Teledyne Frames Varex as a Bottom-of-Cycle Bet, and Flags Defense Mix as a Quiet Brake on Margin Leverage
Jefferies Global Industrials Conference, September 10, 2026: Vice Chairman Jason VanWees on defense, the $1.1 billion Varex deal and capital allocation
Teledyne Vice Chairman Jason VanWees used an appearance at the Jefferies Global Industrials Conference to temper expectations on operating leverage, even as he described a demand backdrop that is the strongest in the company's history. The more candid messages were that the fastest-growing parts of the portfolio are marginally less profitable than the slower ones, that roughly half of the second quarter's margin expansion came from one-time tariff refunds, and that the Varex acquisition should be underwritten as a multi-year margin repair story rather than an immediate earnings contributor.
Margins: Mix Is Negative and Tariff Refunds Flattered the Quarter
VanWees was direct that the second quarter's margin gains overstate the run rate. Total company margin rose about 120 basis points, but he said roughly 60 basis points of that came from tariff refunds. In Digital Imaging, the largest segment, margin rose about 250 basis points, with about half attributable to refunds. Teledyne's second quarter operating margin was 23%, with gross margin in the low 40s.
For the full year, VanWees pointed to about 60 basis points of operating leverage at the total company level, with Digital Imaging north of 100 basis points even excluding tariffs. He acknowledged that mix has been a headwind for roughly six quarters. "All things defense are a little bit lower margin than all things commercial, and defense is growing faster than commercial," he said. He cited unmanned subsea vehicles as a specific drag, since system sales carry lower gross margin than sensor content, and said semiconductor wafer inspection carries a higher contribution margin than a subsea vehicle. His stated aim was to keep expectations reasonable: the company has so far offset the mix drag with growth, productivity and pricing, but the drag is not going away while defense outgrows the commercial businesses.
Pricing contributed roughly 3 points of the 9% organic growth in the second quarter, which VanWees attributed to input cost inflation in memory, rare earths and germanium. He said none of it has yet constrained supply or shipments, but called it "an inflationary annoyance" comparable to the FPGA shortage of 2022, when Teledyne absorbed about $100 million of electronic component cost creep and raised prices by 3 to 4 points to cover it. Supply constraint remains a disclosed risk factor rather than a current problem.
Defense: A $2.15 Billion Business With Unmanned Components Leading
VanWees gave a more granular defense breakdown than the company usually provides. Defense sales were about $1.95 billion last year and should reach roughly $2.15 billion in 2026, or growth of about 10%. Defense now accounts for roughly 35% of sales, with commercial aerospace at about 5% and the remaining 60% in what he called high-reliability industrial markets.
Unmanned systems is the largest defense category at about $575 million. Within it, unmanned air is about $225 million and should grow at a double-digit rate. The fastest-growing piece is roughly $200 million of components and subsystems sold to other companies' unmanned air, surface and counter-unmanned platforms, which VanWees expects to grow 15% to 20%. Teledyne's thermal imaging components are used on unmanned surface vessels operating around the Strait of Hormuz, and the same imaging components serve counter-drone systems. "Ironically, it's kind of the same type of imaging components you use for counter unmanned that you'd use on unmanned," he said.
On its own drones, Teledyne is deliberately avoiding the bottom of the market. VanWees put the average selling price for its systems at $10,000 to $100,000, with thermal imaging, a radio and GPS-jam resistance. The company is not interested in $1,000 to $2,000 "drone dominance" platforms, which he said lean toward commodity. "We really don't want to be a system provider" in that segment, he said, though it will sell infrared components to those who are. AeroVironment is both a neighbor in the market and a long-standing customer for Switchblade and Puma components.
Space is the second-largest defense-related category at about $450 million, almost entirely sensors in Digital Imaging. A little more than half of that is infrared imaging tied to Space Development Agency programs. VanWees noted that initial Golden Dome awards, which landed in July and are therefore not in second quarter orders, will use Teledyne sensors. Digital Imaging's second quarter book-to-bill exceeded 1.4, helped by follow-on awards for the SDA Tranche 3 tracking layer after a small initial order in December. Because Teledyne books only fully funded orders and not contract ceilings, additional awards under these programs should flow into backlog over time.
Missiles and munitions are smaller but growing fast. Components and subsystems for that market should rise from $200 million to about $240 million, up roughly 20%. VanWees said PAC-3 and AMRAAM are among the larger pieces. Teledyne supplies radar and electronic warfare components for AMRAAM, and sensors inside the Boeing-built seeker on Lockheed's PAC-3. Tomahawk content is smaller. Jefferies' Adam Samuelson noted that the framework agreements for these programs still await funding from Congress. VanWees also said the company makes the current Navy SEAL delivery vehicle for SOCOM, an unusual business for a sensor company.
Varex: Timing at the Trough, and a Slower Margin Path Than the Street May Assume
On the $1.1 billion Varex acquisition announced in August, VanWees explained why Teledyne moved now after tracking the company for six years. Varex has cleaned up its own house, taking a goodwill impairment in 2025 on a prior acquisition it inherited and then refinancing a convertible and a make-whole bond into fully prepayable bank debt in March. He also said the medical and life sciences market has been emerging from a roughly three-year post-COVID slump, with peers turning at different points from the fourth quarter through the second quarter. "Hopefully, we try to catch a reasonable value at sort of the bottom of the cycle," he said.
He described the fit as complementary rather than competitive. Varex makes X-ray tubes, which Teledyne does not, though Teledyne makes related vacuum devices for cancer radiotherapy. Varex also makes amorphous silicon and photon-counting detectors, while Teledyne's detectors are mostly CMOS. CMOS is better for high-resolution, low-dose X-ray video such as orthopedic surgery or cardiac catheterization, but it degrades under the high radiation of radiotherapy. GE is a key account for both companies.
Varex adds a bit over $600 million of sales, about 65% to 70% of it in health care, with the rest in industrial nondestructive testing and security screening, including CT systems used for baggage inspection. Combined with Teledyne's existing clinical health care business, VanWees put health care at roughly $1 billion, or about $1.2 billion including laboratory and life sciences sensors. That compares with total company sales of $6.5 billion to $6.6 billion this year, so the end market is approaching 20% of the company.
VanWees was notably restrained on near-term economics. He believes sell-side estimates for Varex in 2027 are "a little bit too high," because Teledyne expects to prune less profitable product lines through its 80-20 process. He sees a mid-single-digit growth market over time but does not expect 5% in the first year. On margins, he expects Varex gross margin in the mid-to-high 30s, below Teledyne's low 40s because of a high bill of materials, and EBITA margin in the mid-to-high teens within 12 to 18 months as public company costs are removed. Reaching 20% would take two to three years, which he called "a little bit of harder work" though with "a good path." That is meaningfully below the 23% company average, so the deal is likely to dilute consolidated margins.
Capital Allocation: Price Discipline, Buyback Optionality and No Divestitures
With pro forma leverage in the low 1x range, VanWees said balance sheet and management capacity are not constraints on additional deals, but Teledyne will not follow Varex with another health care acquisition immediately, so that business leader can focus on integration. Roughly 80% of the portfolio is not tied up in that effort. He said Teledyne has looked at many aerospace and space assets in the past two years and was outbid on most. "We win auctions. We're not a bottom fisher, but we're not going to also do anything silly," he said, adding that paying high-teens to 20-plus times EBITDA is not wise. He said the company has not reached the point where size limits its opportunities.
He also signaled that repurchases could resume. Teledyne has no standing buyback program, but it was aggressive after the April 2024 selloff and again in the fourth quarter of 2025. With the shares having fallen from about $690 to below $600, VanWees noted that more than $1 billion remains authorized and said investors should not be surprised if the company buys stock in the final days of the quarter.
On divestitures, he said Teledyne has never sold a business it acquired and does not operate on a private equity model, though about a third of the roughly $600 million to $700 million of revenue the company had in 1999 has been divested. Product pruning continues, however. At FLIR, acquired in 2021, about $130 million of the roughly $2 billion of revenue was unprofitable on a unit basis and was eliminated, which is why the business looked flat for its first couple of years under Teledyne ownership.
Guidance and Commercial End Markets: Conservative, With Semicap a Standout
Second quarter orders, sales and operating profit were records, with 9% organic growth and a 1.23 book-to-bill. It was the 11th consecutive quarter above 1.0, and funded backlog is about $5 billion. Defense grew roughly 12%, while commercial and industrial businesses mostly grew in the low to mid-single digits, with Digital Imaging at 11.9%. Full-year guidance implies about 6% organic growth and 7% total growth including bolt-ons, which suggests a second half slowdown. VanWees attributed that to conservatism in the roughly half of the company that books and ships within the quarter, and said July trends point to $30 million to $40 million of upside, roughly where the sell side already sits. He added that Teledyne has missed its own guidance about three times in more than 100 quarters.
On the commercial side, he named machine vision cameras for semiconductor mask and wafer inspection, with customers such as ASML, KLA and Lasertec, as the clear standout. That business is about $200 million annually and growing at a double-digit rate, and it contributed to Digital Imaging backlog. Health care grew 8% in the quarter, though VanWees pointed to an easy comparison and guided to mid-single digits for the year. Electronic test and measurement grew 3% to 4%. He described the rest of the commercial portfolio as positive but unspectacular.