Robert Mehrabian — Executive Chairman, Teledyne
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.
Andrew Buscaglia — Analyst, BNP Paribas
Hey, good morning, everyone.
Robert Mehrabian — Executive Chairman, Teledyne
Good morning, Andrew.
Andrew Buscaglia — Analyst, BNP Paribas
Last quarter there was some uncertainty around some of the strong growth you saw and whether that was pulled forward or not. Can you maybe run through the several segments and talk about how that shook out? In some areas, it seems like it didn't. In some areas, it didn't seem like growth really resumed that strong. In your mind, how did things progress?
Robert Mehrabian — Executive Chairman, Teledyne
I think overall, you know, with acquisitions, we had 6.7% growth across our portfolio. I think what we're looking at is various businesses did differently, as you mentioned. For example, our marine businesses continue to grow very strongly, and we're winning contracts both in the defense domain, which is our underwater vehicles as an example, as well as in energy development. In some of our instruments, there's a variation between various instrument businesses. In our gas and flame businesses for safety, we're doing very well, while we see a little softness, for example, in our water and products that are used in drug development. Overall, I'd say we also did have some pullings into Q2, maybe a little more in test and measurement than other areas. Going back to some of the other things that were mentioned before, FLIR's growth was 3% organic.
We also had stronger growth in some of our commercial FLIR businesses. Our unmanned systems, which are both air, ground, and systems, grew 10%. There's variation in our portfolio. Going back, Andrew, to what I said before, we have a fairly diverse portfolio. Some things go up, some things go down, but overall, the truck is moving forward, and it's moving forward handsomely based on what I see.
Andrew Buscaglia — Analyst, BNP Paribas
Okay. 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. Is that one area that grew last quarter nicely, but seems to sustain growth from here?
Robert Mehrabian — Executive Chairman, Teledyne
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. George has really taken some very strong action to take cost out of the part of that business that has slowed down over the last 2 years. 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've skinnied it down to where it should be much more healthy. George, you want to add anything?
George Bobb — President and CEO, Teledyne
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. We also saw an increase year-over-year in our machine vision sensors business where we make sensors for other OEMs.
Robert Mehrabian — Executive Chairman, Teledyne
Great.
Andrew Buscaglia — Analyst, BNP Paribas
Got it. Thank you, guys.
Greg Konrad — Analyst, Jefferies
good morning.
Robert Mehrabian — Executive Chairman, Teledyne
Morning, Greg.
Greg Konrad — Analyst, Jefferies
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?
Robert Mehrabian — Executive Chairman, Teledyne
I think the margins between 2023 and 2024 are, at least in Q4, obtainable, achievable. I think what will happen is that for the year, when you add the first two, three quarters and then Q4, for the year, we should be flat with last year, even though we took a significant amount of cost out in the first three quarters, including Q3 that we just concluded. With all of that said, if we can maintain the same margins as last year with all the cost out, then going ahead, I think 2024 is achievable.
Greg Konrad — Analyst, Jefferies
To put a finer point on the revenues, you raised the full-year outlook by 0.5% to $6.06 billion. Is that all organic? It looks like maybe there's a $20 million step-up sequentially in Q4. Can you talk about seasonality into the final quarter of the year and which segments you expect to see a step-up versus where there's a step-down tied to just typical seasonality?
Robert Mehrabian — Executive Chairman, Teledyne
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. Another $10 million comes from our acquisition from Q-Optics. It's a $30 million increase. It's not a big number, but there's also a little conservatism built into that, of course.
Greg Konrad — Analyst, Jefferies
Okay, thank you.
Robert Mehrabian — Executive Chairman, Teledyne
Thank you, Greg.
James Ricchiuti — Analyst, Needham & Company
Thank you. Good morning. George, I think you gave a book-to-bill number, and I wasn't sure if that was a book-to-bill in the digital imaging business, but maybe if you could, are you able to give, can you give us, provide a book-to-bill for the various, the three major segments?
George Bobb — President and CEO, Teledyne
Sure. Happy to do that. Yes. The book-to-bill ratio I gave you was for Digital Imaging, 1.12x. In the Instrumentation segment, we had a book-to-bill overall of 0.9x, a little higher in T&M, for example, 0.98x. Environmental, closer to 0.95x. Marine, closer to 0.8x, about 0.8x. 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. In Aerospace and Defense Electronics, again, longer cycle business, lumpiness in some larger orders, book-to-bill ratio was 0.84x. Engineered Systems was over 2x in the quarter, but again, that's a long cycle business. We tend to look at the longer-term view there, not one quarter at a time.
Robert Mehrabian — Executive Chairman, Teledyne
Overall.
James Ricchiuti — Analyst, Needham & Company
Got it.
George Bobb — President and CEO, Teledyne
Yep. The overall book-to-bill ratio is [1.09]
James Ricchiuti — Analyst, Needham & Company
Terrific. Thank you. You alluded to, in the earnings announcement, the potential for significant contract opportunities. 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 timeline just given the government shutdown?
George Bobb — President and CEO, Teledyne
Yeah. I wouldn't want to opine too much on the timeline of the government shutdown. What I would say is,
James Ricchiuti — Analyst, Needham & Company
Not about the shutdown. Just as it relates to the timeline for these contracts. Sorry.
George Bobb — President and CEO, Teledyne
Sure. No problem. I would say 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. I would think that would be relatively near-term, hopefully in Q4, depending on the timing of the government operations. 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, hopefully near-term, would be initially more kind of millions of dollars and grow from there. Overall, what I would say is unmanned systems, things like our Black Hornet drone, our sales into counter-unmanned air systems, both of ourselves and where we're selling to other OEMs, integrated surveillance solutions for both border protection and defense, etc.
I think those are the strongest areas. Also, we continue to see a lot of strength in our submarine business where we provide interconnects on the Virginia and Columbia-class submarines.
James Ricchiuti — Analyst, Needham & Company
Okay, thank you.
Jordan Lyonnais — Analyst, Bank of America
Good morning. Thanks for taking the question. On the 737 rate increase step-up, how are you guys thinking about that into [fourth] year and next year, given the comments on some destocking?
George Bobb — President and CEO, Teledyne
Yeah. This is George. What I would say there is, yeah, we expect that destocking really to continue through most of next year. We won't see much of a benefit from the OEM, Boeing 737 MAX rate increase next year, although the demand there continues to be strong and we received a large order for 737 MAX 2026 delivery. Backlogs 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.
Jordan Lyonnais — Analyst, Bank of America
Okay. Got it. Do you guys have any concerns about critical minerals availability, specifically for the sensor products for FLIR?
Robert Mehrabian — Executive Chairman, Teledyne
We have a little exposure there. On the other hand, we've been very diligent to cover that exposure. Overall, I don't think that's going to affect us in the short term.
Jordan Lyonnais — Analyst, Bank of America
Awesome. Thank you guys so much.
Robert Mehrabian — Executive Chairman, Teledyne
Thank you.
Damian Karas — Analyst, UBS
Hey, good morning, everyone.
Robert Mehrabian — Executive Chairman, Teledyne
Morning, Damian.
Damian Karas — Analyst, UBS
You had mentioned.
Yeah. I was hoping to dig in the weeds a little bit more on your comments about cameras and sensors being up year-over-year. Could you just perhaps elaborate on that? What do you think is driving the improvement, and have you been seeing those trends continue into the fourth quarter?
Robert Mehrabian — Executive Chairman, Teledyne
Yeah. I can tell you, first of all, the comps are a little easier, with respect to last year. The, our cameras are up about 11%, and our sensors are up about 5%. Some of our scientific cameras that are very specific applications are down a little bit, about. All in all, and that's probably because I export. All in all, when you add it all up, we're up about 3.4%. I think what has happened, as I mentioned before, with taking the cost out of the DALSA, e2v businesses aggressively this year, that business has stabilized. It's going to grow, and the margins are going to improve as time goes on. We are positive about that. It's just that, when you look at the total imaging businesses, initially, right after we acquired FLIR, everybody was worried about FLIR, FLIR, FLIR. We solved that problem. FLIR's doing great.
FLIR defense is just hitting every milestone we expect. Now DALSA, e2v is stabilized, so we're very positive about our digital imaging segment altogether.
Damian Karas — Analyst, UBS
That's really helpful. 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? I know it's early to be giving guidance for 2026, but just seeing where our trends are, if you were to ballpark today, where do you suspect growth could line up in 2026 if the current conditions remain?
Robert Mehrabian — Executive Chairman, Teledyne
Let me just kind of answer it first broadly. We are very positive about our defense businesses with all the geopolitical problems you see. If you, for example, look at Europe, they are going to increase their defense spending. We, Teledyne, have 5,100 employees in Europe, distributed among many countries. We make drones in Sweden. We make other products. We make stuff in Norway. We have people that go in and out of Ukraine. They're in Denmark. Those guys are under a lot of pressure when we talk to our folks. They have to increase their defense spending. At a macro level, if I look at that, with all of our people there and all the need for in-country production, I see very positive trends for us in Europe.
Today, we probably produce something close $500 million in revenue in European defense, and I expect that to increase as we go forward. Coming back to the bigger picture of defense, George talked about our loitering munitions. As you well know, what they mean by loitering munitions, you got something that's flying around and can essentially attack a target, totally. Most of our competition has fixed-wing aircraft. We have rotating-wing aircraft or quad aircraft. Interestingly enough, that also can fit in a tube and be fired out of a tube, and it can go vertical takeoff and landing. We're very positive about that. The reason I'm talking about this stuff is because defense is going to be a pretty active area, both in Europe and, of course, in the Far East.
I have to say our small drones, what we call our nano drones, by the end of next year, we would have $500 million of these nano drones that you can hold in your hand. We probably have the strongest position there. Between all of the above, I think we're going to do fine in defense. In the commercial domain, we see machine vision recovering, as I said earlier, with a reduced cost structure. We see our test and measurement recovering. We do have long-term opportunities in power generation. All in all, 2026 should be a good year for us, barring any unforeseen catastrophes across the world, which I don't expect. We're just doing our plans for 2026, and we're very positively inclined.
Damian Karas — Analyst, UBS
That's really helpful. Appreciate all the color. Good luck.
Robert Mehrabian — Executive Chairman, Teledyne
Thank you.
Kristine Liwag — Analyst, Morgan Stanley
Hey, good morning, everyone. Robert, that was really helpful color on what you provided with European defense. I just wanted to clarify a few things. When $500 million, is that encompassing all of your defense exposure to Europe, or is that specifically only on the drone exposure that you were discussing? 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-unmanned air systems 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? How do you look at the opportunity set for those kind of different go-to-market?
Robert Mehrabian — Executive Chairman, Teledyne
Okay, Christine, let me start from the $500 million applies to two things. First, our total military sales this year in $500 million applies if you add everything that we've sold, all the nano drones that we've sold and would be selling through next year. $500 million. They're kind of, you know, only 60 or 70 of $500 million is the nano drones. Let's put that to one side. What we're doing is we're both prime in defense as well as subprime. For example, in loitering munitions, we're prime. In nano drones, we're prime. In some of our counter-unmanned air systems, we have partners.
It's a mixture, but we also have strong presence in all of these countries, which is very important because everybody, both in Europe and the Middle East, is driving towards in-country production of their defense products. We have presence everywhere. That works for us. It works for us in Europe, of course. Out of 15,600, 15,,700 folks in our company, 5,100 are located in Europe. That's how we go to market, and where necessary, we establish new entities to be able to operate from.
Kristine Liwag — Analyst, Morgan Stanley
Super helpful. Thank you very much.
Robert Mehrabian — Executive Chairman, Teledyne
For sure, Christine.
Guy Hardwick — Analyst, Barclays
Hi. Good morning.
Robert Mehrabian — Executive Chairman, Teledyne
Morning, Guy.
Guy Hardwick — Analyst, Barclays
I want to ask a little bit more about the digital imaging margins. I think based on your comments that the reason for perhaps the digital imaging margin could be lower than expectations being R&D and also the severance costs. Obviously, you get the benefit of the severance costs, particularly next year. Is R&D a permanent step-up effectively funded by the reduction in the cost base? Kind of looking a bit further forward for 2026, as a follow-up to Damian's question about the top line, what should we be aware of in terms of margin mix for digital imaging in 2026 versus FLIR versus medical versus industrial? What kind of margin dynamics could we potentially expect?
Robert Mehrabian — Executive Chairman, Teledyne
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 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. 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. The investment in R&D is very specific for specific areas. It's not going to cut across all of our products. On the margin improvement for next year, I'll let George talk a little more about that.
George Bobb — President and CEO, Teledyne
Yeah. 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. It's early, really, to talk about what the mix is going to look like next year, what 2026 numbers are specifically going to look like. 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. 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.
Guy Hardwick — Analyst, Barclays
Thank you.
Jonathan Siegmann — Analyst, Stifel
Good morning. Thank you for taking my question. 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 costs. You have great market positions in sensors and cameras, and you've already highlighted the prime opportunities that you have. 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? Maybe comment on, is there opportunities to invest more capital in this area? Thank you.
Robert Mehrabian — Executive Chairman, Teledyne
Thank you very much. That's a really good question. I would say much lower, that's in due course. I think people are willing right now to pay for accuracy and for ability to defeat desired targets. We are actually, in a lot of ways, a lot of our drones are low cost compared to others, and also because they're highly capable. For example, George mentioned and I mentioned our, what we call the Rogue 1, which is a quadcopter. It's the lightest weight of the competition. It only weighs about 10 pounds. As you can imagine, as we decrease the size, the cost goes down. We're very cost-competitive there. The nano drones, which I mentioned earlier, again, those are produced in volume, very cost-competitive. What I think will happen is people may go to the low end of the cost structure, but they'll have to give up some capabilities.
You may, in defeating an armored vehicle, have to have a massive warhead in your drone, whereas in our case, we can do the same thing much more accurately with a smaller vehicle with a smaller warhead. I don't know. It's a give and take. The whole experience in Ukraine, which we've had, has taught us that there is no one solution for what's happening. They obviously are doing very well. On the other hand, they don't have to have that many capable stuff to just fly over the horizon and hit somebody. Cost is important, but I think accuracy and weight are going to be just as important.
Jonathan Siegmann — Analyst, Stifel
Super interesting. Thank you.
Joe Giordano — Analyst, TD Cowen
Hey, guys. Thanks for taking my questions. Can you hear me?
George Bobb — President and CEO, Teledyne
Yeah. Sure, Joe.
Joe Giordano — Analyst, TD Cowen
Yeah. Okay. Great. Yeah. For unmanned, you know, we've been talking about $450 million across all unmanned for feels like kind of for a while, feels like a little bit of a dated number. Maybe it, how can we frame out that over the next couple of years? I mean, we've talked about potential opportunities here, but if we want to look, you know, three, four years out, like is that, can that, what can that $450 million, if things break correctly for you, really become? How material can that business really get?
Robert Mehrabian — Executive Chairman, Teledyne
Yeah. I think we're at $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, we're probably unique as a company where we have products for air unmanned, ground unmanned, and underwater unmanned. 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. The $500 million will grow, for sure. How fast? I'll know in about a month or two when we do our plan for the next couple of years. Grow, it will.
George Bobb — President and CEO, Teledyne
Yeah. I would add on the subsea unmanned side, we have both our subsea gliders, 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. 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.
Joe Giordano — Analyst, TD Cowen
That makes sense. 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?
Robert Mehrabian — Executive Chairman, Teledyne
for this year?
Joe Giordano — Analyst, TD Cowen
Yeah.
Robert Mehrabian — Executive Chairman, Teledyne
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. If you look at our products, if you look across all of our acquisitions, after a few years, the margins improve significantly. They kind of become the standards that we have for instruments, defense, otherwise. The margins this year, contribution from acquisitions are relatively light, but they'll improve next year.
Joe Giordano — Analyst, TD Cowen
Yeah, I had similar numbers too. Thanks, guys.
Robert Mehrabian — Executive Chairman, Teledyne
Sure.
Robert Mehrabian — Executive Chairman, Teledyne
Thank you, operator. I'll now ask Jason to conclude our conference call.
Jason VanWees — Vice Chairman, Teledyne
Thanks, Robert. Thanks, everyone, for joining us this morning. If you have follow-up questions, please feel free to call me, and my number is on the earnings release. All our earnings releases and a replay of this call via webcast are available on our website. Operator, if you could please give the replay information, that'd be ideal. Thanks, everyone. Bye-bye.