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Operator: Welcome to Teledyne’s First Quarter Earnings Release Conference Call. Here is our first speaker, Mr. Jason VanWees.

Jason VanWees: Good morning, and thanks, everyone, for joining us. This is Jason VanWees, Vice Chairman, and we’re about to begin our first 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; CEO, Edwin Roks; President and COO, George Bobb; and EVP and CFO, Steve Blackwood; and finally, Melanie Cibik, EVP, General Counsel, Chief Compliance Officer and Secretary. After remarks by Robert, Edwin, George and Steve, we will 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 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.

Robert Mehrabian: Thank you, Jason, and good morning, everyone, and thank you for joining our earnings call. In the first quarter, we achieved many records, including first quarter total sales, which increased 7.4%, accelerating for two quarters in a row and growing at the greatest rate in years. Sales also increased organically in every segment. Furthermore, non-GAAP earnings per share and GAAP earnings per share and operating — non-GAAP operating margin were also a record for any first quarter. We’re pleased to close the Qioptiq carve-out acquisition in the first quarter, but I should note also that a few months before closing, Qioptiq was awarded major new contracts with both the U.K. and German Ministry of Defense resulting in multiyear acquired backlog.

In any event, even excluding this acquired backlog, orders for Teledyne as a whole exceeded sales for the sixth consecutive quarter. We continue to execute our strategy, which has delivered long-term results regardless of economic and political uncertainty; that is, maintained a balanced and resilient mix of commercial and government businesses across a broad range of geographies and markets and we continue to improve margins in existing businesses and acquire and integrate complementary companies. Before further commenting on the quarter, I wanted to offer some perspective given the current unpredictable operating environment. While we’re going to focus on what we can control, it’s worth noting the following. Teledyne has never believed that offshoring U.S. manufacturing and technology was a wise action.

As a result, we have little low-cost country manufacturing, we are a net exporter, and most of our external sales are produced and sold within regions. To be specific, approximately 80% of our sales are from U.S.-based locations to U.S.-based customers or our international locations to international customers. Of the remaining 20% of total sales, approximately 80%, or roughly 16% of the total, are U.S. export sales to international locations, but only 2% of total sales are U.S. export sales to China. Finally, just 4% of external sales are from Teledyne international locations to U.S.-based customers where new tariffs may apply for our customers. Now, regarding our own supply chain, we import relatively little from China and Mexico with the 2024 annual value of each less than $25 million.

Our largest import from Canada is internal sales of unmanned air systems for the U.S. Military, a large portion of which we believe would be subject to U.S. DoD duty-free exemption. While we are not immune to the current 10%-plus of tariff rates or certainly the pre-pause liberation day proposed tariff rates, we are certainly planning actions to protect margins as the landscape evolves. That includes: taking further exemptions under the U.S.-Mexico-Canada agreement and from the United States Department of Defense, as well as taking advantage of recent exemptions for import of certain electronic components, and then finally, of course, pricing actions where we find necessary. Turning to our full year sales and earnings outlook, we must assume that the market uncertainty will have some impact.

While this is nearly impossible to quantify, we’ve assumed a negative sales impact of perhaps about 1% of annual sales, offset by the Qioptiq acquisition, resulting in 2025 estimated sales of approximately $6 billion. Also, while we exceeded our first quarter midpoint guidance of $4.85, and we expect a contribution from Qioptiq, which is now included in our outlook, we think it’s wise to maintain our full year earnings outlook. Edwin and George may now briefly comment on the performance of our four business segments.

Edwin Roks: Thank you, Robert. This is Edwin, and I will report on the Digital Imaging segment, which represents approximately 52% of Teledyne’s portfolio. First quarter 2025 sales increased 2.2% compared with last year. The performance last year reflected an increase in sales for both [indiscernible] and FLIR Defense and Industrial business, a relatively flat sales across the balance of our portfolio, where increased sales of space-based infrared detectors and semiconductors were largely offset by ongoing weakness in certain markets such as X-ray detectors for consumer discretionary sensitive dental market. Non-GAAP operating margin improved 31 basis points, primarily due to the contribution of FLIR as well as space-based sensor business. George will now report on the other three segments, which represent the balance of Teledyne.

George Bobb: Thanks, Edwin. In the Instrumentation segment, which consists of our marine, environmental and test and measurement businesses, first quarter total sales increased 3.9% versus last year, with organic growth of 2.6%. Overall sales of marine instruments increased 9.5%, 6.5% of which was organic due to both strong offshore energy and subsea defense sales. Sales of environmental instruments decreased 2%, primarily due to lower sales of laboratory instrumentation and emissions monitoring instruments. However, orders were strong for the first quarter book-to-bill of 1.11x. Sales of electronic test and measurement systems, which include oscilloscopes, protocol analyzers and ethernet traffic generators, increased 1.5% year-over-year.

Instrumentation operating margin in the first quarter increased 97 basis points to 27% and 88 basis points on a non-GAAP basis to 27.9%. In the Aerospace and Defense Electronics segment, first quarter organic sales increased 7.8%, driven by growth of defense electronics products. Including the two recent acquisitions, sales increased 30.6%. Overall, segment operating profit increased year-over-year, but GAAP and non-GAAP segment margin decreased as expected due to transaction and integration costs as well as comparatively lower current margins in the new acquisitions. For the Engineered Systems segment, first quarter revenue increased 14.9% and segment operating profit increased 719 basis points due in part to an easy comparison with last year which included higher cost to complete estimates on certain programs that did not recur in Q1 2025.

I will now pass the call back to Robert.

Robert Mehrabian: Thank you, George. In conclusion, despite recent volatility in capital markets as well as economic uncertainty, our performance to date has been resilient and strong. Each of our total orders, sales, margins and earnings increased in the first quarter. While organic sales increased in each segment, we also completed two acquisitions and ended the quarter with a leverage ratio of just 1.8x. While we cannot predict the future, I continue to believe our balanced mix of businesses, strong cash flow, healthy balance sheet, and acquisition pipeline creates more long-term opportunities than risks for Teledyne if the current economic stress continues. I will now turn the call over to Steve.

Steve Blackwood: 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 2025 outlook. In the first quarter, cash flow from operating activities was $242.6 million compared with $291 million in 2024. Free cash flow, that is cash flow from operating activities less capital expenditures, was $224.6 million in the first quarter of 2025 compared with $275.1 million in 2024. Cash flow decreased year-over-year in the first quarter due in part to lower customer cash advances received in the first quarter of 2025 compared with 2024. Capital expenditures were $18 million in the first quarter of 2025 compared with $15.9 million in 2024.

Depreciation and amortization expense was $80.7 million in the first quarter of 2025 compared with $78 million in 2024. We ended the quarter with $2.5 billion of net debt, that is approximately $2.96 billion of debt less cash of $461.5 million. Now, turning to our outlook, which includes the acquisitions of Micropac and Qioptiq. Management currently believes that GAAP earnings per share in the second quarter of 2025 will be in the range of $4.00 to $4.15 per share, with non-GAAP earnings per share in the range of $4.95 to $5.05. And for the full year 2025, we believe that GAAP earnings per share will be in the range of $17.35 to $17.83, and we are maintaining our prior non-GAAP outlook of $21.10 to $21.50 per share. I will now pass the call back to Robert.

Robert Mehrabian: Thank you, Steve. We would now like to take your questions. Operator, if you’re ready to proceed with the questions and answers, please go ahead.

Operator: Thank you. [Operator Instructions] Our first question is from Greg Konrad with Jefferies. Please proceed with your question.

Greg Konrad: Good morning.

Robert Mehrabian: Good morning, Greg.

Greg Konrad: Appreciate all the detail, but maybe just to start with the tariffs, it seems like you took about 1 point out of revenues, including the M&A contribution. Can you maybe just level set us where you see the biggest potential impact? And maybe how does that correlate it with expected organic growth for the year? And also any change to expected FX headwinds?

Robert Mehrabian: Yeah. Actually, the 1% that I took out for revenue was from the total that included acquisitions. So, the total had increased because of the Qioptiq acquisition by $180 million. We took down about $100 million from there. So, the reality of the outlook is that the impact of — you’re asking about tariffs first, Greg? I just want to make sure I have this right.

Greg Konrad: Well, I’m assuming it’s all somewhat related. So, I guess, just the thought process behind the 1 point of revenue that came out of the outlook and maybe where you expect that to impact the business the most?

Robert Mehrabian: Yeah. I think most of that is just really — I’m just — we’re just looking at the GDP, I’m assuming it’s going to get a hit of 1%. So, let’s — it’s kind of a bigger picture. It’s not going to affect a couple of our segments at all. It’s going to probably affect a little bit of Digital Imaging and a little bit of Instruments. I’m going to say, in Digital Imaging, maybe $20 million from before and in Instruments maybe another $20 million. So, you’re looking at maybe $16 million Digital Imaging, maybe $20 million in Instruments. I don’t think it’s going to affect our Aerospace and Defense or Engineering Systems. It’s just a rounding up of what I think or what people think, and I believe it, but if things continue, there’s going to be about 1% to the overall growth in our GDP. So, we’re just taking it as a ballpark.

Greg Konrad: And I guess just, I guess, more on the tariff side, you mentioned all of the moving pieces. I mean, how do you think about the net impact, just thinking about margins, given you mentioned some of the pricing and localized production? How do you think about the margin impact from those or potential margin impact?

Robert Mehrabian: Yeah. Let me start, Greg, if I may, there are two components of the tariffs, as you well know. The first component is what happens for our supply chain and the increase in the cost of the supplies. That we estimate that, that could be — we know that we — in 2024, about $700 million of our products that supplies that we imported both internally and externally aren’t going to be affected. And we assumed that, if it goes from 1% to 15% tariffs, so you’re going to have a 14% increase, which is about $100 million in cost. That we can mitigate some of that and reduce it to less than $70 million, which would probably drop to maybe $18 million a quarter. The second part of the tariffs is the — on the revenue side, that is — how much is it going to affect our revenue.

As I mentioned before, we think that that’s going to have some effect only where we sell from U.S.-based locations to international customers. And I said before, less than 2% to China. So, 80% of what we make and sell is either made in the U.S. sold in the U.S., made internationally sold internationally. Only 17% is based in locations selling to international customers from the U.S. and then only 4% from Teledyne international locations back to the U.S. So, I think it’s important to put those two in perspective because they’re a little different. I look at the supply chain issue, which I just said could be as much as $18 million a quarter in two ways. First, there’s a similarity to what we experienced in 2021 and 2022 where we had to cough up a lot of money to brokers because of scarcity of materials, especially electronic components.

Second, supplies that are coming in at a higher cost don’t really impact the P&L immediately. They go initially in our inventory, so they affect the balance sheet. We have inventory on hand. And if you look at 3 to 4 turns a year, it doesn’t really affect the immediate quarter. It’s going to probably start rolling in, in the Q3, Q4, and that’s where we see an increased cost of goods sold. And this is all before we do our pricing actions. So, yes, I’m giving you a very long answer because I think I’m going to get the same question multiple times. Yes, the tariffs are going to affect us. Overall, GDP may go down 1%, we may go down 1%, and but our revenue is still going to increase year-over-year. And we’re assuming with acquisitions, our average revenue for the year would go up about 6%.

So, I feel pretty good about all of the above.

Greg Konrad: And then maybe just sneaking in one last one. You said U.S. to international, less than 2% of that’s China. I believe China is maybe 5% of your total sales. Can you maybe just talk about what you’re seeing into that region, given — I’m assuming that was probably already volatile before all of this, just broader trends within China?

Robert Mehrabian: Yeah. Going back to the overall, overall is maybe 4%, not quite 5%, 2% of it coming from U.S. what do we sell there? One of the things that we sell there are avionic computers that go onboard commercial airlines that have to be certified. We also sell oscilloscope and protocol analyzers. Some of the avionics actually are going to go there regardless of tariffs because they’re needed or if you’re going to fly commercial airlines and have a certified system. Of that, then you go back and look at oscilloscopes, that comes from U.S. high-end oscilloscope, and that might affect us somewhat. And some of the machine vision staff that might be affected, they’re not U.S.-based really. They’re foreign-based products that we make. We make most of our machine vision products in Canada and in Europe. So, they may be affected indirectly. Yes, it’s going to cause a little pain, but again, we’ll make it up somewhere else.

Greg Konrad: Appreciate it. Thank you.

Robert Mehrabian: Thank you, Greg.

Operator: Our next question is from Andrew Buscaglia with BNP Paribas.

Andrew Buscaglia: Hey, good morning, everyone.

Robert Mehrabian: Good morning, Andrew.

Andrew Buscaglia: Hey, Robert, on that — the comment of 1% coming up, can you comment about risk related to any government spending cuts that you’re seeing? Is any of that contemplated in that? And how do you see Teledyne managing through that?

Robert Mehrabian: To be very honest, I don’t think that’s going to affect us. The kinds of cuts they’re talking about with us, yes, we do have things that may be at risk. If they go to NASA, we have some NASA programs and others. But in the bigger picture, it might even be good for us in some ways because we participate in space programs in a very healthy way, and that’s one of the domains that we’re actually increasing our revenue. We participate in space programs, both science space, which is pretty big for us, and we also participate in defense space. In the defense space, which is about 60% of our overall space programs, we think there’s going to be growth from all of these activities going reduction and then increases in other domains.

So, the answer to your question, the short and long answer to your question is that, overall, we believe that the effect to us is going to not be significant. And if there is one, it will improve our defense programs in missile warning and tracking and intelligence surveillance, et cetera, et cetera. We have about 20 defense programs related to space at the current time.

Andrew Buscaglia: Okay. Got it. And yeah, I think it’s a logical assumption in terms of how you’re thinking about the top-line. What are you seeing in terms of your short-cycle sales more recently? Are you seeing that play out? Some of that business is getting worse? And specifically, can you comment on test and measurement and machine vision, which had been struggling as of late?

Robert Mehrabian: Yeah. I think the effects are going to be somewhat minimal. I think test and measurement may get affected a little bit. We — overall, we think for the year, test and measurement is going to be fairly flat. So that, I think, is an effect. Instruments as a whole, which includes environmental marine and test and measurement, I think it’s going to be okay. It’s going to grow maybe 2.5% to 3%. Going back to machine vision, there are two parts to it, as you know. There’s the FLIR part. And that is doing actually pretty well, especially FLIR Defense. There is some effect on the industrial cameras, especially infrared, handheld and stationary cameras, but that’s going to be fairly flat year-over-year. We think what will happen in the FLIR side is that defense is doing so well that, that will offset any negativity there.

The only area of Digital Imaging that we believe it could affect is the continuing weakness in our sensor sales. Our cameras are coming back — this is legacy Digital Imaging. Our cameras are coming back a little slower than we hope, sensors are lagging even more because people who buy our sensors have to develop new cameras and the market incentives aren’t really there. But if you come back and look at it as a whole, big picture, our book-to-bill across the company is 1.05. Our instruments book-to-bill is 1.04. Overall, Digital Imaging book-to-bill is 1.11. Aerospace and Defense is slightly under 1 and Engineered Systems, which is very lumpy business, is under 1, but we’re not worried about that because we had revenue increases there. So, overall, I’d say, yeah, we’ll see some short-term effects in some of our short-cycle businesses, but overall, we should be fine.

Andrew Buscaglia: Okay. Very clear. Thank you.

Operator: Our next question is from Jim Ricchiuti with Needham & Company.

Jim Ricchiuti: Hi, thanks. Good morning. Question about steps/actions you may take in terms of offsetting some of the pressure that you might see on margins. Robert, I’m wondering how you’re thinking about driving margin improvement in some of the newly acquired businesses over the next several quarters?

Robert Mehrabian: Jim, that’s a really grand question. First, if I look at the overall margin for the year across all of our businesses, we are projecting margin improvement of about 60 basis points for the year. In Q1, we had margin improvement of about 80 basis points year-over-year. And one of the reasons that we think the margins are — improvements are going to be slightly less is because of the acquisitions. And if you take an acquisition like Qioptiq, which moves our needle a little bit, in the first quarter, their margins were lower as we always have when we acquired a business. They’re going to hit our Aerospace and Defense overall by 200 basis points. But the way we look at it, every quarter going forward, their margins are going to improve as we have done with every acquisition in our portfolio.

And eventually, they’ll have the same margins and everything else. So, in a way, I look at it and say, okay, what is the effect right now? In Q1, we only had them for two months. For the year, we’re going to have them for 11 months. It’s going to hit Aerospace and Defense margins somewhat, but — and it is going to decrease it maybe 180 basis points, but our defense margins before that were — Aerospace and Defense were 28.6%. So — and they’re going to improve every quarter. So, by next year, it’s all going to be fine. And every acquisition we’ve made does the same thing. Lowers the margin, but actually contributes to the bottom-line. And as we said, we expect Qioptiq to add another $0.15 to our overall earnings.

Jim Ricchiuti: Got it. That’s helpful, Robert. The follow-up question I had is historically, in periods like this, Teledyne has taken advantage of opportunities. I’m just wondering, are you seeing more — potentially more acquisition opportunities in the current environment? Or is it too early?

Robert Mehrabian: Well, it’s a little early, but historically, as we said, Jim, every time there’s been stress, economic stress, we’ve taken a little hit just like everybody else, but we have done two things. The three times that I remember, there were similar economic stresses, we increased our cash — free cash flow. We had record cash flow. Last year, we had a record cash flow of over $1 billion. I expect to have something close to that this year. As we come out of these things or even during these, we make acquisitions. In 2017, as an example, we bought e2v following 2014 to ’16 depression. This year, we bought Qioptiq, and we also bought Micropac. Having said that, our pipeline is relatively healthy, both in smaller and, what we like to call, mid-sized acquisitions.

We’ve already spent about $750 million in the first quarter buying two businesses. And we — if we don’t do anything else, our debt-to-EBITDA ratio, which is now at 1.8x will go to 1.2x because of our cash generation. So, I’m looking forward to making some acquisitions, and it really depends on how competitive the environment is because there are some other doing the same thing as we are. There are some things available, but we don’t want to overpay them because if you overpay, then you pay for it later rather than sooner.

Jim Ricchiuti: Thanks very much.

Robert Mehrabian: For sure.

Operator: Our next question is from Jordan Lyonnais with Bank of America.

Jordan Lyonnais: Hey, good morning.

Robert Mehrabian: Good morning, Jordan.

Jordan Lyonnais: Could you guys talk a little bit about what you’re expecting in our Aerospace and Defense segment or FLIR with the U.S. FY ’26 budget moving to $1 trillion and also European rearmament, where should we be looking to see Teledyne?

Robert Mehrabian: Yeah. Let me just first say, let’s just stay with defense for a second, two parts. Obviously, U.S. defense increases, we’re going to have increased sales. And in Q1, our defense sales year-over-year increased about 18.7%. Now, there are two parts. Obviously, U.S. defense is going to increase because we have some healthy products ranging from unmanned vehicles, that probably one of the only companies that I can name that have unmanned vehicles in the air, on the ground and underwater vehicles. Second, the defense, we also, of course, make all kinds of components that go into the defense domain. FLIR makes some very unique products for our defense. Let me move to Europe, because that’s just as important. Currently, we sell — in 2024, let’s say, we sell $447 million of product into European defense across many countries.

If the defense budget and that includes, by the way, I’m kind of taking the Qioptiq that we just bought and going backwards and saying, “Well, how much did they sell last year? And so, I’m putting that in that $447 million and the small Micropac acquisition. So, if you look at our defense budget, it’s about 3.3%, if I’m correct, of our GDP. European defense budget at about $500 billion, have been about 2% of the GDP. Everything we hear says they’re planning to increase that to $800 billion to $900 billion over the next five years. As a minimum, we expect to maintain our share with what we have, which is the $447 million growing proportionate to what they increase their budgets with as. Furthermore, we think considering the kinds of products that we make, we’re going to enjoy getting more of the share of those primarily due to the fact that we have unique products that they need, like our — I just mentioned our unmanned systems, but also, we have a good manufacturing footprint of our defense products in Europe.

We have it in the U.K., we have it in Sweden, and we have it in other locations. We make our unmanned vehicles, some of them in Iceland. We have them in Denmark, et cetera. So, there’s two-folds to it. One, we already enjoyed. Second, we — it’s growing. We’re going to grow with it. And third, there’s going to be domestic manufacturing requirements that are going to go into all of the new programs which we enjoy our footprint in Europe. I said we don’t have a manufacturing footprint in Southeast Asia. We’ve avoided it, but not in Europe because we bought a lot of businesses that we’ve invested in European defense.

Jordan Lyonnais: Got it. That’s helpful. Thank you so much.

Robert Mehrabian: Thanks.

Operator: Our next question is from Damian Karas with UBS.

Damian Karas: Hey, good morning, everyone.

Robert Mehrabian: Good morning, Damian.

Damian Karas: Good morning. I was wondering if you might be able to clarify your prior comments about 1% lower GDP and factoring that into the full year guidance. Have you actually started seeing any slowdown in Digital Imaging and Instrumentation over, say, the last month since all this tariff news and the tit-for-tat started? Or are you just kind of derisking because of this cloud of uncertainty, if you will, because I guess if I think about all those book-to-bill numbers that you cited, they were all pretty positive?

Robert Mehrabian: I think your — two-fold. First, we do see some weaknesses in certain areas, but there’s nothing new about that. Test and measurement, oscilloscopes, some of the stuff we sell overseas like to China, yeah, that’s affected. But I think you’re right. It’s my guess. It’s a guess. Now somebody might say 1% is too much, somebody might say 1% is too little. That’s my guess. If it turns out not to be there, I’d be very happy.

Damian Karas: I think we all will be. Thank you for that. And then, not to beat a dead horse here on tariffs, but you mentioned that some of the higher costs, you won’t see that in the P&L immediately as it sits in inventory. But I’m just curious, have you taken any price actions so far or made any adjustments in your supply chain to offset some of this cost inflation that you expect to creep in?

Robert Mehrabian: Yeah. First, obviously, just like 2021-’22, Damian, we jumped on that very fast. First, you got to do a good analysis of what’s happening and how it’s going to affect you. So, we start there. Then, there are exemptions to those. As I mentioned, for example, we make a lot of unmanned vehicles in Canada and we import them to the U.S. So, we’re studying very carefully to make sure that we enjoy the DoD exemptions in that domain. Sometimes, you can also assemble some internal products in a different location where you manufacture the components and assemble them somewhere else. We’re looking at that. Finally, we have to take price action where we’re getting hurt, and we will do that, and we will pass some of that on.

So, in totality, there’s a whole bunch of things. The most important one is the longer it takes for things to affect us the better it is for us in terms of going from inventory to cost of goods sold and having time to take actions to offset what’s coming our way. Pricing opportunities, we’re going to use them wherever we can. And in the first quarter, we actually had a volume increase of 2.3% or so in our products. So, even with some pricing actions that we took. So, it worries me, but not a lot. Look, we’ve been through this before a number of times. And what you got to do is hunker down and do what you do best. We’re very disciplined, do small things very well and don’t expect miracles to happen.

Damian Karas: It makes total sense. Thanks a lot, Robert. Good luck out there.

Robert Mehrabian: Thank you.

Operator: Our next question is from Joe Giordano with TD Cowen.

Joe Giordano: Hey, guys. How are you?

Robert Mehrabian: Good morning, Joe.

Joe Giordano: Can you kind of go through the backlog with us? I know you mentioned it said all-time highs, but there was also some acquired backlog of some major multiyear stuff you got from Qioptiq. So, like how does that look excluding that?

Robert Mehrabian: Well, the Qioptiq backlog that we acquired increased about $60 million because of the two new programs. Overall backlog, I think year-over-year is at the highest we’ve had, including Qioptiq, it’s about I’m going to say about $4 billion, which for us is pretty healthy. Of that, about $450 million is Qioptiq. So, 10% Qioptiq, the rest legacy Teledyne. And some of that is obviously multiyear. But the way we look at it always is what is your book-to-bill in each quarter annualized, and how are you doing in the short-cycle businesses that you don’t have much backlog? That’s the one area that we always very concerned and always very attentive to because some products, we book and ship in two, three weeks, some of our products, environmental products, maybe a month, some of our cameras, whether infrared or visible could be two weeks to four weeks.

So that’s the area that we kind of keep an eye on very carefully. The longer-term backlog, I don’t worry too much about that.

Joe Giordano: Yeah. What about on the — some of the stuff that if we talk about DOGE and some of the NASA stuff that you have that’s more personnel flight control kind of things. What — like can you talk about the margin profile of the things that are at risk versus the margin profile of the things that you think are still growing?

Robert Mehrabian: Well, on the margin profile of things like space — like the space station, where we do a lot of work in designing experiments, training astronauts, coordinating space flights, whatever, that’s our lowest margin business. It’s in the 6% to 7%. The overall margins in our Engineered Systems business, which includes both fixed cost and cost plus, half and half, are the lowest margins in the company, around 10%. Having said that, some of the space stuff that’s coming out, whether it’s the Golden Dome, whether it’s putting satellites in space to be able to do look down at what missile warning and tracking, some of the ground-based simulation stuff, those are our higher-margin businesses, and of course, our unmanned systems.

So, if you add them all up, if we — let’s say, something happens to the NASA budget, yeah, we’ll take a hit in revenue, but it’s not going to affect us so much in our bottom-line, because that’s our lowest margin business. On the flip side, if that money is not reprogrammed into other space programs, we’re going to enjoy those because we have very healthy margins, and we have tremendous heritage in space. Just to give you an example, in the science space, which, in a way, translates to our military and defense space, we’ve participated in 162 missions, science missions. We have spent 1.8 — 1,800 mission years in space. We have a lot of detectors, almost 1,000 detectors out there with zero device failures. And when the government starts investing in the space, they’re going to look for companies like ours that can actually make those very sophisticated stuff that they have made before and have a track record.

So, I think if the DOGE thing flips the way it looks like that is some low-margin businesses may go away, higher-margin businesses, more difficult things to make come back. I think it’d be to our advantage.

Joe Giordano: Yeah, I think that’s an important point. And if I could just sneak in one last thing. The stuff that you’re selling to China outside of the — like the commercial air avionics stuff that you said is — has to go regardless. Is the rest of that stuff — I’m thinking oscilloscopes and environmental kind of environmental equipment. Is that basically at zero now, like with tariffs [145%] (ph)? Is that like effectively an embargo when tariffs are that high?

Robert Mehrabian: You can’t say that. It’s not zero, but it’s going down, yeah. Everybody is waiting to see what happens. Some of our distributors are putting a hold on things. Some of them are taking the higher cost materials because they have no choice. We’ll deal with that. When you look at export to China 2% is — half of it is really not going to be affected. Yeah, I worry about that, but I don’t worry too much about it. We don’t make stuff in China that we bring to the U.S. That’s for sure. Some of our cameras go to China. Some of our stuff like X-ray detectors for dental systems, we’ve already suffered the consequences of China, like everybody else does when they sell product there. We sell product there, pretty soon the product is imitated, produced and sold at a lower cost. So, what you’ve got to do is move upmarket and make more sophisticated products continuously. It worries me, but not a whole lot.

Joe Giordano: Thanks, guys.

Operator: Our next question is from Guy Hardwick with Freedom Capital Markets.

Guy Hardwick: Hi. Good morning.

Robert Mehrabian: Good morning, Guy.

Guy Hardwick: I know you touched on it earlier, but could you mind just maybe explain a little bit more about the Canadian business? I mean, your filings reveal it’s a substantial business. Could you — how much of obviously DALSA is based there? How much of the business is commercial versus government? Because you said that the government business may be exempt from tariffs. And there’s also there’s content rules. I understand that if a product is as much as 20% U.S. content, it could be exempt as well. So that’s my first question. The second question on the $700 million of COGS. I presume that is components for imported into the U.S.?

Robert Mehrabian: Yeah. Let me answer the second question first because I have it in my head right away. I got to kind of pick the rest up. On the $700 million, it’s composed of two parts, things that we make and bring in the U.S., and then supplies that — like material supplies that we buy, including electronics that go into products that we make in the U.S. So, if you go to just the stuff that we make and bring into the U.S., those would be both commercial and defense. Some of the defense stuff, like I mentioned, unmanned air vehicle, obviously, the U.S. DoD is buying them because they need them and use them. Some of the commercial stuff like cameras, they might be subject to — within that $700 million, they might be subject to the 10% or so tariff.

We’ll work with that. It’s not, as I said before multiple times, forgive me if I repeat myself, it won’t affect us immediately because that stuff goes into inventory. We already have inventory that’s going to be used to make products, let’s say, for Q2. And the inventory rolls 3x to 4x a year. So, we see some of it in Q3 then a full bore in Q4 maybe. But in the meantime, there’s a lot of things that can happen, including actions that we take. Now, going back to how much we make in Canada, I have to say that there’s two sides to that, as we make, as I said, drones and military products, we have about 2,000 in Europe. In Canada, we have, I’m going to say, maybe 2,000 employees. And if you take the average revenue per employee in Canada, I don’t know, it maybe $250,000 per employee.

So, you can multiply that out, I’m talking about, what, $500 million in all made in Canada. And the beauty of Teledyne is we don’t make everything anywhere else except the U.S. We make pieces of things here — in Canada, pieces of it in England, pieces of it in Iceland, pieces of it Netherlands, which spread across Western countries, and that’s good for us because where we make stuff in Europe, that’s not going to be subject to European tariffs, obviously. And so, yes, we’re going to have to take some hits if this environment continues and not worry about it, but it doesn’t keep me up at night.

Guy Hardwick: But just to be clear, so I mean, you’re saying it’s a fairly balanced business between commercial and government, or is it more weighted towards government in Canada?

Robert Mehrabian: I would think most of it, more commercial than government because our defense business coming from Canada is not that large. I would say 70-30, 80-20 of that. I don’t have the numbers in front of me, and I don’t want to take guesses, but I can get you those numbers and have Jason supply to you.

Guy Hardwick: Okay. Thank you.

Robert Mehrabian: For sure.

Operator: Our next question is from Rob Jamieson with Vertical Research Partners.

Rob Jamieson: Hey, good morning. Just a couple of quick ones. Just one clarification on tariffs. Sorry, I joined late. The underlying tariffs that you’re assuming on the impacts and everything that you laid out, which is very clear, is that like China at 145%, and then, just what’s been presented by the administration so far?

Robert Mehrabian: Yeah. I guess you can say China of that order if maybe a little higher, maybe 150%, 160%, Canada 25%, United Kingdom 11%, France 10%, Denmark 10%, and then when you roll it all up, it’s about 15% across our portfolio.

Rob Jamieson: Perfect. Thank you. And then just on capital allocation. I appreciate the color you gave on acquisitions and how that looks, but how should we think about prioritization between deleveraging and buybacks over the next couple of quarters?

Robert Mehrabian: Let me go to the buybacks. We buy back — bought our stock back only two times and we’ve brought them back when our stock price went below what we thought was prudent. We brought stock back in 2015, at about — 2015 to 2016, about $100 a share. And we bought, let’s say, about $325 million of our stock. Last year, our stock dropped to $350, $355 or so, and we bought it. But then we stopped when it hit $400. So, it’s very important to look at the window of when we buy the stock. We can always buy the stock, but it’s prudent we can get much more returns in buying companies, improving them and having both revenue and EPS attrition, like we’re talking about Qioptiq as a recent example, or FLIR three years ago. So, the buyback would be exceptions when our stock is low, and there’s nothing really available that we can look at.

Our preference is always to buy companies. So, we’ll buy back opportunistically when we have to or we have nothing else to do. In terms of capital, right now, we’re sitting at 1.8x. By the way, we have long-term debt that Steve mentioned, and we have cash. But if you look at our long-term debt, it’s all fixed and it’s fixed at average of about 2.4%, and it spreads from two years hence out to 2029, 2030. And frankly, we can pay that down, but it would be stupid because we can get better interest rates in the immediate market than what we’re paying. So, we’re generating cash. We’re sitting at 1.8x. If we don’t do anything, our debt-to-EBITDA ratio will go down to 1.2x by year-end. And if we don’t do anything, another year, we’ll go down to [0.5x] (ph).

So, we have a lot of muscle to buy things and we will. If the price is right, and if it has strategically fits with what we’re doing. We not going to just go out and buy stuff because it’s available. We’re going to buy stuff that we can run, it fits with our portfolio and our strategy. So — and we generate about $1 billion of cash a year. So, we’re going to be fine.

Rob Jamieson: That’s great. Very clear. Thank you. And then, just one last one on test and measure. I know it’s a small business for you guys, but looks broadly in line with expectations. Any puts and takes you can give us just on the end markets that you serve there and how trading developed through the quarter?

Robert Mehrabian: Yeah. We sell primarily two products and one smaller product. The primary product that we sell are oscilloscopes and primarily high-end oscilloscopes, high-bandwidth, high-frequency. And then the second thing we sell are protocols. Protocols are basically the rules with which devices communicate with one another or devices communicate with the clock. We also have a very small piece of Ethernet generators that we bought, which is growing fast, but it’s small. It used to be $15 million, it’s going to be $30 million. But the primary products we make are oscilloscopes and protocols. And they can be somewhat affected by economic circumstances because there’s capital equipment, especially oscilloscopes. In Q1, protocols went up the revenue, oscilloscopes went down, as Ethernet generators went up.

There is one thing that we do that is very unique in that we also use our oscilloscopes in our protocol analyzers. So, that’s a unique offering that we’re able to make since we have such a strong position in protocols so we can sell things, protocol analyzers that utilize our oscilloscopes. So, all in all, it’s a nice beautiful business with very high margins, and — but it is subject to economic downturns.

Rob Jamieson: Great. Thank you.

Operator: Thank you. There are no further questions at this time. I’d like to hand the floor back over to management for any closing comments.

Robert Mehrabian: Thank you. I will ask Jason to conclude our conference call.

Jason VanWees: Thanks, Robert. And again, thanks, everyone, for joining us this morning. If you have follow-up questions, certainly feel free to call me or send me a note on my numbers on the earnings release. And again, thank you, everyone, and talk to you later. Bye.

Operator: This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation.