Noah Poponak — Analyst, Goldman Sachs
Is the short cycle—I guess if instrumentation book-to-bill is still below one. 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 the third quarter flat sequentially and hope to beat it and see what the indicators are in three months.
Robert Mehrabian — Executive Chairman, Teledyne Technologies Incorporated
Yeah. No, exactly. In the next three days, starting right after this meeting, we go into operations reviews with all of our businesses across the globe. They all come in here. What we got to do is George and I have to sort through that they do not sandbag us. People have a tendency to be cautious. We got to challenge them without getting them to become too effervescent. It is a balance. I am hoping that we will get some of these poolings in Q3 and Q4, right? I mean, as long as this whole international trade is volatile, who knows?
Stephen Blackwood — EVP and CFO, Teledyne Technologies Incorporated
Yeah. I thought volatile trade was causing push-outs, not pull-ins. I wonder if your guys aren't telling you that.
Robert Mehrabian — Executive Chairman, Teledyne Technologies Incorporated
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 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. No, today's Japan 15%. Somebody else is at 18%. We are very cautious and we are looking at that just like you are. Yeah.
Stephen Blackwood — EVP and CFO, Teledyne Technologies Incorporated
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 quarter?
Robert Mehrabian — Executive Chairman, Teledyne Technologies Incorporated
Yeah. Noah, 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 three-year period, that's a pretty healthy improvement. FLIR margins, by and large, have improved. Now, the flip side is because of the downturn in our camera and sensor, especially sensor business. The margins in DALSA E2V have gone down. Now, overall, together, if you look at— By the way, we also, as George mentioned, we have some charges we took in Q2 to kind of right-size the business. So the margins, if you look at DALSA E2V year over year, they've gone down 100 basis points, but I would attribute most of that to the cost out.
Flip side, FLIR margins are as high as 24.2% in Q2 of this year, and they've gone up about 30 basis points. When you look at the overall digital imaging, even with 100 basis points down in DALSA E2V, digital imaging as a whole, even with the cost out, is only down 10 basis points or flat. That, to me, is encouraging because for a long time, everybody was saying, "Gee, what are you doing with FLIR?" FLIR is doing really well. It's carrying the day. As soon as we straighten out, which we are, George straightens out with his people, the DALSA E2V picture, we're going to be fine.
Stephen Blackwood — EVP and CFO, Teledyne Technologies Incorporated
Interesting. Okay. That's super helpful. What did you take in charges in millions of dollars in the quarter?
Robert Mehrabian — Executive Chairman, Teledyne Technologies Incorporated
About 5.3. 5.3, the way I look at it, every $600,000 is a penny.
Stephen Blackwood — EVP and CFO, Teledyne Technologies Incorporated
Okay.
Robert Mehrabian — Executive Chairman, Teledyne Technologies Incorporated
It's about 8.
Stephen Blackwood — EVP and CFO, Teledyne Technologies Incorporated
Okay.
Robert Mehrabian — Executive Chairman, Teledyne Technologies Incorporated
9 cents.
Stephen Blackwood — EVP and CFO, Teledyne Technologies Incorporated
Okay. Got it. Thank you.
Robert Mehrabian — Executive Chairman, Teledyne Technologies Incorporated
Thank you, Noah. By the way, thank you for sending those three prepared questions. It is very helpful to me.
Stephen Blackwood — EVP and CFO, Teledyne Technologies Incorporated
Oh, good. I'm glad to hear that. We'll keep doing it. Thanks again.
Robert Mehrabian — Executive Chairman, Teledyne Technologies Incorporated
Yeah. 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. 60 is a good number. George, what do you think?
I think that's right. I think, yeah.
That's where it is.
Stephen Blackwood — EVP and CFO, Teledyne Technologies Incorporated
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. 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?
Robert Mehrabian — Executive Chairman, Teledyne Technologies Incorporated
I'm going to let George answer that. From a sustainability perspective, there's two 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, you want to add to that?
Yeah. I would just add, so the energy part of the business is about 40% of the marine business. We 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. 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 unmanned vehicles. Globally in particular. We also have a nice submarine interconnect business there where we're on platforms like the Virginia and Columbia-class submarine. That business is doing well.
I think in that case, on the defense side, certainly think that's sustainable given the overall environment geopolitically, particularly where we're selling vehicles into places like the Baltic Sea, the Black Sea. Certainly, submarines are among the U.S. Navy's top priorities.
Stephen Blackwood — EVP and CFO, Teledyne Technologies Incorporated
Okay. Last question. If I could just slip one other one in. It sounds like Micropack margins were up. That's going well. Are you still thinking in terms of Key Optik being able to add about $0.15 to EPS this year?
Robert Mehrabian — Executive Chairman, Teledyne Technologies Incorporated
The answer is yes. Both in Micropack and Key Optik, as we look Q1, Q2, Q3, Q4. Margins are consistently improving and projected to improve. That's our storybook, right?
Yep.
Stephen Blackwood — EVP and CFO, Teledyne Technologies Incorporated
Thank you.
Robert Mehrabian — Executive Chairman, Teledyne Technologies Incorporated
By the way, Key Optik turned out to be a really good acquisition. It's very interesting. There's a part of it that's in the U.S., which are energetics, etc., when you separate missiles from what drives them. 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 report to Jifen. By the way, that's spelled J-I-H, capital F-E-N. Reports to Jifen Lee, who runs our FLIR Defense. She's integrating that into FLIR Defense, even though we're reporting in a segment. Doesn't matter. It's how you manage it and how you enjoy the fruits of having similar products, different customers. Key Optik makes products in Europe. We can sell those products now in the U.S. Of course, the opposite is true with FLIR. There we go.
Stephen Blackwood — EVP and CFO, Teledyne Technologies Incorporated
Thank you.
Robert Mehrabian — Executive Chairman, Teledyne Technologies Incorporated
Yeah. I think you got it. I think we sell it to our drone 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 drone. We have a very competitive drone there called the R1. The other thing is that we have unique drones in the small nano drones, which you've seen, the Black Hornets, which are growing in revenue and in adoption by many countries. On the sensor side, we have this large business in Santa Barbara that makes cooled and uncooled infrared and infrared plus visible sensors. We sell them to anybody. We're not going to just sell it to our own. Actually, we make a lot more revenue selling it to other people.
Our $200 million worth of product plus that they make, they also enable another $800 million of revenue across Teledyne by the sensors. I'm sure other people are enjoying the same thing. Basically, you want to make sensors for other people. It's very simple. The math is really simple. The larger the production floor, you spread your cost and development across a broader sales channel. The more sales you have, the better your margins, consequently, because you have more. We'll sell it to anybody. We do, actually. We sell to competitors. We sell to people that are not competitors. We sell to both defense companies and non-defense companies.
Stephen Blackwood — EVP and CFO, Teledyne Technologies Incorporated
Got it. Okay. 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?
Robert Mehrabian — Executive Chairman, Teledyne Technologies Incorporated
Yeah. There are two. One has to do with the writing down, the R&D, which obviously, it's good if you can accelerate it. 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. Flip sides. R&D credits, you can accelerate. The other side, you're expected to pay $30 million more in taxes than we're expecting now, too, where 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.
Stephen Blackwood — EVP and CFO, Teledyne Technologies Incorporated
Got it. Thank you.
Robert Mehrabian — Executive Chairman, Teledyne Technologies Incorporated
Of course.
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? Are you already engaging with some of the industry partners? Just give a sense of how big of an opportunity that could be for the company. Thank you.
Thank you. It's a little too early to kind of be too specific. 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 mostly in the space-based sensing, but also some of the electronic subsystems.
Yeah. And we're trying to coordinate our response. We're getting some early requests for proposals from some of our customers. We're positively inclined towards that. Now, historically, we have participated in the defense systems that they use in the Middle East that Israel uses. This is very different, obviously. It's bigger. It's broader. It's more space-based. Because we have a pretty rich heritage of space imaging, both in science and defense, by the way, they overlap. As George mentioned, we play in all of those domains. You're going to have to use those if you're going to have any kind of a broad defense system looking down. I don't know if that answered your question.
Thank you. It's very helpful. 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'd be helpful.
Sure. It's, again, tale of two cities, right? Last time we bought stock, the stock was at $400. Now it's over $500. So you ask yourself, is that a wise thing to do? I think the most important thing is to have the optionality on the table. In terms of acquisition availability, there are available acquisitions, but they're insane in prices. People are paying 19, 20 times EBITDA for products, for businesses that you got to go and do three, four years of hard fixing. We, one case as an example without mentioning the exact nature of it. We bid a price which we thought was a stretch for us. And somebody bid a price 30% higher. It just blew us out of the water. There are acquisitions with the insanity of the price until it kind of moderates. We're going to sit on the sideline.
We may buy our stock back if that's the best value. We would also, if we look at, we have all fixed debt going forward. The longest fixed debt, the cost to us in terms of is about 5%. And right now, we're earning just north of 4%. You look at that and you say, "What do you do? Sit on $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'll go down to 0.5 next year, in the next year. It's a nice place to be. We may buy our stock. We may buy businesses if insanity prevails.
Robert Mehrabian — Executive Chairman, Teledyne Technologies Incorporated
Hi, Joe.
Apologies if you said this in the beginning. I missed the very beginning of the call. Just relating to the pull forward, the potential there, I know it's not a huge number, but were you seeing tangible reductions in orders in early July that confirmed something like this? Or is it more just something that you're just maybe worried about but aren't seeing evidence of it?
The answer is no. We did not see it. We are just. It is. The cautious nature of Teledyne to kind of not be effervescent. We have not seen it. I hope we will not see it. I hope we can say next quarter that we pulled forward. We have not seen any evidence, no.
Got it. Okay. Last quarter, given all the controversy around tariffs and we did not 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 are three months further along and the tariffs are coming in at lower rates?
Yeah. There are two parts to this, as you well know. One of them is on the sales side. The other part is on the cost side. Let me deal with the sales side. The good thing about Teledyne, in terms of tariffs, is that 82% of our revenue on the sales side comes 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 do not 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. 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.
We have products that are extremely unique, like magnetrons for X-ray cancer treatment, which are unique products. We think that is not going to be affected much. Having said all of that, we will see some impact, but it will not be very large. On the cost side, that is 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 is $80 million. We can probably mitigate some of that by using U.S., Mexico, Canada, and the fact that we are 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 do not know. That is as wholesome a picture as I can give.
What I'm getting at is I think you guys were factoring in every % of price that you need to do will kind of destroy demand to a certain extent. Do you still feel that way? Is that kind of contingency still in the guide?
No. The answer is no. We've become less cautious in that domain.
Robert Mehrabian — Executive Chairman, Teledyne Technologies Incorporated
Teledyne's 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. If those hold up, we'll be fine.
Great. Can you talk a little bit more about the test and measurement business and the performance during the quarter and your expectations for the second half? I think last quarter, you called out that you saw strong Ethernet test sales, and that's related to AI. Just curious if there are any additional areas of strength you saw during the quarter, any additional color?
Let George answer that, please.
Sure. We had about 5.5% organic growth in the test and measurement business in Q2. It was our third consecutive quarter of year-over-year growth. Fundamentally, the protocol sales drove most of that growth, but the oscilloscope sales were also kind of slightly higher. On the oscilloscope side, it is driven by some of the high-speed applications, also driven by some power and motor drive analyzers. On the protocol side, yes, it has been driven by those network applications, high-speed communications, things like PCI Express. We continue to, again, that business has stabilized. We have seen nice consecutive growth in three quarters, year over year. We still expect the business to be up kind of low single digits for the full year. It is solid for now.
Yeah. 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.
Perfect. Thank you.
Terry, how are we doing?
Robert Mehrabian — Executive Chairman, Teledyne Technologies Incorporated
Okay. Let's go to Jason then.
Jason VanWees — Vice Chairman, Teledyne Technologies Incorporated
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. Terry, if you'd give the replay information over the call, the webcast, we'd appreciate it. Goodbye, everyone. Thank you.