Teledyne Technologies Incorporated Aktie

Hello, and welcome to the 2026 Annual Meeting of Stockholders of Teledyne Technologies, Inc. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to Robert Mehrabian, Executive Chairman of Teledyne. Dr. Mehrabian, the floor is yours.

Thank you. Good morning, ladies and gentlemen. I'm Robert Mehrabian, Executive Chairman of Teledyne Technologies Inc., and it's my pleasure to welcome you to the meeting. It's 9:15 a.m., and in accordance with the notice of the meeting, I call to order the Teledyne Technologies Annual Meeting of Stockholders. This year we are again holding our annual meeting virtually. This annual meeting is also being made available to the public in a listen-only webcast mode. An agenda and rules of conduct for the meeting have been posted on our virtual meeting site. All stockholders entitled to vote have the ability to do so online. After voting has been completed on all matters on the agenda, we have closed the polls and Ms. Cibik will present the preliminary report of the inspector of election.

I will now make certain introductions. Let me first introduce our directors who are also participating virtually. The directors who handed are reelection are Michelle A. Kumbier, Senior Vice President and President, Turf and Consumer Products, [indiscernible] and Robert A. Malone, Executive Chairman, President and CEO of First Sonora Bancshares, Inc. and retired Chairman and President of BP America, Inc.

Teledyne Directors whose terms are continuing, in addition to myself, are Laura A. Black, Managing Director of Miedema Company, LLC. George C. Bobb, the third President and CEO of Teledyne. Simon M. Lorne, Senior Adviser, and former Vice Chairman and Chief Legal Officer of Millennium Management LLC and former General Counsel, U.S. Securities and Exchange Commission. Vincent J. Morales, Senior Vice President and Chief Financial Officer of PPG Industries Inc. Jane C. Sherburne, Principal of Sherman, PLLC and former Senior Executive Vice President, General Counsel and Corporate Secretary of the Bank of New York Melon Corporation. Michael T. Smith, retired Chairman and CEO of [indiscernible] Electronics Corporation and Teledyne Director and Wesley W. von Schack, Chairman of AG Insurance Services and former Chairman, President and CEO of Energy East Corporation.

I would like to take a moment to express our deep gratitude to our director and friend, [indiscernible], who decided to retire from our Board of Directors following the expiration of its term at today's Annual Meeting of Stockholders. Throughout his 20-year service and has been a valued and dedicated member of the Board and we're deeply great for his many contributions to Teledyne. I would also like to introduce Stefan F. Blackwood, Executive Vice President and Chief Financial Officer of Teledyne and Melanie S. Cibik, Executive Vice resident General Counsel, Chief Compliance Officer and Secretary of Teledyne. Also present today is Adam Parrish of the Deloitte and Touche, the company's independent auditors. If questions arise during the discussion period that I am should appropriately address, he will be glad to respond. We're also being assisted today virtually by representatives of Computershare, Mark [indiscernible] will serve as inspector of election.

I will now move to the second agenda item. Melanie Cibik will report on the meeting of the notice of this meeting and the presence of a quorum.

This meeting is held pursuant to notice stated and mailed or made available to stockholders on March 12, 2026, to each stockholder of record on March 2, 2026 who is entitled to vote. A list of stockholders entitled to vote at the meeting has been available at company headquarters for the past 10 days and is also available for examination by any stockholder desiring to do so on the website used to access this meeting. All documents concerning the call and notice of the meeting will be filed with the records of the meeting. The preliminary count of shares present immediately before the start of this meeting indicated 93.76% of the outstanding voting stock of the company present in person or by proxy. This represents a quorum.

I hereby declare a quorum is present at the meeting. Now we will proceed to agenda item #3. The first matter to be acted upon by stockholders is the election of 2 Class III directors to serve until the 2027 annual meeting as provided in the proxy statement. Melanie Cibik will now put in nomination the name of the slate of directors listed in the proxy statement.

I hereby nominate for election as directors of the company the following directors: Michelle A. Kumbier and Robert A. Malone.

I second the motion.

Thank you, Steve. No recent notice was received by Teledyne that any other nominations would be made at this meeting pursuant to the nomination procedure provided for in the company's restated certificate of incorporation and bylaws. Therefore, I declare the nominations closed.

The next matter being submitted to stockholders for action is the ratification of the appointment by the Audit Committee of our Board of Directors of Deloitte & Touche LLP as our independent registered public accounting firm. In its steel operations, the Audit committee has worked regularly with Deloitte and Touche MP and has had the opportunity to evaluate their work. I move for the ratification of the appointment of Deloitte & Touche to audit the financial statements of the company had its subsidiaries for the year 2026.

I second the nomination -- or motion, sorry.

Thank you. The next matter being submitted to stockholders for action is the advisory resolution on executive compensation, commonly referred to as stay on pay on core. We're asking the stockholders to approve the nonbinding advisory resolution on executive compensation as described and set forth in the proxy statement. The Board has recommended a vote in favor of this nonbinding resolution. Therefore, I move for the approval of this resolution.

I second the motion.

Thank you, Melanie. The next matter being submitted to stockholders for action is the proposal to approve the amendment and restatement of Teledyne restated certificate of incorporation to adopt a stockholder right to call a special meeting of stockholders as described in the proxy statement. As noted in the proxy statement, the affirmative vote of a majority of shares outstanding is required to approve this proposal. The Board has recommended a vote in favor of this proposal. Therefore, I move for the approval of this proposal.

I second promotion.

Thank you, Steve. The next and final matter being submitted is the approval of the proposed amended and restated paradigm Technologies Incorporated 2014 incentive award plan as described in the proxy statement. Based on the recommendation of the Personnel and Compensation Committee, the Board adopted demented plan subject to stockholder approval. The Board has recommended a vote in favor of this purpose of, therefore, a move for the approval of this proposal.

I second the motion.

Thank you. Ms. Cibik is there any other business that this forum should consider?

Management knows of no matters to be properly presented for consideration at this annual meeting.

Thank you. Voting has now been closed. We will have a report of the secretary Melanie.

Mr. Chairman, the ballots have been counted in over 96% of the shares present in person or by proxy at this meeting have been voted for the election of each of the 2 Class II director nominees named in the proxy statement. Over 97% of the shares present in person or by proxy at this meeting have voted in favor of ratifying the appointment of Deloitte & Touche LLP as Teledyne's independent registered accounting firm to audit our financial statements for fiscal 2026. Over 95% of the shares present in person or by proxy at this meeting have been voted in favor of approving the advisory vote on executive compensation. Over 87% of the outstanding shares have been voted in favor of approving an amendment and restatement of the company's restated Certificate of Incorporation to adopt the stockholders' right to call special meetings of stockholders. Finally, over 93% of the shares present in person or by proxy at this meeting have been voted in favor of approving the amended and restated Teledyne Technologies, Inc. 2014 Incentive Award Plan.

I hereby declare that the nominees for directors have been duly elected. The appointment of Deloitte & Touche LLP to audit Teledyne's financial statements for our fiscal year 2026 has been duly ratified and the advisory resolution on executive compensation has been duly approved. I hereby declare that the proposal to approve an amended and restatement amended and restatement of the company's restated Certificate of Incorporation to adopt a stockholder right to call a special meeting of stockholders has been during approval. Finally, I hereby declare that the proposal to approve the amended and restated Teledyne Technologies, Inc. 2014 incentive award plan has been duly approved. We have now come to that part of the agenda providing for general questions and discussions. If there is or are stockholders entitled to go through this meeting and wish to ask a question, you may submit the questions by clicking on the message icon in the upper right corner of your screen and typing in your question. We will answer questions submitted by you after the meeting. This includes your e-mail address with your question. As there is no other business, this concludes our meeting. Thank you for joining and for your support and interest in Teledyne. The meeting is adjourned.

This concludes the meeting. You may now disconnect.

Welcome to Teledyne's First Quarter Earnings Call. I would now like to introduce our first speaker, Mr. Jason VanWees. Jason, please go ahead.

Thank you. Good morning, everyone. This is Jason VanWees, Vice Chairman. I'd like to welcome everyone to Teledyne's First 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'll ask for your questions. But of course, before we get started, all forward-looking statements made this morning are subject to various assumptions, risks and caveats as noted in the earnings release under 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 via webcast and dial-in, will be available for approximately 1 month. Here is Robert.

Thank you, Jason, and good morning, everyone, and welcome to our conference call. We started 2026 with record first quarter sales, earnings per share and operating margin. Specifically, sales and non-GAAP earnings increased 7.6% and 17.2%, respectively. In addition, despite a 30 basis point increase in R&D expense, non-GAAP operating margin increased 58 basis points year-over-year.

And while we acquired DD-Scientific in January and increased our capital expenditures significantly from last year, our leverage ratio declined to the lowest level in 5 years since before the acquisition of FLIR in 2001. Excluding the impact of acquisitions, sales increased 5.3% due in part to the performance of our Digital Imaging segment, while organic growth was 6.9%.

Sales of visible light sensors, infrared detectors and specialty semiconductors for space applications, each increased at double-digit rates as did FLIR infrared cameras for unmanned air vehicles as well as our own complete unmanned aerial systems. Also within the Digital Imaging segment, our industrial imaging and x-ray businesses is returned to year-over-year growth, which helped contribute to the strong margin performance in the first quarter.

Given stronger sales in the first quarter, but also record orders and backlog with a book-to-bill of 1.16, which is our tenth consecutive quarter of book-to-bill of over 1, we're comfortable in increasing both our expected sales and earnings for 2026. We believe now sales will be in the range of $6.415 billion or 70 basis points higher than we communicated in January. We're also raising our earnings outlook at both the bottom and top of our prior range. to about $24 at midpoint or $0.35 overall in increase. George will now briefly comment on the performance of our 4 business segments. George?

Thank you, Robert. In the Digital Imaging segment, first quarter sales increased 7.9% due to well balanced growth throughout the segment, including Teledyne imaging sensors, Delta e2v and Teledyne FLIR. As Robert mentioned, sales of visible and infrared detectors for space-based imaging increased nicely. Sales of infrared subsystems and cameras for our customers' unmanned air systems and unmanned maritime service vehicles also increased. .

In addition, revenue from our own complete unmanned air systems increased due to continued growth of the highly differentiated Black Hornet nano drone as well as full rate production deliveries of our Rogue 1 loitering munition. Interest in counter drone activity also remains elevated. And in the first quarter and early Q2, we received orders for infrared cameras and subsystems, totaling in the tens of millions of dollars for counter drone applications. There were also bright spots outside of defense.

For example, industrial machine vision cameras and sensors for semiconductor inspection and X-ray products for health care increased year-over-year and sales of micro-electromechanical systems or MEMS, grew over 20%, primarily due to demand for micromirrors used for optical switching and high-speed networking applications. Finally, non-GAAP operating margin in the segment increased 107 basis points to 23.2%, despite a 59 basis point increase in R&D expense within the segment.

In the Instrumentation segment, which consists of our marine, environmental and test and measurement businesses, first quarter sales increased 5.3% versus last year. Overall sales of marine instruments increased 8.3%, primarily due to strong defense-related sales, including unmanned subsea vehicles, which increased more than 20% for applications such as anti-submarine warfare and mine countermeasures as well as sales of interconnects for U.S. Virginia and Columbia class submarines.

Interconnects for offshore energy production also continued to grow. However, these were partially offset by reduced sales of marine instruments for hydrography and oceanographic research. Sales of environmental instruments increased 6.7%. This primarily resulted from higher sales for gas safety and ambient air monitoring instrumentation, partially offset by lower sales of laboratory and life sciences instruments.

Sales of electronic test and measurement systems decreased 3.7% year-over-year with greater sales of oscilloscopes, offset by lower sales of protocol analyzers. However, we continue to expect full year sales growth as semiconductor suppliers increase their shipments and data centers increasingly adopt devices, utilizing the newest, fastest data transfer protocol.

Instrumentation non-GAAP operating margin in the first quarter decreased primarily due to product mix. That is a decline in higher-margin test and measurement, [ first growth ] in autonomous underwater vehicles in marine, which generally carry lower margins.

In the Aerospace and Defense Electronics segment, first quarter sales increased 14.4% due to 1 additional month of results from the Qioptiq acquisition and with organic growth of 8.4% across defense electronics, partially offset by slightly lower sales from the commercial aerospace market due to a result of a tough comparison. Non-GAAP segment margin increased nearly 200 basis points year-over-year due to higher sales and corresponding operating leverage, improved margins at companies acquired in 2025 and in this case, a relatively easy comparison.

For the Engineered Systems segment, first quarter revenue decreased 2.6%. However, segment operating margin increased 113 basis points. I will now pass the call back to Robert.

Thank you, George. In conclusion, we are excited to begin 2026 with a strong first quarter with continued orders and sales momentum in our backlog-driven businesses, specifically defense where Teledyne has meaningful exposure to low-cost drone, counter drone technologies, space-based sensing, electronic counter measures and maritime surveillance.

Furthermore, certain markets such as industrial inspection and health care, which have had headwinds in the past are now inflecting. Finally, with a leverage at a 5-year low, we are actively pursuing a number of acquisitions, but at the same time, we're investing more in R&D and capital expenditures to accelerate our own organic growth. 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 second quarter and full year 2026 outlook. In the first quarter, cash flow from operating activities was $234 million compared with $242.6 million in 2025. Free cash flow, that is cash flow from operating activities less capital expenditures was $204.3 million in the first quarter of 2026 compared with $224.6 million in 2025. .

Cash flow decreased due to higher inventory purchases, partially offset by greater operating results in the first quarter of 2026 compared with 2025. Capital expenditures were $29.7 million in the first quarter of 2026 compared with $18 million in 2025. Depreciation and amortization expense was $87.2 million in the first quarter of 2026 compared with $80.7 million in 2025.

Now turning to our outlook. Management currently believes that GAAP earnings per share in the second quarter of 2026 will be in the range of $4.75 to $4.90 per share with non-GAAP earnings per share in the range of $5.70 to $5.80. And for the full year 2026, we believe that GAAP earnings per share will be in the range of $20.08 to $20.44 and non-GAAP earnings per share in the range of $23.85 to $24.15. I will now pass the call back to Robert. .

Thank you, Steve. Operator, we would like to start the questions. If you're ready to proceed, please go ahead. .

[Operator Instructions] Our first question comes from the line of Greg Konrad with Jefferies. .

Maybe just to start on the revised revenue guidance of $6.415 billion. Can you maybe just talk about organic versus inorganic? And then if you think about some of the derisking or things that have gotten better since the guidance you gave last quarter, where are you seeing the most outperformance just from a segment basis?

Of course, Greg. First, fundamentally, we're seeing about a 4.9% total growth for the year right now, which is about 70 basis points higher than we had in January. About 4% of [ that solid 4% ] is organic and about 0.9% is from acquisitions, 1 early in 2025 and 1 small one early this year. From a segment perspective, we think the highest growth will probably be in our Digital Imaging and Aerospace and Defense with Aerospace and Defense probably over 6% and Digital Imaging overall about 5% led by really FLIR which we expect will grow about 6.5%. I hope that answers your question. .

Yes, that's perfect. And you gave a little bit of color on the opening, but just following up on defense. How much was it up overall in the quarter? And then you mentioned FLIR. Can you just maybe give a little bit more color on FLIR defense growth? And then what's kind of driving the outperformance in A&D electronics just given that growth, thinking about that broader portfolio?

Okay. Let me start with FLIR defense I think we're looking at about 9% growth in that area. Pretty much all of our products in the FLIR Defense are growing, specifically drones, nano drones, loitering drones, surveillance systems, you name it. And of course, we do supply both include visible and more importantly, infrared detectors, not only to our own drone manufacturers but also to everyone else across the world that's making drones.

From from an A&D perspective, the growth has been again in a variety of our components. As you know, we make everything from lasers to detectors, readouts, semiconductors, switches. All of these are seeing various degrees of growth. And it's -- the business is very healthy, both supplying our own products, but more importantly, supplying products from -- that are required as the various conflicts are increasing both in Europe and the Middle East.

The next question comes from the line of Amit Mehrotra with UBS.

This is a Zach Walljasper on for Amit today. So just 2 questions from me. Can you just help give some color on the order trends between segments? And then the second question for me is just around the full year guide. So high level, the first quarter came in a little above and then raising a little above that. So there's not too much incremental pickup expected, but if you help flesh out the puts and takes for the balance of the year that you're seeing that will be helpful. And then like should the typical earnings seasonality still hold for 2026?

Sure. Let me start with the overall, which I mentioned, the overall book-to-bill right now is 1.16. It is led by digital imaging and specifically, both FLIR as well as DALSA e2v that's where we have probably the highest book-to-bill higher than certainly we talked about in January. Digital Imaging right now is looking like about 1.38 in book-to-bill in instruments, a lot of short-cycle stuff, but it's still holding above 1, just slightly over 1.

A&D, which it's a little lumpy because both A&D and Engineered systems are lumpy because we get big orders, then there's a period of quiescence and then we pick up orders. They're just below 1 right now. certainly A&D. But I think what's happened to us is for whatever products that we're able to put out an increased production, there's very strong demand, and that's why we think across our portfolio, we're going to do very well. We would think that we'll have a little more sales in the second half versus the first half.

And in January, we were saying the first half would be a little much -- a little lower than we had. So we're kind of guiding our second half maybe at 51% versus first half at 49%. But as in January, we were thinking the first half would be more like 48% than the second half 52% in terms of our revenue. So we remain bullish but also cautious, not to over promise what we can deliver and stay within the framework that we've operated for the last 25 years.

The next question comes from the line of Andrew Buscaglia with BNP Paribas.

Just wanted to touch on the Q2 guidance. Just that it reflects the point at the midpoint EPS declining sequentially, which is atypical, historically like it's seasonality. I'm wondering where is the biggest pain point. I think my guess is the instrumentation like the test and measurement area being a little weaker than expected in Q1. But wondering, yes, what are the dynamics affecting that Q2 guide?

Let me just put it the big picture is the following. In Q1, we had some good tax benefits year-over-year. Our tax benefits increased because of stock option exercises increased about [ $0.10, $0.11 ] year-over-year. In Q2, where we sit right now, we're not projecting similar tax benefits.

Now if our stock were to move up and our people start exercising more options, that would change. But right now, we're not projecting that. So we're taking that part out, we're projecting more like $0.03 rather than having the increase that we have. So primarily, that's it, just to cut through it, everything else I'm comfortable with.

.

Maybe could you comment further then on that instrumentation comment I made earlier, just that was a weak start to the year. What do you think drove that? And how do you see that the cadence of that unleash over the next 9 months?

Well, I'm going to just make 1 short comment and then I want to let George answer that. The different parts through instrumentation, strong marine performance for us, especially under water vehicles. These are vehicles that are used across the world, some of them for mine counter measures, very strong performance, but slightly lower margin than some of our high-margin like test and measurement. I'll let George kind of [indiscernible] a little bit, George?

Yes. So I think I will focus on test and measurement, which is where we had the decline in Q1. And there are 2 parts of that business. Really, there's the oscilloscope side of the business, where we saw year-over-year growth and continue to see good demand in high-bandwidth applications power applications, for example, the people who are designing power supplies for data centers and from sales into the in-vehicle networks market. .

Protocol sales were down year-over-year, and that was really due to the timing of PCI Express Gen 6 CPUs and GPUs. So we go through on the protocol side, kind of 2 phases. There's a silicon designer phase where we sell silicon designers, and then there's a phase of integration of chips when they come to the market. So what we expect this year is for those chips to come to market in the second half of the year, and we still expect full year growth in the low single digit in test and measurement. So overall, as Robert said, strong performance in marine, strong performance in environmental, test and measurement is a little weaker in Q1, but still expect full year growth in the low single digits.

That's great. George mentioned the various aspects. We still expect instrumentation to grow over 4% for the year. .

And the next question comes from the line of Jim Ricchiuti with Needham & Company.

I know it's probably early yet, but are you seeing signs of potential increases in your defense business just related to the conflict in Iran?

Yes. [indiscernible] first, we are being approached by the government actually, the government is making some investments. We haven't announced it yet, but they're making some investments in getting our capacities increased in certain specific areas, which I can't go into until the releases are approved.

Second, we're seeing obviously increased demand for anything that has to do with drones and counter drones. And we're also seeing some demand for underwater vehicles. There are a lot of inquiries right now, some orders, but we expect orders to really start picking up in the next 6 months.

Got it. That's helpful, Robert. And just on the M&A pipeline, just given valuation levels, are you still thinking the focus this year is going to be mainly tuck-ins? Or is there the potential for something larger?

I think tuck-ins, first, maybe some midsized acquisitions like we did early in 2025. The larger ones they come not that frequently, and we're looking at some, obviously, but people are willing to pay some outrageous prices to get the revenue, and we'll have to see. But I would say the answer to your question specifically, tuck-ins first; midsized, second; larger, we'll have to wait and see what fits our portfolio. We don't want to go outside our portfolio too much in getting a very large acquisition and then have to do a whole new segment, et cetera. That's not us. So there we are.

And mainly in the instrumentation, digital imaging? Or are there still some potential opportunities in A&D?

I would say in all of our segments, probably with the exception of Engineered Systems, where we're not looking at acquisitions because it's a business that's growing and the government is investing in that. So it means almost all of our segments depends on what we get.

The next question comes from the line of Jordan Lyonnais with Bank of America. .

On the growth that you guys called out for space, can you give us a sense if that is related to Golden Dome? And then two, just for the FY '27 budget request, the $70 billion that they want for drone funding and the [ Dawn ] program. How are you guys thinking about that if that funding gets approved? And for that much funding to come through, can you support those volumes of own systems and as a supplier to everyone?

Yes. Let me start by saying that right now, as Steve mentioned so the George, we're investing in our businesses both from CapEx with increased CapEx, about 35% over last year in the first quarter and expect to keep doing that throughout the year. So we've investing in capacity because we, frankly, our demand is larger than our capacity in certain areas. So we're investing in that. Second, we're also increasing some R&D expenditures. We increased our R&D by $10 million just in the first quarter. That's to us -- to me, that's about $0.14 a share that we added in our investments because we think those are going to be good investments, there's going to be good demand for you.

Now having said that, I'll let George talk about Golden Dome. Right now, we're pretty well set on tranche programs, the SDA tranche programs, we've won just about everything with minor exceptions here and there. So I don't expect to get much more than that. But going to the Golden Dome, I'll have George answer that.

Sure. So just as a follow-on to that, what I would say is, certainly, on the tranche programs, as Robert mentioned, we've done very well there, and that's what's driven a lot of the growth on the infrared imaging space side of the business. And we think we're very well positioned for Golden Dome as it evolves, given the fact that we've been on all of these [ space development agency ] tranche programs.

We'll see how much budget goes in there in reality, right? Asking for increased budgets is one thing, getting it is another. But eventually, there will obviously be some monies either way, we're ready. But right now, with what we have and what we're seeing in terms of the book-to-bill, we feel we should invest in our own businesses, which is very unusual for us at this point in the year. .

The next question comes from the line of Joe Giordano with TD Cowen.

you had previously last quarter talked about your unmanned business, $500 million, growing about 10%. I think the general view is that feels pretty conservative given recent events. Just curious for a bit of an update there. And then if you can maybe talk about the subsea stuff specifically, like where are you positioned on potential like Strait of Hormuz mine sweeping, what types of products would that be for you? Just any sort of color you can give there and how that might materialize over the next couple of quarters here?

Sure. Sure. Okay. Let's start with the unmanned. As you know, we make unmanned systems air, ground and Subsea. I don't know if there are many companies that are able to do all of that, our unmanned air systems is growing very fast. Our Black Hornets, which are the nano drones. Over the last bunch of years, including this year. Just that one drone Black Hornet 3, now Black Hornet 4 will have revenues of about $500 million over that period. We expect -- and we have received already orders for Black Hornet, both in this country and some for Europe.

And of course, Middle East conflict is demanding more. Second, we've introduced the our Rogue 1, which is armed drone. We have our first contracts. Those would increase substantially with time. We have other systems coming along the way. And then if we go to subsea, we have different kinds of underwater drones. They're not just any. We have, for example, gliders that can stay on very long periods of time and can go to large distances. And then we also have our [ Gavia ] vehicles, various ranges of it that go to different depths.

And those are the ones that are used for detecting mines, and we have some nice orders for that in Europe. Overall, I'd say, I would remain with the $500 million for now for -- but it's -- some of the pockets are growing higher than 10%. So Broadly speaking, I think we're approaching almost $2 billion in revenue between defense, global defense, U.S. defense, drones EW, missiles, munitions, et cetera. That's a big chunk of our revenue for this year. It's about 30% to 35% of the whole company.

So when you get a part of your portfolio growing that fast and you're actually investing dollars the way we are, we've always been kind of very cautious with our money that ought to tell you that we're kind of bullish about this area.

Next question comes from the line of Guy Hardwick with Barclays.

I was wondering if you could maybe update us on your margin outlook, particularly in digital imaging, where it seems that you've had a positive mix effect with the industrial scientific cameras picking up?

I think as George mentioned and [indiscernible] mentioned a little bit, for the quarter, our margin went up about 58 basis points. We're projecting that to continue throughout the year. So we think we'll end up the year about 60 basis points above last year, and it will be led by digital imaging at over 100 basis points, 105, 107 basis points, which is something that we've been striving for ever since the acquisition of FLIR.

But now FLIR'S doing well and the legacy digital imaging with DALSA e2v is picking up. So the margins overall would grow about 60 basis points, led by Digital Imaging. Aerospace & Defense is not far behind at about 70 basis points.

And just generally talking about your, say, long cycle versus short cycle trends, it sounds like you don't think there's a bump to the order book in the defense side, yes, perhaps in the next 6 months. Does that suggest a pretty good outlook for defense for next year rather than kind of an acceleration this year in terms of revenues?

No, I hope I didn't give the impression that we don't expect acceleration this year. We do because our orders are way up right now in our defense businesses. We expect it to pick up more. I don't mean to be greedy, but we expect it to pick up more in the next 6 months or so because of the use of munitions, the significant use of munitions in the Middle East. Having said that, we are already experiencing very strong defense orders across all of our portfolio from components to systems.

The next question comes from the line of John Godyn with Citi.

I wanted to just ask or kick off with a big picture question about M&A and the strategy. A couple of years ago, we saw new issues. IPOs business is being created that really focused on kind of roll-ups and industrial rollups with an aerospace and defense focus. More recently, they've been that plus broader industrials as well. And when you think about the amount of new kind of industrial compounders, industrial roll-ups, companies focused on finding niche highly engineered products, et cetera, it definitely feels a little more crowded today than maybe years ago.

You guys started this theme, I mean, decades ago in the history books, you started it, but even just one decade ago, you were ahead of many of the others. I wanted to just sort of take the temperature on the market at large. Are you rubbing up against competitors more? Is it harder to get deals done? Are sellers reshaping the processes in the face of different and maybe more buyers seeking the same opportunities? I just feel like with all the IPO activity, it's worth kind of level setting, recalibrating and taking your temperature.

Yes. I don't know. It's a very kind of difficult question to answer. We've always had competition. Some of the -- let me begin somewhere else. In the last 12 months, 13 months, we've already spent $900 million in acquisitions. In the last 25 years, we've spent $12.8 billion in acquisitions, only $4 billion of it with our stock. So $10.8 billion of it with cash, which we generate. And in the last 12, 13 months, $900 million. So I think our -- and we've made 75 acquisitions in the past 25 years. Yes, it's getting crowded.

On the other hand, people that are conglomerates that are putting things together. They also have a tendency to put them together and then take them apart. If you look at various conglomerates, we've been the beneficiary of taking them apart. We've gotten a few businesses from conglomerates that suddenly decide, well, this thing doesn't fit or we want to concentrate.

So we have been getting some really nice carve-outs in the recent past. We've always had competition. We always have going forward. That's not what worries me. What worries me is the crazy prices that people have been willing to pay. Fortunately, some of that is switching over to this AI and data center domain and bless them, let them spend their money in that area, and we will stick to the things we know. So I don't really see a lot of competition increases.

Okay. That was great color. And if I could just sort of clarify some of the commentary on defense and maybe a little bit on aerospace. But it's very loud and clear that defense demand signals are strong. Bookings are strong. One of the challenges in the past at different times, with Teledyne is that the bookings are strong, but doesn't necessarily translate into the immediate quarters.

And there could be some confusion about kind of short versus long cycle exposure. But when we see all these strong demand trends in defense, is that going to translate immediately? Like can you maybe just talk about the short-cycle elements of your portfolio a little bit more? You mentioned munitions. I just want to make sure that we're all kind of hearing that loud and clear, but also translating into the models the right way.

That's a good question. That's a very good question. Let me just say it's mixed. Yes, some of our orders that we get are long 2, 3, 4 years in duration. Some of our orders are yet to come because of the conflicts in the Middle East. And of course, there's European growth in defense, where we're getting some healthy orders.

By and large, when we think about part of our portfolio growing 9%, 10% organically, that's very healthy. We haven't had that for a while. On the other hand, I'm not going to be the one standing here and telling people that we're going to grow 20% a year, like I've heard others do. That's not us. It might happen if the munitions that are being used are replaced faster.

But the government cycles are tedious even when there's urgent need. So I would balance it to say that we do have the great backlog. We have about $4.6 billion in our backlog right now, and those will translate into revenue. The good thing is that based on what we see, both in the Middle East, but also European defense increases as well as Ukraine conflict as well as what's happening in China and Taiwan, all of these directionally, all of these things favor the portfolio that we've developed both in legacy Teledyne and of course, with Flir acquisition.

That's great. If I could slip in just 1 more related question on aerospace. I know your aerospace exposure is very small and your commercial aftermarket exposure is even smaller as a percentage of that. But is there any tea leaf reading there just on the back of what's going on in the Middle East, high oil prices, it's obviously much more topical with the companies that are more kind of aerospace, heavier aerospace pure plays.

I'll let George address that one, please?

Yes, you mentioned that it's a relatively smaller part of the business, which it is. It's about 4% of our revenue, give or take. The business actually is split about 1/3 OEM, 2/3 aftermarket. What we've seen in the aftermarket, the aftermarket was healthy in Q1. So I'm not seeing anything in the near term as a result of that conflict. .

The next question comes from the line of Noah Poponak with Goldman Sachs.

Robert, is it possible to state or quantify what short-cycle industrial revenue growth was in the quarter and what defense revenue growth was in the quarter and then what's in the full year 2026 revenue guidance for each of those?

Right. Let me start with the government, we had a 9% growth in U.S. government. We had in non-U.S. government total, we had another 4% growth. This is organic. Where we grew most also was in international domain. We had a little shrinkage in the U.S. commercial, but we grew significantly internationally.

What's happened to us now is our international businesses have become 48% of our portfolio now, 20 years ago, that was less than 15%. So the growth has been international and U.S. government, U.S. government being at 9% and international about 8.5%. I don't know whether I picked up everything you asked.

And I guess what would -- are you able to quantify what growth was in short-cycle industrial, I guess, as you've defined it, during the downturn you experienced in machine vision, test and measurement, semiconductor. I guess I'm trying to get a sense for how much that recovered in the quarter in the 5% organic total company that you had?

Yes. I think generally, the short cycle grew at about lower single digits, 3% to 4%; defense, high single digits. There's difference between machine vision and semiconductors, they're very healthy. We have good growth there. On the other hand, we have a little shrinkage in test and measurement. So the first quarter, that's where [indiscernible]

That helps. And I think you've discussed this a little bit, but just the revenue number you're now providing for the full year, I think, would require the organic to slow a bit through the rest of the year. It sounds like defense orders would suggest it can hold or accelerate. Maybe [ 9 ] is just a tough large number starting point. And then it sounds like short-cycle industrial still has room to accelerate? Why would total company organic not accelerate?

Well you got me there. I'm a little conservative. Noah as you know us to be, we expect revenue to keep growing throughout the year. Year-over-year, we had growth in the first quarter. We expect growth in the second quarter in the third and the fourth quarter. So when I look at the rest of the year, in January, we thought the first half of the year would be 48% of the total second half, 52% of the total.

We switched that now. We think the second half would be a little less. And the reason for that is, frankly because a little conservatism. And we think we're going to have less benefit in the second half of the year from foreign exchange. We got some nice benefits in the first half of the year. In Q1, we had about 2%. We think that will drop down to maybe 0.6% in Q2 and then we're projecting 0 in the last 2 quarters. Now if that were to flip, so when we look at the year, we're thinking now our foreign exchange is going to be 0.6%, 0.5%. If that shifts, of course, our revenue would increase correspondingly. Some of the conservatism has to do with foreign exchange.

I understand. Last one for me is just on the instrumentation margin. Maybe you can just maybe just talk about how you see that progressing through the rest of the year. And then I guess that segment had really nice margin expansion in the last 3 or 4 years. Now we have this quarter, what -- how should we think about the right kind of medium term a few years out instrumentation margin?

Let me start by saying, historically, our instrumentation margins have been the healthiest in the company. We think with progression through the year this year, our margins will keep increasing. I think this was our lowest margin quarter and primarily because of test and measurement. We think the margins will go up every quarter, and we should end the year closer to 27.5%. To get there, we're projecting 29% margin in the fourth quarter for that segment. So as George said, our underwater vehicles don't have as great a margin as do our test and measurement. But we're anticipating a comeback in our protocol analyzers. Our oscilloscopes are already doing well. So I think margins will increase as the year goes on.

the next question comes from the line of Rob Jamieson with Vertical Research Partners.

Just a couple just on Aerospace and Defense margins. Much better in the quarter than I expected. I was just curious on the better expansion outlook for that quarter or for [indiscernible] segment versus last quarter. Was there anything mix related that we saw in this quarter or that you're expecting through the rest of the year? Or is this more some of the cost efficiencies from the Qioptiq acquisition and integration?

I think I'll let George answer this, but it has to do a lot to do with acquisitions. .

Yes, that's right. So I'll answer it maybe a couple of ways. One, on the acquisition side, our playbook is pretty simple. We acquire companies at reasonable valuations and then we work to improve them. And we've really seen over the last year with the Qioptiq acquisition and the [ MicroPact acquisition ], in the Aerospace and Defense Electronics segment, a lot of good work there on margin improvement. Also did benefit a little bit from mix in Q1. We sell, for example, our avionics spares and high reliability semiconductors, things like that, that were somewhat better year-over-year. But fundamentally, I think cost discipline always improving the acquisitions and then, yes, a little bit of benefit from mix.

Perfect. And then just quick, can I get an update on just how you're thinking about free cash flow for the full year. And then just with the increase in CapEx investment that you called out as well. How should we think about that kind of in like the 2.5% of sales range for the year?

Let me start with free cash flow. We've been fortunate in the last -- in '24, '25 to generate over $1 billion in free cash flow. We expect that to happen again this year. First half is a little slower than that, but I will pick it up the second half of the year because we're spending more on CapEx this year, we're projecting at about $150 million, which is an increase versus last year. And of course, we're spending a little more on inventory. We're spending a little more on where we have some cautions approach to some of the product or supply chain that comes out of China with the restrictions.

So we're investing in some inventory. We're investing in some machining facilities for germanium, et cetera. Having said all of that, [ $115 million ] CapEx, over $1 billion in free cash flow, I hope we'll get to $1.1 billion.

This concludes the question-and-answer session, and I'd like to turn the call back over to management for closing remarks.

Thank you very much. I'll ask Jason to conclude the conference call. .

Thanks, Robert, and again, thanks to everyone for joining us today. And of course, if you have follow-up questions, please feel free to call me or send me an e-mail. My number is on the earnings release. Thanks all. Bye. .

This concludes today's conference. You may disconnect your lines at this time, and we thank you for your participation.

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.

Welcome to the Teledyne Fourth Quarter Earnings Conference Call. Here is our first speaker, Mr. Jason VanWees.

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'll answer 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 1 month. Here is Robert.

Thank you, Jason. We concluded 2025 with the largest quarterly orders, sales and non-GAAP earnings and 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 a $400 million for stock repurchases within the fourth quarter. Nevertheless, having generated approximately $1.1 billion in free cash flow for 2 consecutive years, we ended 2025 with a leverage ratio of just 1.4x. Last week, we continued our string of pearls strategy with the acquisition of DD-Scientific, a U.K.-based manufacturer of high-performance electrochemical gas sensors.

Gas sensors are not only a critical technology component used in our environmental instruments, but such gas 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 4 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 19, the U.S. Space Development Agency awarded 4 prime contracts for 72 Tranche 3 Tracking Layer missile warning, missile tracking satellites, and we were selected to supply space-based infrared detectors to 3 of the 4 primes. This continues our very strong participation across each of SDA's tracking layer programs and positions us well for future Golden Dome 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 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 an 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 Qioptiq 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 2003 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, prove 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 in East, 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 to 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 to $4.59 per share, with non-GAAP earnings in the range of $5.40 to $5.50. And for the full year of 2026, we believe that GAAP earnings per share will be in the range of $19.76 to $20.22 with non-GAAP earnings per share in the range of $23.45 to $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.

[Operator Instructions] Our first question comes from the line of Greg Konrad with Jefferies.

Maybe just to start on the outlook for revenues. I mean, you gave a little bit of color around short cycle, but just thinking about that 4% growth, is there any way to parse organic versus inorganic given the smaller recent deals, plus how you're thinking about long-cycle growth in backlog versus maybe initial assumptions around the short-cycle businesses overall?

Okay. Greg, let me start with organic versus nonorganic. We think most of the growth would be organic about 3.6%, nonorganic, a little over 4%, 4.2%, about. In terms of short and long cycle, I don't see a lot of differences between those 2. We think that we have probably a little smaller increases in certain areas like environmental and test and measurement, maybe a little over 2%, but that will be offset with a healthy increase in our marine instruments, about 5%. And we think FLIR will grow just under 5%, maybe 4.6% to be accurate. So I don't see a lot of difference between short and long cycle. And as I mentioned before, we don't believe over the years, the total year in 2006 -- '26, we're going to see shrinkage of our short-cycle businesses that we have before.

And then maybe just a follow-up to that. I mean, you had really strong digital imaging margins in Q4. I think you called out a contingent liability reversal. But how are you thinking about the exit rate for digital imaging and maybe the biggest opportunities into 2026, given you've talked about a 24% target in the past?

Yes. Let me start with the question on the contingent liability. I think if you look at that and you balance it out versus roof costs. We've been reducing costs as we go along. Fundamentally, it added about 50 basis points to our margins in Q4. So even with that, we have a 24% margin or a little in excess of 24% margin in 2025 fourth quarter. For the full year 2025, digital imaging margins came in at about 22.6%, which was about 30 basis points improved over the prior year. 2026, we're a little more hopeful, and we believe that the margins would go up maybe another 80 basis points and get to about 23.4%. And with good luck, I hope we'll get to the 24%.

Our next question comes from the line of Amit Mehrotra with UBS.

This is Zack Walljasper on for Amit Mehrotra today. My first question is just the implied 1Q guidance suggests about 10% earnings growth year-on-year, while the full year guidance like implies about 7%. Just can you give some help just around the cadence of the year and like the implied deceleration because compared to last year, the earnings comps are relatively similar 1H versus 2H.

Yes. It's easier comps in Q1 versus last year. We improved obviously, earnings, as you said, throughout the year. Traditionally, we've been about 48% in the first half of the year in revenue and 46% in profitability. We believe that's about going to be what happens the coming year. Now I'm hoping that we can improve on both of those numbers as we get the year started. But it's the -- we just got through 3 weeks of the 2026, so I'm hesitant to go further out on a limb than I have.

Our next question comes from the line of Andrew Buscaglia with BNP Paribas.

I was hoping you could add some color to some of these bigger -- seemingly bigger defense awards you're talking about, specifically the tracking layer program, which seems very topical currently. Can you -- any way you can size that -- the size of that award or the contribution you expect Teledyne to receive in '26 and beyond?

Yes. I will -- perhaps that's a question I can pass to George.

Sure. So on the tracking layer, of course, we provide very high-performance infrared arrays. And that program for us will be north of $100 million over the next few years.

And what are -- you sound like you're selling to these 3 of the 4 defense primes. What can we expect in terms of margin contribution from something like that? Is it higher versus corporate average or lower or what?

I would say it's about average. I mean, we -- yes.

Yes. It's -- as George mentioned, these are going to probably be fixed-price contracts. So our performance will improve again as it always does as a function of time. So early on, maybe our margins will be a little less. But overall, these are really good programs for us.

And this -- I imagine this is a multiyear, you'll see this -- so you'll see additional contribution years out or is this something in 2026 that subsides thereafter?

So we'll start to perform in 2026, but it will be over a 2- or 3-year period.

Our next question comes from the line of Jim Ricchiuti with Needham & Company.

I apologize if you gave this on the call, I had to jump off momentarily. But did you provide an order number? And Robert, any color as to how the book-to-bill was in the main segments of the business?

Not yet, Jim, but I will now. First, we -- in the fourth quarter, which is our most recent numbers that I can get, we think instrumentation as of whole would be -- is about 1. Digital imaging is above 1 or 1.06. Aerospace and defense is higher at 1.25. Engineered Systems is under 1, but that's a lumpy business, and we've had some big orders during the year. So total for Q4 is 1.07. And then for the full year, if you take everything for the full year, it's about 1.08. So we feel very comfortable that in all of our segments, we're either at 1 or better than 1.

Got it. What were the full year sales from the unmanned business again? If you provided it, I apologize. And I'm wondering how you're thinking about the growth in the total unmanned business in 2026, just given the pipeline?

In -- yes, in 2025, I would say our unmanned businesses combined, all combined are about $500 million. We think that will be a little higher in '26, maybe 10% of our overall revenue.

Our next question comes from the line of Jonathan Siegmann with Stifel.

And maybe just following up on autonomous and unmanned. The record underwater vehicle sales, can you talk a bit more about the drivers? Last year's reconciliation bill had significant funding increases in this area? And just how relevant is this to your business? And are you seeing any benefit on it?

Yes. As you know, we have -- in the underwater vehicle, where we have both manned and unmanned. In the manned vehicles, we are the sole supplier to the Navy Seals, and we not only have provided all the vehicles, but there's continuous revenue from parts and maintenance. The new stuff that we're doing goes to a whole range of subsea products. Some of them have to do with infrastructure, anti-submarine warfare and some of them have to do with just observations and measurements. For example, our glider are deployed in front of large naval operations to measure temperature and density in salinity, which all of these affect acoustic sensors and speeds.

So you have to compensate for those. We also have really good program wins, not just in the U.S. but especially in Europe for security of harbors. And we provide a whole range of underwater vehicles from very shallow ones that go only 1,000 meters down deep to very large vehicles that go as deep as 3,000 meters so -- or more. And so we have a whole suite of, I would say, I'm just looking at a picture, I think I see about 10 or 12 different underwater vehicles that we're selling not just in the U.S. These are autonomous vehicles, but also especially in Europe.

Great. And then on the loitering munitions, congratulations on that production award. Can we expect to hear anything about developments with the Army with your product?

Thank you. Well, there is a program called Lasso, you may be familiar with. It's a development program. And it hasn't all been announced, but it's coming up, and we're one of the participants in that program. But overall, I would say, there's not just the loitering munitions that we have introduced, but we're working on some new ones as well. So you'll hear more about that as we both develop our products as well as we win programs. I just want to make sure that when I was talking about unmanned on a question that Jim asked, our 2025 revenue on unmanned, both air, ground and underwater was about $500 million. We think that will grow about 10%. I said it'd be 10% of revenue in 2026, but it'd be probably closer to $550 million. Sorry, I needed to correct that. Go ahead, please.

Our next question comes from the line of Guy Hardwick with Barclays.

I just wonder how you guys feel about M&A, particularly maybe larger M&A versus share repurchases. Obviously, I saw you bought back $400 million of stock in Q4 and the stock price's big move upwards since then. And maybe that looks relatively less attractive than M&A, but I think a sense from a few months ago that you weren't particularly encouraged by M&A prices, except for maybe bolt-on deals. Maybe you can give us an update of the M&A picture and whether small versus large.

Sure, Guy. First, let me go back to the stock repurchases. We've been very conservative about stock repurchases. When you look at our 26-year history, we've all in bought maybe $1.2 billion and only at times where our stock was really -- we believe was really undervalued with respect to our peers and the market. So I would say the fourth quarter purchase was opportunistic as it was twice before in our history that we bought stock. Our primary driver has always been acquisitions. And you mentioned the larger acquisitions. First, we consistently like to buy what we call the string of pearls, small acquisitions that we can tuck in like the one we just announced, DD-Scientific in the U.K., would like to do that continuously regardless of whatever else happens.

On the larger acquisitions, we have a pretty good list of what's coming up, both from private equity people who bought a range of products and businesses and combined them. And we don't mind paying a reasonably good price for an acquisition as long as the quality of the mix of the businesses we're getting is there. Where we're hesitant -- and we mentioned before, where we're hesitant is when we're buying a fixer upper and we're bidding 15, 16x EBITDA, somebody else walks in and pays 21, 22x. We really don't think that's for us. But having said that, based on what we see, there's a whole range of acquisitions, what we call for us large would be, let's say, we pay $1 billion or thereabouts. There's a whole range of those that are coming, and we're more encouraged than we were in 2025.

Okay. And just -- that's very helpful. Just one quick modeling follow-up question. In Digital Imaging, what was the FX contribution in the quarter?

I can just talk to you about the general, the total contribution in -- for the year was about 40 basis points. It started negative in the year in Q1, picked up, ended in Q4 about 80 basis points and averaged out for the whole year at 40 basis points. So it was there, but it was not that significant.

Our next question comes from the line of Joe Giordano with TD Cowen.

I wanted to ask on memory. Obviously, prices are up a ton, and I believe there'd be applicability for you guys having to buy that across whether it's instrumentation or T&M and elements of digital imaging. So can you comment on what you're seeing there? How big a percentage of sales it is and how effective you've been able to pass that through to people?

Yes. Thanks, Joe. First, we don't see a risk, net risk in that area. Some of our businesses, as you said, specifically more geared towards test and measurement instrumentation do use memory and may have some constraints in supply cost inflation. Ironically, memory and storage suppliers are also reasonably large customers of our test and measurement instrumentation businesses. So if they spend incremental CapEx buy -- for proper buy to, call them, memories, then that's generally good for us because that's a higher margin contribution business for us. But coming back to what I summarized, net risk is not big.

That's good to hear. Curious -- I guess 2 more for me. One, can you just run us through the organic kind of by segment, what you're thinking for next year? And then I also like a bigger picture, do you think there's been talk from the government about restricting defense companies and what they can do with their balance sheets and how they spend their money. Do you see yourself -- I think I know your answer, but do you see yourself in that population of companies that would be potentially targeted there? And if no, does it make you want to do things that others can't because you have less restrictions?

Yes. Well, let me tell you, we've never been driven by what others do anyways. As I said, our preference is buying companies and investing in our businesses. But let me go back. Teledyne, as said, we've rarely bought our shares back. So $1.2 billion in share buybacks over a 26-year history is not a whole lot considering we generate that much cash in the last 2 years every year. Having said that, we've never paid a dividend. And we're more concerned about investing. If we can't buy companies, we're more inclined to invest in our businesses. For example, just last year, we increased our CapEx by 40%, and we increased our R&D spending by 10%. So if we can't find really good acquisitions, even though last year was a good year for acquisitions, we invest in CapEx and R&D, and we're going to do that moving forward. There are pockets of our businesses that are performing really well and like where we supply cooled and uncooled infrared sensors and cameras to our various customers will increase more CapEx there.

Having said all of that, we've always been a commercial company, albeit we do have significant defense businesses, can go as high as 30%. But overall, also most of our defense businesses are fixed price businesses. I don't think it really applies to us. But nevertheless, since we don't buy a lot of our own stock, I don't think I'm so concerned about that. Now you asked about revenue. Organic, we believe organic revenue growth, I mentioned this before, but I'll do it very quickly. In Digital Imaging, it'd be about 3.5%. Overall, it'd be around that 3.5%, 3.6%. Aerospace and defense may be a little higher. Instruments would be around that. But we like the fact that it's around 3.5% to 4% in our various businesses. We don't expect any of our businesses to decline.

Our next question comes from the line of Alex Preston with Bank of America.

I just wanted to touch on 737. It seems like we got some more certainty on rate increases at the end of '25. Just wondering if there's been any change to your thinking on destocking into '26.

I'll ask George to answer it. I don't think so. But George?

Yes, I would say no major change. And I would just keep in mind that our overall Commercial Aviation business is only about 5% of the business and only about 1/3 of our aviation business is OEM and only a portion of that is Boeing. So no major change there for us.

Our next question comes from the line of Rob Jamieson with Vertical Research Partners.

Guys, nice quarter. Just quickly on test and measurement. Just can you go through some of the demand drivers there? Was that mostly the Ethernet test again that was driving the strength? And did you see any kind of improvements in some of the other end markets that you serve that might be related to like auto or anything like that, that you could provide insight on?

Yes. I would say, Rob, in the immediate future, our oscilloscopes, high-end specialty oscilloscopes are doing well and will continue to do so, both from the auto market as well as from motor control and power control in the larger data centers. And also, we have product, a small company that generates Ethernet traffic capability, so we can simulate that. And basically, what's happened to the Ethernet, it's moving to the terabit range, 1.6 terabit to be accurate. And we do have products in that domain. In some of our protocol analyzer business, we expect a little slower start in '26, primarily because that business is very dependent on where the large suppliers issue or produce chips. Before they produce their chips, they use our protocol analyzers, the engineers to develop the chips. But until they issue the chips, the users don't buy our protocol analyzers. So there's a little gap in that domain with the 2 major producers of chips having delayed things. But as we move into the year, that will even itself out. So that's the best answer I can give you.

No, that's helpful. And then just looking at some of the legacy machine vision and CMOS X-ray businesses in digital imaging. Are there any -- as you see the machine vision business starting to recover and you don't expect that to be negative this year, are there any particular end markets or exposures there where you'd expect the most upside? And then I guess on the X-ray CMOS sensors business, just some of the commentary that we've seen recently from DENTSPLY that they're expecting recovering sales in the second half of '26. Just kind of aligned with -- I know you talked about seasonality in the second half, but would you continue to expect like a sequential improvement for the medical portions within DI as we move through 2026?

I'll ask George to pick that up, please. But in general, I'd say we're going to do okay in the machine vision domain because of mask and semiconductor inspection, et cetera. I'll let the X-ray for George to comment on.

Yes. I would also just add on the machine vision side, we saw good single-digit growth in both machine vision cameras and machine vision sensors in Q4. And we expect in that overall industrial and scientific vision to be up kind of low single digits in 2026. So we were certainly seeing the recovery there. And as Robert mentioned, that's areas like semiconductor mask and wafer inspection and the inspection of electronic components. On the X-ray side, really, we're kind of anticipating flat year-over-year in 2026. We have not built in a recovery in that business in 2026.

Ladies and gentlemen, that concludes our question-and-answer session. I'll turn the floor back to management for final comments.

Thank you very much, operator. I'll now ask Jason to conclude our conference call.

Thanks, Robert. And again, thanks, everyone, for joining us today. And of course, if you have follow-up questions, my number is on the earnings release and all our news releases are available on our website. So thanks, everyone. Talk to you later. Bye-bye.

Thank you. This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation.

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

Thank you, and good morning, everyone. This is Jason VanWees, Vice Chairman, and I'd like to welcome everyone to Teledyne's Third quarter 2025 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'll ask for 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, risks 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, via webcast and dial-in will be available for approximately one month. Here is Robert.

Good morning, everyone, and welcome to our conference call. First, I must say, I'm very pleased to announce that we had record -- all-time record quarterly sales, non-GAAP earnings per share and free cash flow. Sales increased 6.7% from last year. Non-GAAP earnings increased 9.2% and free cash flow was a record $314 million. Furthermore, total company new orders were also a quarterly record due in part to continued backlog growth at Teledyne [ fleet ].

Given our strong third quarter performance, recovering commercial short-cycle businesses, and also robust backlog growth, we're raising our full year earnings outlook at both the bottom and the top of the forecasted range. Likewise, last quarter, we expected 2025 full-year sales to be about $6.03 billion. But now we believe we may achieve sales of $6.06 billion.

Our defense-related businesses, including our new acquisitions are performing extremely well. And we continue to pursue a number of significant contract opportunities not yet formally awarded or reflected in our backlog. However, given the current U.S. government shutdown, we had a bit measured on expectations for new contract awards or acceptance of allowance of shipments that we need export licenses for. And of course, cash collections from the government will be somewhat delayed.

The prior shutdown in December 2018 and early 2019 lasted about 35 days. I believe today, we're in the 22nd or 23rd day. In that -- at that time, between 2018 and '19, we didn't really experience any significant impact from the short term. And we similarly don't expect to have much impact, except if the shutdown were to stretch for months and god forbid, til the end of the year. It may affect about -- if it goes that long, it may affect about 25% of our sales somewhat, which are related to the government but any temporary impact to commercial shares for which we may be dependent on U.S. government exports may be somewhat affected. Overall, I do not think this is going to affect Teledyne significantly.

Also, you may have noted that China has designated Teledyne FLIR LLC as an unreliable entity. While customers in China represent only 4% of our sales in 2024, '25 [indiscernible] sales by Teledyne FLIR LLC were less than 0.4%. So we don't expect much effect from there. Actually Teledyne Brown engineering was added to the same list in December of 2024, but it's sales to customers in China are zero.

Finally, I must note, despite spending $770 million in cash year-to-date on acquisitions, our current balance sheet is the strongest since prior to the FLIR acquisition in 2021. We also expect to close a small transponder tech carve-out from [indiscernible] very soon. having recently received approval from the government of Sweden. And furthermore, we continue to pursue a number of other acquisition activities.

George will now briefly comment on the performance of our business segments.

Thank you, Robert. In the Digital Imaging segment, third quarter sales increased 2.2%. Teledyne FLIR sales continued to grow, but this was also the first quarter in two years in which sales from our legacy Delta e2v businesses collectively increased modestly. For example, Sales of our sensors and cameras for industrial and scientific vision systems increased year-over-year and accelerated for the second quarter in a row. However, this was partially offset by ongoing weakness in sales of X-ray detectors especially for the more consumer discretionary dental market. Both the overall Teledyne FLIR defense and industrial businesses increased with sales of unmanned systems, counter unmanned air systems, and infrared components and subsystems being the strongest performers.

Third quarter digital imaging book-to-bill was 1.12x. And as Robert mentioned, we continue to pursue a number of opportunities not yet awarded. These include, for example, unmanned aerial systems opportunities, such as a full rate production order for our Rogue 1 loitering munition under the Marine Corps Organic Precision Fire Light or OPFL program, as well as a potential new award under the U.S. Army's Low Altitude Stocking and Strike Ordinance or LASSO program, for which we are competing. There also remains several unawarded contracts, both domestic and international for FLIR's airborne, land and maritime surveillance systems.

Non-GAAP operating margin decreased 92 basis points, primarily due to greater cost reduction expenses, which we did not exclude from non-GAAP margins as well as 90 basis points of increased R&D expense.

In the Instrumentation segment, which consists of our marine, environmental and test and measurement businesses, third quarter total sales increased 3.9% versus last year. Overall sales of marine instruments increased 3.2% due to strong sales of interconnect used in offshore energy production and for U.S., Virginia and Columbia class submarines. However, these were partially offset by difficult comparisons in offshore energy exploration and some reduced sales of products for hydrography and Oceanographic Research.

Sales of environmental instruments increased nicely at 7.5%. This primarily resulted from higher sales for process gas safety and ambient air and emissions monitoring instrumentation due in part to demand for new natural gas-fired power plants and other energy infrastructure.

Sales of electronic test and measurement systems, which include oscilloscopes, protocol analyzers and Ethernet traffic generators increased modestly, both sequentially and year-over-year. In particular, sales of high bandwidth oscilloscopes used by customers developing or testing high-speed networking devices increased nicely but were partially offset by sales to customers in the automotive and consumer electronics markets. Instrumentation operating margin in the third quarter decreased slightly on a tough comparison. However, we continue to expect a slight increase for full year 2025.

In the Aerospace and Defense Electronics segment, third quarter sales increased 37.6%, primarily driven by acquisitions and organic growth of defense electronics products. Commercial aerospace aftermarket sales increased and OEM orders for 2026 deliveries were strong in the quarter, but OEM-related shipments declined from last year given some continuing customer destocking. Overall, segment operating profit increased year-over-year, but GAAP and non-GAAP segment margins decreased slightly year-over-year due to comparatively lower current margins at recently acquired businesses. Nevertheless, overall margin increased sequentially for the second consecutive quarter since closing the acquisitions.

For the Engineered Systems segment, third quarter revenue decreased 8.1% given an especially tough comparison with last year. However, despite the lower revenue and also a tough comparison, operating margin increased 30 basis points from last year.

I will now pass the call back to Robert.

Thank you, George. Let me just conclude by saying there are always going to be near-term challenges to overcome and we have a strong history of doing that. We have a portfolio that varies from market to market. And no one market in our portfolio goes down at once. At the same time, no one market goes up all at once. Nevertheless, our strong portfolio always protects us from market turbulence.

The government shutdown, of course, is a problem for everybody. And there is a market volatility that we're dealing with. But we're resilient, we're well positioned and we have a number of very strong growing markets with tangible critical products and solutions, as George mentioned.

For example, in our unmanned air and subsea system as well as our space-based electronics and imaging sensors for both the U.S. government and our NATO, we're very strongly positioned. The ongoing need for new energy sources and new or renewed power generation are positively impacting our instrumentation businesses. And the development and inspection of advanced semiconductors utilize our electronic test and measurement instrumentation and our digital imaging solution.

Finally, regarding M&A activities, while we have a very strong balance sheet, and we have -- as I mentioned before, we have about $1 billion in free cash flow. We're going to be aggressive, but we're also going to be prudent not to overpay for things that are trading much higher than our own multiple.

Let me just conclude with one remark. First, I want to congratulate George Bobb for being added to our Board last night, but I also want to note that I our plan to be the Executive Chairman of the company for at least another three years.

With that, I'll 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 2025 outlook.

In the third quarter, cash flow from operating activities was $343.1 million compared with $249.8 million in 2024. Free cash flow, that is cash flow from operating activities less capital expenditures, was $313.9 million in the third quarter of 2025, a record for Teledyne compared with $228.7 million in 2024. Cash flow increased year-over-year in the third quarter, primarily due to favorable accounts receivable collections in the third quarter of 2025 compared with 2024. Capital expenditures were $29.2 million in the third quarter of 2025 compared with $21.1 million in 2024. Depreciation and amortization expense was $84.5 million in the third quarter of 2025 compared with $76.9 million in 2024. We ended the quarter with $2.0 billion of net debt. That is approximately $2.53 billion of debt less cash of $528.6 million.

Now turning to our outlook. Management currently believes that GAAP earnings per share in the fourth quarter of 2025 be in the range of $4.76 to $4.98 per share with non-GAAP earnings per share in the range of $5.73 to $5.88. And for the full year 2025, we believe that GAAP earnings per share will be in the range of $17.83 to $18.05 and non-GAAP earnings per share in the range of $21.45 to $21.60.

I'll now pass the call back to Robert.

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.

[Operator Instructions] And our first question is from the line of Andrew Buscaglia with BNP Paribas.

So last quarter, there was some uncertainty around some of the strong growth you saw and whether that was pulled forward or not. And it seems -- can you maybe run through several segments where -- 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 resume that strong. But in your mind, how did things progress?

Well, I think overall, with acquisitions, we had a 6.7% growth across our portfolio. I think what we're looking at is various businesses 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 we -- that are used in drug development. Overall, I'd say we also did have some pull-ins into Q2 maybe a little more in test and measurement than other areas. But going back to some of the other things that we mentioned before, FLIR's growth was 3% organic. We also had stronger growth in some of our commercial FLIR businesses and our unmanned systems which are both air, ground and systems grew 10%. So there's a variation in our portfolio.

And 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.

Okay. And 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. So maybe is that one area that grew last quarter nicely, but it seems like sustained growth from here?

Well, I'll answer part of it 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, the also 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. But George has really taken some very strong actions to take cost out of the part of that business that has slowed down over the last two years. And 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, do you want to add anything?

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 [indiscernible] and wafer inspection, inspection of electronic components. And we also saw an increase year-over-year in our machine vision sensors business, where we make sensors for other OEMs.

The next question is from the line of Greg Konrad with 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 talked about a 24% target. How do you think about the margin recovery into Q4 and maybe into next year for digital imaging?

I think the margins between '23 and '24 are at least in Q4, are 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. So 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 2040 is achievable.

And then maybe just to put a finer point on the revenues. So you raised the full year outlook by 0.5% to 6.06%. Is that all organic? And then it looks like maybe there's a $20 million step-up sequentially in Q4. Can you maybe talk about seasonality into the final quarter of the year and maybe which segments you expect to see a step up versus maybe where there's a step down tied to just typical seasonality?

Well, first, 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 and then another $10 million comes from our acquisition from Qioptiq. So it's a $30 million increase. It's not a big number. But there's also a little conservatism building to that, of course.

Our next question is from the line of Jim Ricchiuti with Needham & Company.

Just -- 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 -- can you give us -- provide a book-to-bill for the various three major segments?

Sure. Happy to do that. Yes, the book-to-bill ratio I gave you was for Digital Imaging, 1.12. In the Instrumentation segment, we had a book-to-bill overall of 0.9, a little higher in T&M, for example, 0.98, environmental closer to 0.95, Marine closer to 0.8, about 0.8. But 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. And then in aerospace and defense electronics, again, longer cycle business, lumpiness in some larger orders, book-to-bill ratio was 0.84. And Engineered Systems was over 2x in the quarter. But again, that's a long-cycle business. And so we tend to look at the longer-term view there, not one quarter at a time. Yes. And the overall book-to-bill ratio, 1.09.

Terrific. And you alluded to in the earnings announcement, the potential for significant contract opportunities. And 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 at the time line just given the government shutdown.

Yes. I wouldn't want to opine too much on the timeline of the government shutdown. What I would say is...

Not about the shutdown just -- sorry, just as it relates to the timeline for these contracts, sorry.

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 foray production order there. Again, we think that would be relatively near term, hopefully, in Q4, depending on the timing of the government operations. And that would be in the range of tens of millions of dollars. The last program that I mentioned, the U.S. Army program. That initial order, again, hopefully, near term, would be initially more kind of millions of dollars and grow from there. And overall, what I would say is unmanned systems, things like our Black Hornet drone, our sales into counter-UAS systems, both of our sales and where we're selling to other OEMs, integrated surveillance solutions for both border protection and defense, et cetera. So I think those are the strongest areas. Also, we continue to see a lot of strength in our submarine business, where we provide interconnect on the Virginia and Columbia class submarines.

Our next question comes from the line of Jordan Lyonnais with Bank of America.

On the 737 rate increase step up, how are you guys thinking about that into 4Q and next year given the comments on some destocking?

Yes, this is George. So what I would say there is, we expect that destocking really to continue through most of next year. So 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. So 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.

Okay. Got it. And then on defense, do you guys have any concerns about critical minerals availability, specifically for the sensor products for FLIR?

We have a little exposure there. On the other hand, we've been very diligent to cover that exposure. So overall, I don't think that's going to affect us in the short term.

The next question is from the line of Damian Karas with UBS.

You've mentioned -- yes, 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?

Yes. 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 -- so all in all, and that's probably because the 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. So we're positive about that.

It's that -- when you look at the total imaging businesses, initially right after we acquired FLIR, everybody was worried about FLIR, FLIR , FLIR. While we solve that problem, FLIR is doing great, FLIR's defense is just hitting every milestone we expect. And now DALSA, e2v is stabilized. So we're very positive about our Digital Imaging segment altogether.

That's really helpful. And Robert, I just was wondering if you could maybe give us your perspective on the macro outlook. Have -- are there any changes to your view since your last update. And I know it's early to be giving guidance for 2026. But just seeing where our trends are -- and if you were to ballpark today, where do you suspect kind of growth could line up in 2026 if the current conditions kind of remain?

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, [indiscernible] Denmark. Those guys are under a lot of pressure when we talk to our folks, they have to increase their defense spending.

So macro level, if I look at that with all of our people [ dead ] and all the need for in-country production, I see very positive trends for us in Europe. Today, we probably produce something close to $0.5 billion in revenue in European defense, and I expect that to increase as we go forward.

Coming back to the -- just 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 and we're very positive about that. So 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.

And then I have to say our small drones, what we call our nano drones, by the end of next year, we would have sold $0.5 billion of these nano drones that you can hold in your hand, we probably have the strongest position there. So between all of the above, I think we're going to do fine in the 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. And we do have long-term opportunities in power generation.

So all in all, '26 should be a good year for us, barring any unforeseen catastrophies across the world, which I don't expect. And we're just doing our plans for '26 and we're very positively inclined.

Our next question is from the line of Kristine Liwag with Morgan Stanley.

Robert, that was really helpful color on what you provided with European defense. And I just wanted to clarify a few things. When you said $0.5 billion, is that encompassing all of your defense exposure to Europe? Or is that specifically only on the drone exposure that you were discussing? And then 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 drone 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? And how do you look at the opportunity set for those kind of different go-to-market?

Okay. Kristine, let me start from the beginning. The $0.5 billion applies to two things. First, our total military sales this year in Europe. Also $0.5 billion applies, if you add everything that we saw all the nano drones that we've sold would be selling through next year, that's another $0.5 billion. So there's kind of only [ 60 or 70 ] without the first $0.5 billion is the nano drones. So let's put that to one side.

What we're doing is we bought prime, prime defense as well as soft. Prime For example, in loitering munitions, we're prime, in nano drones, we're prime, in some of our counter UAS systems, we have partners. And so 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 the defense products. And we have presence everywhere. So 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. So that's how we go to market. And where necessary, we established new entities to be able to operate from.

Next question is from the line of Guy Hardwick with Barclays.

Just a little -- I want to ask a little bit more about the digital imaging margins. So I think based on your comments that the reason for perhaps digital imaging margin be lower than expectations being R&D and also the severance costs. Obviously, you get the benefit of severance costs, particularly next year. But is R&D a permanent step-up effectively funded by the reduction in the cost base? And kind of looking a bit further forward for 2026, as a follow-up to Damian's question about the top line. What kind of -- what should we be aware of in terms of margin mix, digital imaging in 2026? Is it FLIR versus medical versus industrial? What kind of margin dynamics could we potentially expect?

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 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. And frankly, that's worth for us because some of our sensors, whether they are for [indiscernible] systems or for infrared systems are doing very well, our in 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 producers it [ thereon ]. So the investment in R&D is very specific or specific -- cut across all of our products.

On the margin improvement, for next year. I'll let George talk a little more about that.

Yes. What I would say is, first, as I mentioned before, obviously, we've taken the costs out. We're seeing the recovery in the short-cycle business. So it's early really to talk about really what the mix is going to look like next year, what 2026 numbers are specifically going to look like. But 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. So 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.

Our next question is from the line of Jonathan Siegmann with Stifel.

So you've commented already unmanned. Demand signals globally are very strong. but there also seems to be substantial aspirations by customers of getting these capabilities at much lower cost. So you have great market positions in sensors and cameras, and you've already highlighted the prime opportunities that you have. But 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 and maybe comment on, is there opportunities to invest more capital in this area?

Well, thank you very much. That's a really good question that 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. So 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. So for example, George mentioned and I mentioned our what we call the Rogue 1, which is quadcopter. It's the lightest weight of the competition. It only weighs about 10 pounds and as you can imagine, as we decreased the size, the cost goes down. So 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. And so you may -- in defeating an armored vehicle, you may have to have 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. So I don't know. It's a given. The whole experience in Ukraine, which we've had as far as 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. So cost is important, but I think accuracy and weight are going to be just as important.

The next question is from the line of Joe Giordano with TD Cowen.

Can you hear me?

Yes, sure, Joe.

Yes. Okay. Great. Yes. So for unmanned, we've been talking about $450 million across all on [indiscernible]. It feels like kind of for a while, it feels like a little bit of a dated number. Maybe -- 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 3, 4 years out, like is that -- what can that $450 million if things break correctly for you really become -- how material can that business really get?

Yes. I think we're around $500 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 under water. As you may know, that we're probably unique as a company where we have products for air, unmanned, ground unmanned and underwater unmanned. And I'll let George talk a little bit about the underwater domain because that's our growth domain right now, and we're really excited about that. So 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, but grow it will.

Yes. I would add on the subsea unmanned side, we have both our subsea colliders, which are kind of long duration, long endurance can stay on station for a long time. Useful, as you can imagine, in areas like antisubmarine warfare and other areas. But 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, antisubmarine warfare. So yes, 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 vehicle vehicles, given needs in the Black Sea, Baltic Sea and Asia Pacific.

That makes sense. And just a follow-up. 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?

For this year, I would say probably most of it is organic but 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. But as you look at our products, if you look at across all of our acquisitions, after a few years, the margins improved significantly. And so they kind of become the standards that we have for instruments, defense otherwise. So the margins this contribution from acquisitions are relatively light but they'll improve next year.

Thank you. At this time, we've reached the end of our question-and-answer session, and I'll hand the floor back to management for closing comments.

Thank you, operator. I'll now ask Jason to conclude our conference call.

Thanks, Robert. And again, thanks, everyone, for joining us this morning. Of course, if you have follow up questions, please feel free to call me, and my number is on the earnings release. And all our earnings releases and a replay of this call via webcast is available on our website.

Operator, if you could please give the replay information, that would be ideal. And again, thanks, everyone. Bye-bye.

Thank you. This concludes today's conference. You may disconnect your lines at this time. We thank you for your participation. Have a wonderful day.

Welcome to Teledyne's Second Quarter Earnings Call. Here's our first speaker, Mr. Jason VanWees. Please go ahead.

Thank you, and good morning, everyone. This is Jason VanWees, Vice Chairman. I'd like to welcome everyone to Teledyne's second quarter on 2025 conference 51 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 answer your questions. But of course, before we get started, our attorneys have reminded me to tell you that 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, and of course, actual results may differ materially. In order to avoid potential selective disclosures to call is simultaneously being webcast and a replay, both via web cat and dial-in will be available for approximately 1 month. Here's Robert.

Thank you, Jason, and good morning, everyone, and thank you for joining our call. Today, we reported record quarterly sales. We've achieved greatest total for an organic sales growth in almost 3 years. Second quarter sales increased 10.2%, half organic an acquisitions and accelerated for 3 quarters in a row.

Sales also increased organically in every segment. Non-GAAP earnings per share increased 13.5% from last year and were also a record for any second quarter. Finally, Orders exceeded sales for the seventh consecutive quarter. Our Energy & Defense businesses continue to perform very well. Due to market strength but also our specific portfolio of technologies serving growing sectors such as unmanned air and subsea systems, space-based sensors, NATO defence spending and offshore energy productions. Sales from our shorter cycle environmental and test and measurement instrumentation businesses also increased single digits, mid-single digits. And this is about the greatest level in a few years. Organic sales growth in Digital Imaging was also the most in 3 years, primarily resulting from healthy growth in our Teledyne flares defense and industrial businesses. Nevertheless, we're being a little cautious worrying about whether [indiscernible] second quarter strength in our short-cycle businesses resulted from accelerated demand in advance of client U.S. trade policy announcements in the first quarter. Consequently, we're currently forecasting that total sales in the third quarter will remain essentially flat with the second quarter.

Despite spending $770 million year-to-date on acquisitions, our current debt to leverage ratio debt-to-EBITDA is 1.6% with only fixed rate debt and approximately $1.17 billion, out of $1.2 billion available in our credit facility. While we're pursuing a number of acquisitions, mostly smaller ones at this time, we will consider stock repurchases where we feel larger acquisitions are too pricey, as we found in the second quarter and where Teledyne offers the best value. Therefore, our Board of Directors increased our stock repurchase authorization from $896 million to $2 billion. And we will [indiscernible] that, as I said before, if appropriate. George will now briefly comment on the performance of our [indiscernible] sales.

Thank you, Robert. In the Digital Imaging segment, second quarter sales increased 4.3%, which was the greatest year-over-year growth in 3 years. The performance largely reflected record growth of Teledyne FLIR where the defense and industrial businesses increased nicely, largely driven driven by international defense sales as well as complete unmanned air systems and commercial infrared components and subsystems for the overall unmanned market. We had another quarter of strong orders with a total digital imaging book-to-bill of 1.1x, but it was especially nice to see booking and subsea defense sales. Sales environmental [indiscernible] process gas safety and emissions monitoring and [indiscernible].

Sales of electronic test and measurement systems, which include ciloscopes, protocol analyzers and Ethernet traffic generators increased 5.5% year-over-year. Instrumentation operating margin in the second quarter increased 149 basis points to 27.6% and 134 basis points on a non-GAAP basis to 28.5%.

In the Aerospace and Defense Electronics segment, second quarter sales increased 36.2% primarily driven by acquisitions and organic growth of defense electronics products. While commercial aerospace aftermarket sales increased, this was offset by or restrictions. Overall segment operating profit increased lower current margins at our recently acquired businesses. For the Engineered Systems segment, second quarter revenue increased 3.3% and segment operating profit increased 395 basis points due in part to a relatively easy comparison with last year but also strong execution on a number of government programs.

I will now pass the call back to Robert.

Thank you, George. [indiscernible], I want to thank everyone at Teledyne for delivering a double-digit top and bottom line growth. Also we're very optimistic about their long-term outlook. Our growth in our long-cycle business portfolio. Having said that, we remain very optimistic about the future given our portfolio and where the markets in our domain are moving.

With that, I want to turn the call to Steve.

Thank you, Rob. And good morning. I will first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our third quarter and full year 2025 outlook. In the second quarter, cash flow from operating activities was $226.6 million compared with $318.7 million in 2024. Free cash flow that is cash flow from operating activities less capital expenditures was $196.3 million in the second quarter of 2025 compared with $301 million in 2024.

Cash flow decreased year-over-year in the second quarter, primarily due to higher income tax payments in the second quarter of 2025 compared with 2024. Capital expenditures were $30.3 million in the second quarter of 2025 compared with $17.7 million in 2024. Depreciation and amortization expense was $86.5 million in the second quarter of 2025 compared with $77.8 million in [indiscernible] net debt, that is approximately [ $2.62 ] billion of debt less cash of $310.9 million. Now turning to our outlook. Management currently believes that GAAP earnings per share in the third quarter of 2025 will be in the range of $4.39 to $4.54 per share. with non-GAAP earnings per share in the range of $5.35 to $5.45. And for the full year, 2025, we believe that GAAP earnings per share will be in the range of $17.59 and to $17.97 with non-GAAP earnings per share in the range of $21.20 to $21.50.

I will now pass the call back to Robert.

Thank you, Steve. We'd now like to take your questions. Kerry, if you're ready to proceed with the question and answer, please go ahead. .

[Operator Instructions] And our first question will come from Andrew Buscaglia with BNP Paribas Asset Management.

I just wanted to touch on your guidance for Q3 and some of the caution you're citing. Where exactly is this pull forward within your business segments? And can you comment on, are you seeing this more on -- with some of the short-cycle businesses versus long cycle? If you could add that to your comments.

Yes. I think, Andrew, the comment is primarily about short-cycle businesses because the longer cycle businesses, we have reasonably good visibility as to where things are and where our programs are short-cycle businesses, especially things like instruments. We get like sometimes 2 weeks, 2 weeks to. And we kind of are a little cautious. We worried that maybe $15 million to $20 million, mostly in that domain may have been proved in. Now we're not sure, but listening to our folks, that seems to be maybe the case. There's a little of that in our longer cycle businesses like FleerDefense, for example. .

Okay. That's helpful. Can you comment on order activity in some of these longer-cycle businesses. I know you guys had a press release out supporting U.S. stance on dominance and wondering if you've seen an order uptick within unmanned systems or the components you supply to them?

Yes. I think specifically, if you look at our own [indiscernible] systems FLIR and generally in FLIR, first quarter, we saw book to below 1.17, this quarter, just a little over 1. Even Digital Imaging, excluding FLIR, recognizing that the comps are easier, we saw uptick on orders book-to-bill has 1.2. In the other businesses, lumpy businesses like Engineered Systems is way over 1, but we know that's lumpy. Overall, I think our book-to-bill has been healthy. And as we mentioned earlier, this is like it's about 1.1 across all of our portfolio and its seventh consecutive quarter that we've seen that.

So looking at that, you have to be positive. And I am. But we're always a little cautious. Maybe too cautious. Let me leave it at that.

Next question comes from Damian Karas with UBS.

And better to be safe and cautious then sorry, Robert. But I do want to ask you -- so I just want to kind of maybe push you a little bit on digital imaging. The book-to-bill is strong. I think this is the second quarter of 1.1 book-to-bill or higher. But yet you still really only have, I think, modest organic sales growth factored into the second half. So could you just help us reconcile why we wouldn't see more of a meaningful pickup in sales just based on those bookings?

Yes. It's a kind of a story of 2 chapters. Flare is strong. Even when some of the short-cycle businesses like in cameras, et cetera, in [indiscernible] to go down. Our industrial in the FLIR, our -- [indiscernible] some of the problems that business has been on a -- it's been down. And while we're getting a little order pickup, it is comp when you go to book-to-bill and the business that's done. On the other hand, George and the managers in the business have been able to take cost out reorganized where necessary. As George mentioned, we took a little hit in Q2 because we can't our cost expenses, cost out expenses in our non-GAAP. So that business is stabilizing. Again, we think some of our longer cycle businesses that we see growing are going to be more like Q4 and maybe early [indiscernible] we're just going to be fine. .

Okay. Fair enough. Really appreciate that. And then my second question. The aerospace and defense margins did come in quite nicely. Would you maybe be able to elaborate a little bit, was there any pricing or business mix factors, productivity? Maybe just give us a sense for what drove that margin strength? And is there anything that we should be bearing in mind the rest of this year as we update our models?

Yes. Damian, I'm going to let George pick some of this up, but in general, what happens is if you look at the margins, we -- when we make acquisitions, the margins go down because our acquired businesses by and large, have lower margins. And if you look at Q1, Q2, Q3, Q4, our margins improved in those acquired businesses. if you exclude the acquired businesses, yes, our margins are very healthy, excellent execution. George, do you want to comment on that?

Yes. I think I would just say in the legacy defense electronics businesses in the aerospace business, margins continue to be strong. In the new acquisitions, we acquired 2 companies here in the last several months, MicroPact and Key Optic had a good uptick in Q1 and the margins in MicroPact. And in both of those acquisitions, we're doing what we always do, which is work on improving the margins as we integrate those companies. .

Yes, Damian, just to kind of put things in perspective, I think my benefit our shareholders might benefit from this analysis. If you -- for a second, if you exclude FLIR, we spent $1.9 billion in cash acquiring businesses that are of some significant, 47 of them. What we paid for them at the time we acquired them was 9x EBITDA. So that is really just simply improved margins. even when you include FLIR, which is when we've only had in 3 years, even there, what we paid when we acquired and what it is today, there's about 100 basis point improvement. Having said that, that's really the operating book that we have, acquire businesses don't overpay focus on improving margins, do you already 20, anything else you have to do and go from there, which you look at our overall businesses, no matter which year, how many, which segment is the same story.

Our next question comes from Greg Konrad with Jefferies.

Maybe just to follow up on your guidance that Q3 would look similar from a top line perspective relative to Q2. I mean I know what you did with the EPS guidance, but has there been any change to the revenue guidance you gave on the last call just as we think about kind of expectations for Q4? .

Well, let me stay with Q3 for a second, if I may, Greg. The way we're looking at it is we're looking at getting some uptick from acquired businesses in maybe about 5%, similar to Q2 and very little organic. And again, the reason we're doing that is we're just kind of looking at our short-cycle businesses, it's almost impossible to predict where they're going to end up. Now we have raised overall. We've raised our guidance for the year, of course, primarily because Q2 came in higher. But even with a flat Q3, we've raised our guidance for the year in terms of revenue by almost $20-plus million. And given our conservative nature for us, that's a hefty increase. So we think for the year, we'll have probably about $6. 30 billion, maybe a little more. We have growth of 6.3%. We're assuming most of that 4% plus 4.2% will come from acquisitions, maybe 2-plus percent from organic. But then we are also looking at FX effects and other things. So it's there's a lot of moving parts, but that's the best we can do at this time.

I appreciate that. And then maybe just to dig into industrial and scientific vision a bit. I think you called out the book-to-bill was 1.2 in the quarter. And I appreciate some of the short-cycle commentary. But any additional color in kind of what you're seeing in that business, either from an end market perspective and how you're kind of thinking about the outlook for the [indiscernible]

Sure. Why don't I ask George to address that one too.

Yes, sure. So in that part of the business, the industrial and scientific vision, what we saw in Q2 is the machine vision cameras business had year-over-year growth in applications like semiconductor mask and wafer inspection. The machine vision sensors business was down year-over-year on sales but had an order uptick year-over-year. So both machines and cameras, machine vision sensors had increases in orders year-over-year. So as you mentioned, overall book-to-bill was 1.2 million -- we still think that business for the full year is relatively flat. But [indiscernible]

And then as we mentioned before, George and even before yours, we took cost out. And so we've kind of stabilized. We feel we've stabilized that business to a revenue stream that is lower than it used to be. So now we can focus on improving the margins. as we've done in other businesses, George, you did that in Marina as an example.

That's right. I would say we run the same playbook always, right, which is we focus on getting the cost structure right and growing from there. .

And then maybe just sneak in 1 last one. I mean you gave a lot of positive defense commentary. I mean if we think across the businesses, can you give some color on what overall defense was up and how maybe international contributed to that just given some of the positive commentary.

Yes. There are 2 parts. And I think that's a really relevant question at this point. We have U.S. government defense and we have foreign government business. The U.S. government defense improved 12.5% year-over-year. And it was primarily organic primarily. Foreign government also improved and over 15%. And there's a very good reason for that. Our defense portfolio is spread across different countries and different products. We have a very strong presence in Europe. For example, our very well-known nanodromes, are not made in the U.S. They're made in Europe. On the other hand, some of our other zones are made in Canada and some are made in the U.S. So when we look at growth, we look at Europe where defense spending is increasing, we have a nice footprint of manufacturing facilities across Europe.

And as you well know, in-country production is the in-sourcing is a key. So if you already have an existing footprint, that's really good. The other thing is that everybody is talking about unmanned. Yes. Well, unmanned systems are not new to Teledyne. But we built our first unmanned drones during the Vietnam or we built 5,000,000 fire beds that were used as targets and intelligence gathering. Unfortunately, when we got our divorce from Allegheny, they sold our best drone business, which was the Global Hawk, they sold it for $155 million to Northshore. And so that business just went away, and it's only come back because of FLIR. But FLIR has a very strong portfolio of drones, both very small nano drones and others. But the other part that we are enjoying is that in the first 20 years of our history, new history, we got unmanned vehicles.

We bought 21 companies underwater companies, marine companies, and we have underwater unmanned vehicles that are equal to as many as we sell that are above water. And finally, the issue on drones is low cost. And the lower the cost, the better and we are fortunate because of fees that we can supply sensors, IR sensors, both for our drones as well as other people's tons. And we're happy to sell people sensors. That's a big market for us. So the combination of being the company in infrared, having infrared and visible sensors, a packaging game for our drones and selling them for other people's drones is put us in a nice place in this environment. I know that's a very long answer to a short question. I think the context, these important drones are nothing new to Teledyne.

Moving on to our next question, Noah Poponak with Goldman Sachs.

Do you guys have growth in orders versus growth in revenue or a book-to-bill for the first half of the year in what you would call broadly defined short cycle or in machine vision and instrumentation.

Yes. I think in instrumentation, which would be short cycle, except for parts of marine now that are defense-related, which are underwater vehicles again. I think it's just above 1 because in Q1, it was 1.04, in Q2, it's 0.97. So average is a little over 1%, let's say, 1%.

And that doesn't change much across the businesses. Environmentally, is a little healthier surprisingly. T&M is healthy, but still just below 1, and Marine is obviously above one. On Digital Imaging, as George mentioned and I mentioned, we're getting -- we're kind of getting a little bit of an uptick in our dose took some cost out and we had lower revenue. But Q1 was 1.02, Q2 is 1.23. We're cognizant of the fact that you get good book to bill with your revenue is down. But nevertheless, it's way over on and Fis really healthy over one. It's 1.17 Q1, 1.02 Q2. So average is where we want. We feel good about those businesses right now.

Okay. Yes, I mean, we're all going to -- we're all thinking about the same thing here with the back half growth guide. And I recognize the pull forward you're mentioning, but $15 million to $20 million is 1% of the revenue in the quarter. So if you had the acceleration to the 6% organic growth in the quarter, and you're saying 3Q and 4Q are 1 and 1, you're sort of saying what was 6 and 1 is 5 and 2. So you're still adjusted for the pull forward, you're still projecting a not insignificant decel in total organic revenue growth when the long cycle is growing 5 to 7, and you're telling us the short cycle is getting better.

I guess, it is -- is the short cycle -- like I guess if instrumentation book-to-bill is still below and you've only seen a short window of digital imaging orders getting better, plus there's just a lot happening in the macro. I mean, I guess I'm trying to get at how much of what you're saying about 3Q is a very bottom-up plan versus you guys said, "Hey, given all those mixed inputs and we need a little more time to feel good about short cycle, let's just call it the third quarter, flat sequentially and hope to beat it and see what the indicators are in 3 months.

Yes. No, exactly. Well, in the next 3 days, starting right after this meeting, we go in our operations reviews with all of our businesses across the globe, and they all come in here. And what we got to do is George and I have to sort through that they don't sandbaggers. People have a tendency to be cautious. And we got to challenge them without getting them to become to ever recent. So it's a balance. I'm hoping that we get some of these pull-ins in Q3 and Q4, right? I mean as long as this whole international trade is volatile. Who knows.

Yes. I thought volatile trade was causing pushouts, not pull-ins. So I wonder if you guys aren't telling you that.

The reason I say that it's both if people think tariffs are going to go up in a certain area, from a sales perspective, then they might like to get their orders and then get under the tariffs. On the other hand, they could be the reverse, if tariffs are high and they think they're going to go down. Right now, it's so uncertain. Every day, you pick up the paper now today is Japan, 15%. Somebody else is at 18%. So we're very cautious, and we're looking at that just like you are. Yes.

Okay. I got it. Fair enough. Could you spend another minute on the Digital Imaging margins and what your thinking happens in the back half and you've spoken to your medium-term framework just given those stepped back a little bit in the group.

Yes. No. Yes, again, there's tale of two cities. In FLIR, margins have continuously increased. For example, in FLIR defense. When we acquired the business, our margins were more like just below 15%. Today, they're over 20%. Over a 3-year period, that's a pretty healthy improvement player margins, by and large, have improved. Now the flip side is because of the downturn in our camera and sensors, especially sensor business, the margins in those 2, we have gone down. Now overall, together, if you look at -- and by the way, we also, as George mentioned, we have some charges we took in Q2 to kind of rightsize the business. So the margins, if you look at [indiscernible] to be year-over-year, they've gone down 100 basis points, but I would attribute most of that to the cost out.

Flip side, player margins are as high as 24.2% in Q2 of this year, and they've gone up about 30 basis points. So when you look at the overall digital imaging, even basis points down in also digital imaging as a whole, even with the cost out is only down 10 basis points or flat. And that, to me, is encouraging because for a long time, everybody was saying, "Gee, what are you doing with FLIR? Well, FLIR is doing really well is carrying the day. And as soon as we straighten out, which we are, George straightens out with these people, the [indiscernible], we're going to be fun.

Interesting. Okay. That's super helpful. What did you take in charges in millions of dollars in the quarter? .

About $5.3 million -- $5.3 million the way I look at it, every 600,000 is [indiscernible]. It's about $0.09 -- $0.08, $0.09.

By the way, thank you for sending those 3 prepared questions. It's very helpful to me.

Our next question comes from Jim Ricchiuti with Needham & Company.

Wondering just given the moving parts, in terms of the overall revenue outlook, the sales outlook for Q3 and Q4. I'm wondering if your expectations for margin improvement for the full year have changed at all. I think versus your earlier expectation, correct me if I'm wrong, you were talking, I think, about 60 basis points of operating margin improvement.

Yes. We're still there. We did that in Q2. We improved the 57 basis points now to [indiscernible] take. Right now, we're at 55% for the year. 50,60 is a good number. George, what do you think?

No, I think that's right. I think -- yes. .

So that [indiscernible].

And looking at the instrumentation business, the Marine portion of that business. The Marine instrumentation business has generated strong growth it seems like for the better part of a couple of years now. And I wanted to -- if we could maybe just if you could talk a little bit about the drivers there. It's both, I think, both defense and commercial subs, is it sustainable at these given what you're seeing?

I'm going to let George answer that from a sustainability perspective, there's 2 ways to look at it. One of them is the growth, are you going to sustain a 15% growth going forward year in, year out? The answer is no. Is it sustainable because it's at a high level. Yes. because we have really unique products. George, do you want to add on that? .

Yes. I would just add, so the energy part of the business is about 40% of the Marine business. We've seen -- continue to see strong growth there in the subsea interconnects for oil production, for example, offshore streamers for geophysical surveys for oil and gas exploration. And we expect that to continue at least for the next few years, subject, of course, to oil prices, which we can't predict. On the defense side of the business, that's probably, give or take, 30% of the Marine business. What's driving that? Subsea unmanned vehicles, a lot of demand for our unmanned vehicles globally in particular. And then we also have a nice submarine interconnects business there, where we're on platforms like the Virginia and Columbia class submarine and that business is doing well. So I think in that case, on the defense side, certainly I think that's sustainable given the overall environment geopolitically, particularly where we're selling vehicles into places like the Baltic Sea, the Black Sea. And certainly, submarines are among the U.S. Navy's top priorities.

Last question if I could just slip 1 other 1 in. It sounds like MicroPact margins were up, that's going well. Are you still thinking in terms of kioptic being able to add about $0.15 to EPS this year?

The answer is yes, both in Micropact and [indiscernible] as we look Q1, Q2, Q3, Q4, margins are consistently improving and projected to improve. That's our story book, right? [indiscernible] turned out to be a really good acquisition it's very interesting. There's a part of it as in the U.S., which are energetics, et cetera, when you separate Nicols, from what drives them. But then in Europe, especially in the U.K., it's a lot of military applications, which are very closely tied to what FLIR makes. So what George has done is has the -- U.K. part report to [indiscernible], the byway that pen JIH Capital FE refers to [indiscernible], who runs our FLIR Defense. So she is integrating that into flare defense, even though we're reporting in that segment doesn't matter how you manage it and how you enjoy the food self having similar products, different customers, the optic mixed products in Europe. We can sell those products in the U.S. And of course, the opposite is true with lag. So there we go. .

Moving on to Jordan Lyonnais with Bank of America.

Could you guys cover -- so on the drone exposure overall, how are you thinking about the opportunities. Black Hornet was added to the Blue UAS [indiscernible]. But is it the driver for you guys is really just the camera systems you'll sell to everybody versus your own drone products.

Yes. I think you got it. I think we sell it to our own products. And our drone products are obviously not just the ability to put our sensors in, but we're developing new drones all the time. The latest drone that's going to go into pre-production is a weaponized on, but we have very competitive drone there called the R1. And the other thing is that we have unique zones in the small nano drones, which you've seen the Black Hornet, which are growing in revenue and in adoption by many countries. But then on the sensor side, we have this large business in Santa Barbara that makes code and uncooled infrared and infrared plus visible sensors. I will sell them to anybody.

We're not going to just sell it to [indiscernible]. Actually, we make a lot more revenue, selling it to other people, but out of $200 million worth of product plus that they make -- they also enable another $800 million of revenue across Teledyne by the sensors. And I'm sure other people are enjoying the same thing. Basically, you want to make senses for other people, and it's very simple. The math is really simple. The larger the production floor, you spread your cost and development across a [indiscernible] sales channel and more sales you have, the better your margins consequently because you have more. So we'll sell it to anybody. And we do, actually, we sell to competitors. We sell to people that are not competitors, and we sell to both the first companies and nondefense companies.

Got it. Okay. And then for the one big beautiful bill that passed, are there any changes that we should consider for the R&D tax changes or any other new programs that you guys see a lot of runway from? .

Yes. There are 2. One has to do with the writing down the R&D, which obviously it's good if you can accelerate -- but the other part is really the cash tax portion. And we think that would be lower in the second half of the year by as much as $30 million. So flip side, R&D credits, you can accelerate. The other side, you expect it to pay $30 million more in taxes than we're expecting now to our calculation show. And we're obviously very busy trying to figure out all the R&D expenditures that we have across the company. it's been good from that perspective.

Next question comes from Jonathan Sigman with Stifel.

On Golden Dome, there seems to be some funding coming through to that program. Can you talk a little bit about which Teledyne products have the most relevance to? And are you already engaging with some of the industry partners and just give a sense of how big of an opportunity that could be for the company?

Thank you. It's a little too early to kind of be too specific, but we have a lot of activity there, coordinated activity. I'm going to let George answer that.

Sure. So the 1 big beautiful Black did include some funding to advance the Golden Dome concept. In general, we've got a large presence in space-based imaging and electronic subsystems that go into things like missile tracking. So we would expect, given our presence on, for example, the space development agency tranche programs, overhead persistence infrared programs, things like that, that we'd have opportunities in the -- mostly in the space-based sensing, but also some of the electronic subsystems.

Yes. And we do -- we're trying to coordinate our response. We're getting some requests for early requests for proposals from some of our customers. And we're positively inclined towards that. Now historically, we have participated in the defense systems that they use in Middle East at Israel users. But this is very different, obviously. It's bigger, it's broader. It's more space-based, and because we have a pretty rich heritage of space imaging, both in size and defense, by the way, they overlap. And as George mentioned, we play in all of those domains. And you're going to have to use those if you're going to have any kind of broad defense system looking down. I don't know if that answers your question.

Very helpful. And on the share buyback authorization, I'm just curious whether we should be taking that as an indicator that the pipeline of activity is slowing down or whether you're starting to see value in the stock, if you can maybe expand on that, that would be helpful.

Sure. It's, again, tail off to [indiscernible] right. Last time we bought stock was -- the stock was at $400 [indiscernible] $500. So you ask yourself is that a wise thing to do. I think the most important thing is to have optionality on the table. In terms of acquisition availability, there are available acquisitions, but they're in same in prices. People are paying 19, 20x EBITDA for products for businesses that you've got to want to do 3, 4 years of hard fixing.

Are we 1 case, as an example, without mentioning the exact nature of it, we did a price, which we thought was a stretch for us and somebody did a price 30% higher. I just blew as out of the water. So there are acquisitions with the insanity of the price until it kind of moderates, but we're going to sit on the sideline. We may or buyer stack back if that's the best value.

We would also -- if we look at -- we have all fixed debt going forward. The longer fixed debt, the cost to us in terms of it's about 5%. And right now, we're earning just north of 4%. So you look at that and you say, what do you do? $800 million, $900 million of cash? Or do you use some of that, not all of it, some of that to redeem some of the bonds. The good thing is our debt-to-EBITDA ratio is 1.6. If we do nothing, it will go down to 0.5% next year in the next year. So it's a nice place to be. We may buy our stock we may buy businesses if Canopy prevails.

We'll go next to Joe Giordano with TD Cowen.

Apologies if you said this in the beginning, I missed the very beginning of the call. But just relating to the pull forward the potential there. I know it's not a huge number, but like were you seeing tangible reduction in orders in like early July that confirms something like this? Or is it more just like something that you're just maybe worried about but aren't seeing evidence of it?

The answer is no. We didn't see it. We're just -- it's the cautious nature of Teledyne to kind of not be fees. We haven't seen it. I hope we won't see and I hope we can say next quarter that we pulled forward. But we haven't seen any evidence. No.

Got it. Okay. And then last quarter, given all the controversy around tariffs, and we didn't know what was going on and raising prices, you guys were building in some kind of contingency on the demand side related to price actions you may have to take to combat. Now as tariffs have deescalated, have you removed any of that kind of contingency from the guide, now we're 3 months further along and the tariffs are coming in at lower rates?

Yes, there are 2 parts to this. As you will know, 1 of them is on the sales side. And the other part is on the cost side. Let me deal with the -- first, with the sales side. The good thing about [indiscernible] terms of tariffs is that 82% of our revenue on the sales side come from U.S.-based businesses that are selling to U.S. best customers or international locations selling to international customers.

So in that way, 82% of our product is under the 10th, and we don't worry that much everybody. Of the other 18% of the sales, approximately 5% or 14% of the total 18%, are U.S. exports to international locations. That can have an effect, but Fortunately, for us, only 2% of our sales are to China in that moment. Finally, 4% of our external sales are from Teledyne international locations to U.S.-based customers where new tariffs may apply, but we have products that are extremely unique like magnetrons for x-ray for cancer treatment, which are unique products. And we think that's not going to be affected much.

Having said all of that, we see some impact, but it won't be very large. On the cost side, that's a different story. We import about $700 million of material, which enters our cost of goods. And if you assume tariffs are, let's say, 11%, that's $80 million. We can probably mitigate some of that by using U.S., Mexico, Canada and the fact that we're doing U.S. military OD products. And that leaves maybe $60 million in the cost, which is $15 million a quarter, which we have to make up with price increases. I don't know. That's as wholesome picture as I can give.

I guess what I'm getting is, I think you guys were factoring in like every percent of price that you need to do will kind of like destroy demand to a certain extent. Do you still feel that way? And is that kind of -- is that contingency still in the guide?

No, the answer is no. We've become less cautious in that domain. .

We'll go next to Rob Jamieson with Vertical Research Partners.

Just a quick one, just to go back to the full year guidance on EPS. Just can you walk us through a scenario and what would need to happen across the portfolio for you to hit the high end of the guidance range or maybe even exceed it. What would need to happen?

Teledyne history would repeat itself. How's that. I think -- no, I think it all depends on our short-cycle business because we have a really good view on the long cycle. We're seeing growth in -- as George mentioned, we're seeing growth in our test and measurement. We're seeing growth in our environmental surprisingly. And if those hold up, we'll be fine.

And then just can you talk a little bit more about the Test and Measurement business and performance during the quarter and your expectations for second half I think last quarter, you called out that you saw strong Ethernet test sales, and that's just related to AI. Just curious if there are any additional errors of strength you saw during the quarter, any additional color?

I'll let George answer that, please.

Sure. So we had about 5.5% organic growth in the Test and Management business in Q2. It was our third consecutive quarter of year-over-year growth. And fundamentally, the protocol sales drove most of that growth, but the [indiscernible] sales were also kind of slightly higher. On the [indiscernible] side, it's driven by some of the high-speed applications, also driven by some power and motor drives analyzers.

And on the protocol side, yes, it's been driven by those network applications, high-speed communications, things like PCI Express. And so we continue to -- again, that business has stabilized. We've seen nice consecutive growth in 3 quarters year-over-year. We still expect the business to be up kind of low single digits for the full year, and it's solid.

Yes. Anything that increases traffic increases requirements for larger storage capacity. And anything to do with AI is, of course, just that would benefit our protocol businesses.. So Terry, how are we doing.

[indiscernible] over to our speakers for closing comments.

So okay. Let's go to Jason then.

Again, thanks, everyone, for joining us today. And if you have follow-up questions, feel free to call me at the number on the earnings release. Can you give the replay information over the call, the webcast, we'd appreciate it. Goodbye, everyone. Thank you. .

Thank you. Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.