process of AI makes it easier to do any of these things is just -- you just disagree with the premise of that.

AI makes it easier to do what?

To take the output of a sensor and either make sense to track something or do any of that.

Oh, no, I think it -- yes. No, certainly, it makes it easier to take the output of the sensor. I guess what I'm saying is we want to provide the sensor and the ability for our customers to go do that. In certain cases where it's important to us strategically, we want to have the capability in our product. So autonomy, target recognition, things like that. But what I'm saying is our sensors are used across 100-plus different applications, right? We wouldn't want to go try to solve each of those things because we don't necessarily understand each of those end applications as well as our customers do. So we want to create that capability for our customer then to use AI tools with our sensors to solve that problem. Yes.

Okay. Let's move to capital deployment because it's such a critical element of it. Maybe first, maybe walk us through your process and how target identification and what the process internally is for diligence and towards execution and what sort of metrics you're looking to.

Do you want to take that?

Sure. So by unit count, typical Teledyne bolt-on acquisition that's been, call it, 60 of the 75 companies we bought. But basically an answer to an open-ended question from the businesses themselves. What is that other provider in the market that sells a complementary product to a market you're already in, to a customer base you already serve? And that's your classic Teledyne bolt-on like the one we bought 2 weeks ago, a small company in the U.K., $20 million of revenue. you accounting to scientific makes gas sensors for industrial air monitoring, continuous missions monitoring, that's great. That's your average Teledyne bolt-on. So I'd call it a bottom-up from the business, a head of engineering, a head of sales, a General Manager, that's sort of the bread and butter. The larger deals that are what I call maybe a little bit more top-down a public company, a FLIR, the Excelitas divestiture of this company, Qioptiq that we bought, that's largely from a couple of people, largely me in some case, tracking those for many, many years. And either the timing is right for us, the timing is right for them or both. And the first meeting we had with FLIR was 10 years before we bought the company. We looked at pieces of Excelitas when before it was Excelitas, when it was Perkin Elmer, before was Perkin Elmer, it was EG&G, been tracking the company for 25 Finally, it was the time that the private equity firm who owned it just needed to divest and delever. So the timing was right. But it's usually a long process. We get banker books, teasers come in my e-mail, five a day. But pretty much everything we bought either top down or bottom up has been something we've looked at for a long, long time. It's just the timing is right. And the price has to be right. We're not a bottom fisher, but we're also not going to pay 20x, 22x EBITDA for an average industrial business. That's not us. We will buy our own stock. it's the lowest risk, best price available, and we did that in Q4. But we can be very mobile. I mean, middle of April 2024, we were all in stock buyback, then some people got punished for overpaying, some of which we made reference to and markets got a little bit more rational. We did nearly $1 billion of transactions between Qioptiq and half a dozen bolt-ons. And we went all in buyback again in Q4. And now we'll see where we are. So it's fluid. It depends on what week you ask me, which alternative will be. But the preference is still to buy companies that fit well with Teledyne. That's the overwhelming preference, but sometimes it makes sense, sometimes it doesn't.

I mean you definitely showed the willingness and ability to be tactical with the buyback. Is that something Is that how we should think about it in the future? Is it -- do you want to use it more consistently as a baseline and then flex it? Or should it just be like this is -- we're going to be traders on that?

It's opportunistic. I mean, again, the preference is good companies that fit well with Teledyne that we understand that are in markets we know, not a big risk, not a gamble, not a change of strategy. That's clearly the preference. But if our stock trades down, we're trading at 15, 16x and people are paying 20, 22, we'll do the former all day long. But again, the preference is to grow.

And now what's the landscape today? I mean, valuations are tough. Aerospace popular market, it's hard to find things. So where are you looking now?

Yes, there's certainly more available now sort of across the spectrum. I mean, not just aerospace and defense, a lots available. general industrial land, there's from private equity exits that were maybe vintage 2021, 2022, eventually are looking for an exit or they have to divest and delever in the higher rate environment. A lot available, but pricing is high. And it's hard to predict the pricing. We've looked at a handful of things this year that were -- consideration was $1.2 billion or $1.4 billion, where we thought the business is worth maybe more like $900 million to $1 billion. And if someone wants to pay that, we're not going to chase it just to chase it. But availability is good. I would say if I had to guess, maybe the next 18 months look like the last 18 months that one of those will be attractive and either it will be at the right price or we're deemed the best buyer that's high certainty to close either from a financial point of view or a regulatory point of view. So maybe there's a medium-sized deal and a half a dozen bolt-ons over the next 18 months, spend $1 billion like we did over the last 18 months, which is still less than 1 year's free cash flow. So still we could do more, have the bandwidth financially and management-wise to do more. But again, we're not going to do anything stupid.

And I'll say this, this is a stupid question. So I appreciate that. Do you feel like in a way, you've almost been punished or murdered for being held to like a high standard of return? Like when we start -- when everyone starts to add back amortization and create fake earnings, and you guys have a very strict mandate on what your return profile is, but I feel like it's easier to show accretion now and it's easier to show kind of missage numbers and valuations are high. So like are you passing on things that maybe you would not be punished for chasing to some extent?

I think you're ultimately rewarded or punished appropriately, although that may not be the case in the ultra short term -- no, but it's true. I think people -- in certain environments, people like M&A regardless of the returns, regardless of the price. But then that ends up in the sell-side model, that ends up with a hurdle you have to hit and then things tend to reverse themselves. And that happened with some of the T&M peers or other people as well that chase certain things. So eventually, things are rational in the -- not even in the long term, intermediate term, things are rational. But yes, we're not going to chase something in a given quarter, just...

Sometimes it's hard to wait.

It is. I mean, to my point before on a lot of what we bought, we've looked at not just for years, but many years, occasionally for decades. There was some trends -- one of those things I made reference to those north of $1 billion in 2025. I had personally visited sites 20 years ago. But too high, so we didn't do it.

Fair enough. I mean you've been asked multiple times, many times by me about a dividend as part of the capital structure. What are your thoughts there?

Look, never say never, but we've never done it to date. So the logical assumption should probably be no. Maybe at some point, I mean, if it goes 3, 4 years, and we're still underspending free cash flow and we're net cash on the balance sheet, maybe that's different. But today, the preference has been to buy good companies that fit with what we do. And we're not at the law of large numbers yet. So I think we'll be able to fill that use of funds for the foreseeable future. But 10 years from now, who knows?

Maybe last in a few minutes here, we'll touch on margins. Some of the pushback I get from like a pitch standpoint is that if you look at the portfolio, it's high margin, high quality. There's not a lot of obvious upside when I look at things like the instrumentation business is high, Aerospace and Electronics is high. Engineered Systems is cost plus. So I think there's -- yes, there's opportunities in DI, but across the portfolio, where is the juice? So like how should I think about that? And what are you pushing internally?

Yes, probably a couple of ways to think about it. So number one, DI margins, which you mentioned, right, which got better in Q4, projecting to be better in 2026, and there's some room to continue to improve there. There's also just -- what's our model. We go buy companies. And we typically are resetting margins in each segment on a pretty regular basis, right? Because we're going and buying a company that is quality that might have 20% margins and then we work to bring them up to our standard margin. And then beyond that, what I would say is we've got a pretty good track record of kind of 50 basis point a year improvement over the long term from one place or another. And that remains kind of the benchmark that we strive for, notwithstanding the fact we've got high margins.

Just maybe last on the Aerospace and Defense Electronics specifically, I mean, that's an area where the margins picked up huge. I know some of it was mix. I know -- I think there was a point where even you guys publicly were like I don't know how much higher this can go, maybe there's downside. It's held up really well. Like is this a number that we're now more comfortable with this being like a forward number?

I think it is. I mean you have to keep in mind, as OE increases as defense increases versus commercial aerospace aftermarket, that's a little detrimental to margins. Having said that, we have these new acquisitions. We're improving their margins as we go. So I think this level we're sitting at is sustainable.

Yes. Any last minute questions from the audience here? All right. I think I'll leave it there then. Guys, thank you very much. It was a pleasure to see you.

Thanks Joe.

Have a good rest of the day. Thanks, everyone.