Teledyne Technologies Inc (TDY) — Q2 2025 Earnings Call Transcript

Thank you, and good morning, everyone. This is Jason VanWees, Vice Chairman. I'd like to welcome everyone to Teledyne's Second 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 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, this call is simultaneously being webcast and a replay, both via webcast 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 the greatest total and organic sales growth in almost 3 years. Second quarter sales increased 10.2%, half organic, half 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 and 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 defense spending and offshore energy productions. Sales from our shorter-cycle environmental and test and measurement instrumentation businesses also increased mid-single digits. 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 FLIR Defense and Industrial businesses. Nevertheless, we're being a little cautious, worrying about whether second quarter strength in our short-cycle businesses resulted from accelerated demand in advance of planned 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 use that, as I said before, if appropriate. George will now briefly comment on the performance of our four segments.

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 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 bookings of 1.2x in our Industrial and Scientific Vision Systems business collectively. Non-GAAP operating margin decreased marginally due in part to greater severance costs, which we did not exclude from non-GAAP margins. In the Instrumentation segment, which consists of our marine, environmental and test and measurement businesses, second quarter total sales increased 10.2% versus last year. Overall sales of marine instruments increased 16% due to both strong offshore energy production and subsea defense sales. Sales of environmental instruments increased 5.6%, primarily due to higher sales of process gas safety and emissions monitoring instrumentation. Sales of electronic test and measurement systems, which include oscilloscopes, 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 a decline in OEM sales due in part to on-again, off-again export restrictions. Overall, segment operating profit increased year-over-year, but GAAP and non-GAAP segment margin decreased year-over-year, but increased sequentially primarily due to comparatively 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. In conclusion, I want to thank everyone at Teledyne for delivering 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 remains very stable and most of our short-cycle businesses have returned to reasonable sales and orders growth. As I mentioned earlier, we're a bit cautious because of the near-term pull-ins perhaps as a consequence of various tariff scenarios. 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, Robert, 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 2024. We ended the quarter with $2.3 billion of 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 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.

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 in 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 sometimes 2 weeks, 3 weeks book-to-bill cycle times. We are a little cautious. We're worried that maybe $15 million to $20 million, mostly in that domain may have been pulled 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 FLIR Defense, 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.'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 unmanned systems in FLIR and generally in FLIR, first quarter, we saw book-to-bill of 1.17. This quarter, just a little over 1. Even Digital Imaging, excluding FLIR, recognizing that the comps are easier, we saw an uptick on orders, book-to-bill as high as 1.2. In the other businesses, lumpy businesses like Engineered Systems, it's way over 1, but we know that's lumpy. Overall, I think our book-to-bill has been healthy. As we mentioned earlier, this is about 1.1 across all of our portfolio, and it's the 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.

It's better to be safe and cautious than sorry, Robert. However, I want to push you a bit on Digital Imaging. The book-to-bill is strong, and this marks the second quarter of 1.1 or higher. Yet, it seems you have only factored in modest organic sales growth for the second half. Can you help us understand why we wouldn't expect a more significant increase in sales given those bookings?

Yes, it's a story of two chapters. FLIR is performing well. Even though some shorter-cycle businesses like cameras and DALSA, e2v have declined, our industrial sectors, including infrared cores and cameras, are doing fine. FLIR Defense is particularly strong. We have faced challenges in our DALSA, e2v segment, which has been struggling. Although we’ve seen a slight increase in orders, it’s easier to improve book-to-bill ratios when the business is already down. On a positive note, George and the management team have successfully reduced costs and reorganized where needed. As George noted, we experienced a setback in Q2 due to our inability to account for cost cuts in our non-GAAP figures. However, that segment is stabilizing. We anticipate that some of our longer-cycle businesses will start to grow in Q4 and possibly early 2026, which might explain our cautious outlook.

Okay. But just to clarify, you haven't really seen the short cycle start falling off in real time, but your assessment was, 'Hey, maybe there's $15 million to $20 million of a little uplift that we got,' but you haven't seen that yet?

No. There are different forces operating in our management. Some of them are a little more cautious than others. And frankly, over the last 25 years, we've learned a hard way that being a little cautious pays dividends over the long term, even though sometimes you look at your stock after an earnings call like today and say, 'No good deed should go unpunished.' Having said that, we will be fine. I think 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, when we make acquisitions, the margins go down because our acquired businesses, by and large, have lower margins. 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, Micropac and Qioptiq. We had a good uptick in Q1 in the margins in Micropac. 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, to put things in perspective, our shareholders might find this analysis beneficial. Excluding FLIR, we invested $1.9 billion in acquiring 47 significant businesses, and at the time of acquisition, we paid 9 times EBITDA for them. Looking at those same businesses today, the EBITDA reflects a multiple of 3.4 times what we paid. This illustrates improved margins. Even considering FLIR, which we’ve had for three years, there’s about a 100 basis point improvement from what we paid at acquisition to its current status. Our strategy remains clear: acquire businesses without overpaying, focus on enhancing margins, and follow our priorities. This approach consistently holds true across all our business segments and years.

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?

Let me focus on Q3 for a moment, if I can, Greg. Our expectation is to see some growth from acquired businesses in Q3, around 5%, which is similar to Q2, with very little coming from organic sources. The reason for this is our focus on short-cycle businesses, which are difficult to predict. We have increased our guidance for the year mainly due to stronger Q2 results. Even if Q3 is flat, we have raised our revenue forecast by over $20 million, which is a significant increase for us given our cautious approach. We anticipate approximately $6.3 billion for the year, representing around 6.3% growth. We expect that most of this growth, around 4% to 4.2%, will come from acquisitions, with perhaps just over 2% from organic growth. Additionally, we are factoring in foreign exchange impacts and other variables. There are many factors at play, but this is our current outlook.

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 year?

So 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 machine vision cameras and machine vision sensors had increases in orders year-over-year. As you mentioned, overall book-to-bill was 1.2. We still think that business for the full year is relatively flat. But I think we are encouraged by some of those order trends that we saw in Q2.

And as we mentioned before, George and even before George, we took cost out. 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. Now we can focus on improving the margins, as we've done in other businesses. George, you did that in Marine 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.

Yes. There are two parts. And I think that's a really relevant question at this point. We have U.S. government defense and we have foreign government defense. The U.S. government defense improved 12.5% year-over-year, primarily organic, primarily. Foreign government also improved, 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 nano-drones 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, in-sourcing is key. 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. Look, we built our first unmanned drones during the Vietnam War. We built 5,000 Firebees 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 Northrop. 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. 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. Finally, the issue on drones is low cost. The lower the cost, the better. We are fortunate because of FLIR that we can supply sensors, EO/IR sensors, both for our drones as well as other people's drones. 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 has put us in a nice place in this environment. I know that's a very long answer to a short question, but I think the context is important. Drones are nothing new to Teledyne.

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, Noah, 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. Environmental is a little healthier surprisingly. T&M is healthy, but still just below 1. Marine is obviously above 1. On Digital Imaging, as George mentioned and I mentioned, we're kind of getting a little bit of an uptick in our DALSA, e2v, where we 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 when your revenue is down. But nevertheless, it's way over 1. FLIR is really healthy over 1. It's 1.17 in Q1; 1.02 in Q2. So average is way over 1. We feel good about those businesses right now.

Okay. We are all considering the same factors regarding the growth guidance for the latter half of the year. I understand the pull forward you mentioned, but the $15 million to $20 million represents only 1% of the revenue for the quarter. If we look at the acceleration to 6% organic growth in the quarter, and you're indicating that Q3 and Q4 will be 1 and 1, it implies that what was previously 6 and 1 is now 5 and 2. Even after accounting for the pull forward, you're still forecasting a noticeable deceleration in total organic revenue growth while the long cycle is seeing growth of 5 to 7, and you're suggesting that the short cycle is improving.

Exactly.

I think the short cycle is relevant here. If the instrumentation book-to-bill ratio is still below 1 and we have only seen a small increase in Digital Imaging orders, along with various macro factors at play, I'm trying to understand how much of your outlook for Q3 is based on a detailed plan versus an acknowledgment of the mixed signals that suggest we need more time to feel confident about the short cycle. Let's assume the third quarter remains flat sequentially and we can aim to surpass that, while monitoring the indicators over the next three 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. What we got to do is George and I have to sort through that they don't sandbag us. People have a tendency to be cautious. We got to challenge them without getting them to become too effervescent. 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 that.

The reason I say that is 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 in and then get under the tariffs. On the other hand, it 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.

Okay. I get it. Fair enough. Could you spend another minute on the Digital Imaging margins and what you're 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, Noah, there's a clear contrast between the two segments. In FLIR, our margins have consistently improved. For instance, when we acquired FLIR Defense, the margins were just under 15%, and now they're over 20%. That's a substantial improvement over three years. Generally, FLIR margins have gotten better. Conversely, due to the downturn in our camera and sensor business, especially in sensors, the margins for DALSA and e2v have decreased. Overall, while DALSA and e2v experienced a year-over-year margin drop of 100 basis points, which I mainly attribute to cost reductions, FLIR margins reached as high as 24.2% in Q2 this year, reflecting a 30 basis point increase. When considering the entire Digital Imaging segment, even with the decline in DALSA and e2v, the overall performance is only down 10 basis points or flat, which I find encouraging. People have been questioning the future of FLIR, but it is performing well. Once we address the DALSA and e2v situation, as George is working on, we will be in a good position.

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

About $5.3 million. I see every $600,000 as a penny, which translates to around $0.09 or $0.08. Thank you for sending those three prepared questions; they are very helpful to me.

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 it 57 basis points, not to nitpick. 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.

Looking at the Instrumentation business, particularly the marine segment, it has shown significant growth over the past couple of years. I wanted to discuss the factors contributing to this growth, which seems to come from both defense and commercial submarines. Can this growth be sustained based on what you're observing?

I'm going to let George answer that. From a sustainability perspective, there are two ways to look at it. One of them is the growth. Are you going to sustain 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?

The energy segment constitutes roughly 40% of our marine business, and we have observed ongoing strong growth in subsea interconnects for oil production, specifically in offshore streamers for geophysical surveys related to oil and gas exploration. We anticipate this trend will persist for at least the next few years, although it is contingent on unpredictable oil prices. The defense segment accounts for about 30% of the marine business. The demand here is largely driven by subsea unmanned vehicles, which are sought after globally, particularly in markets for our unmanned vehicles. Additionally, we have a strong submarine interconnects business supporting platforms like the Virginia and Columbia-class submarines, and this sector is performing well. I believe that the defense side has a sustainable outlook, especially given the current geopolitical climate, particularly for our vehicles being sold in regions such as the Baltic Sea and the Black Sea. Submarines are a top priority for the U.S. Navy.

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

The answer is yes, both in Micropac and Qioptiq as we look Q1, Q2, Q3, Q4, margins are consistently improving and projected to improve. That's our storybook, right? By the way, Qioptiq 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, etc., when you separate missiles 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. What George has done is has the U.K. part reports to JihFen Lei, who runs our FLIR Defense. So she is integrating that into FLIR Defense, even though we're reporting in a segment, it doesn't matter. It's how you manage it and how you enjoy the fruits of having similar products, different customers. Qioptiq makes products in Europe. We can sell those products now in the U.S. And of course, the opposite is true with FLIR. So there we go.

Could you discuss the overall opportunities related to drone exposure? The Black Hornet has been added to the Blue UAS list, but are you primarily focused on selling camera systems to a broader market rather than just your own drone products?

Yes, I think you're right. We market our drone products, which include not only the integration of our sensors but also the continuous development of new drones. The latest drone we're gearing up to produce is a weaponized version, alongside our highly competitive R1 drone. Additionally, we offer unique small nano-drones like the Black Hornet, which are seeing increasing revenue and uptake in multiple countries. On the sensor front, we have a significant operation in Santa Barbara that produces both cooled and uncooled infrared sensors, as well as infrared plus visible sensors. We market these to a wide range of customers rather than just our OEMs. In fact, we generate substantially more revenue from external sales. With $200 million worth of product production, our sensors contribute an additional $800 million in revenue for Teledyne. Other companies likely benefit similarly. In essence, the goal is to manufacture sensors for a variety of customers. The underlying principle is straightforward: a larger production scale allows us to distribute costs and development efforts across a wider sales network. Increased sales lead to improved margins, so we are open to selling to anyone, including competitors as well as both defense and non-defense companies. Yes. There are two. One has to do with the writing down the R&D, which, obviously, it's good if you can accelerate it. But the other part is really the cash tax portion. 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 what our calculations show. 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.

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. The One Big Beautiful Bill Act 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. We would expect, given our presence on, for example, the Space Development Agency tranche programs, Overhead Persistent 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, we are working on coordinating our response. We are receiving some early requests for proposals from our customers, and we view this positively. Historically, we have been involved in the defense systems used in the Middle East, specifically those utilized by Israel. However, this situation is very different; it is larger, broader, and more focused on space. Given our extensive experience in space imaging, which intersects both science and defense, we are positioned to operate across these areas. To have an effective broad defense system that looks down, you will need to leverage these capabilities. I'm not sure if that fully addresses your question. Sure. It's a situation with two sides. The last time we bought stock, it was priced at $400, and now it's over $500. You have to consider if that was a smart move. The key is to keep options open. There are acquisitions available, but the prices are exorbitant. People are paying 19 to 20 times EBITDA for businesses that need several years of significant work to improve. In one instance, we made a bid that we thought was quite high for us, and another party offered a price 30% above ours, which was beyond our reach. Acquisitions are priced irrationally right now, so we'll remain cautious. We might buy back our stock if it offers good value. Additionally, we have fixed debt going forward, which costs us about 5%, while we're currently earning just over 4%. You have to decide whether to hold onto $800 million to $900 million in cash or use some of that to pay off some bonds. The positive aspect is our debt-to-EBITDA ratio stands at 1.6, and if we don’t take any action, it will drop to 0.5 by the end of next year. That's a favorable position to be in. We may consider repurchasing our stock or acquiring businesses if prices stabilize.

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 reductions in orders in like early July that confirm 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 being cautious as is typical for Teledyne. We haven't observed any evidence of it. I hope we can say next quarter that we managed to pull forward, but at this point, we haven't seen any signs. 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 de-escalated, have you removed any of that kind of contingency from the guide now that we're three months further along and the tariffs are coming in at lower rates?

Yes, there are two parts to this, as you well know, one 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 Teledyne is that 82% of our revenue on the sales side come from U.S.-based businesses that are selling to U.S.-based customers or international locations selling to international customers. In that way, 82% of our product is under the tent, and we don't worry that much about it. Of the other 18% of the sales, approximately 75%, 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 domain. Finally, 4% of our external sales are from Teledyne international locations to U.S.-based customers where new tariffs may apply, but we have unique products that are extremely unique like magnetrons for X-ray for cancer treatment. 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. 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 DoD products. 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 a picture as I can give.

I think you were considering that every percentage increase in price could significantly impact demand. Do you still believe that, and is that scenario still part of your guidance?

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

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's past is likely to repeat itself. This largely hinges on our short-cycle business, as we have a clear perspective on the long cycle. We're experiencing growth in our test and measurement sector, and surprisingly, in our environmental division as well. If these trends continue, we will be in a good position.

Great. 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 areas of strength you saw during the quarter, any additional color?

We experienced approximately 5.5% organic growth in the test and measurement business in Q2, marking our third consecutive quarter of year-over-year growth. The majority of this growth was primarily driven by protocol sales, though oscilloscope sales also showed a slight increase. The growth in oscilloscopes was influenced by high-speed applications and power and motor drive analyzers. On the protocol side, we experienced growth due to network applications and high-speed communications such as PCI Express. Overall, that business has stabilized, and we have seen consistent growth over three quarters year-over-year. We anticipate that the business will increase by low single digits for the full year, which remains solid.

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

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