Q1 2026 Earnings Call Transcript

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

Thank you. Good morning, everyone. This is Jason VanWees, Vice Chairman. I'd like to welcome everyone to Teledyne's First Quarter 2026 Earnings Release Conference Call.

We released our earnings earlier this morning before the market opened. Joining me today are Teledyne's Executive Chairman, Robert Mehrabian; President and CEO, George Bobb; EVP and CFO, Steve Blackwood, and Melanie Cibik, EVP, General Counsel, Chief Compliance Officer and Secretary. After remarks by Robert, George and Steve, we'll ask for your questions. But of course, before we get started, all forward-looking statements made this morning are subject to various assumptions, risks and caveats as noted in the earnings release under periodic SEC filings, and of course, actual results may differ materially.

In order to avoid potential selective disclosures, this call is simultaneously being webcast and a replay via webcast and dial-in, will be available for approximately 1 month. Here is Robert.

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

And while we acquired DD-Scientific in January and increased our capital expenditures significantly from last year, our leverage ratio declined to the lowest level in 5 years since before the acquisition of FLIR in 2001. Excluding the impact of acquisitions, sales increased 5.3% due in part to the performance of our Digital Imaging segment, while organic growth was 6.9%. Sales of visible light sensors, infrared detectors and specialty semiconductors for space applications, each increased at double-digit rates as did FLIR infrared cameras for unmanned air vehicles as well as our own complete unmanned aerial systems.

Also within the Digital Imaging segment, our industrial imaging and x-ray businesses is returned to year-over-year growth, which helped contribute to the strong margin performance in the first quarter. Given stronger sales in the first quarter, but also record orders and backlog with a book-to-bill of 1.16, which is our tenth consecutive quarter of book-to-bill of over 1, we're comfortable in increasing both our expected sales and earnings for 2026. We believe now sales will be in the range of $6.415 billion or 70 basis points higher than we communicated in January. We're also raising our earnings outlook at both the bottom and top of our prior range. to about $24 at midpoint or $0.35 overall in increase.

George will now briefly comment on the performance of our 4 business segments. George?

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

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

For example, industrial machine vision cameras and sensors for semiconductor inspection and X-ray products for health care increased year-over-year and sales of micro-electromechanical systems or MEMS, grew over 20%, primarily due to demand for micromirrors used for optical switching and high-speed networking applications. Finally, non-GAAP operating margin in the segment increased 107 basis points to 23.2%, despite a 59 basis point increase in R&D expense within the segment. In the Instrumentation segment, which consists of our marine, environmental and test and measurement businesses, first quarter sales increased 5.3% versus last year.

Overall sales of marine instruments increased 8.3%, primarily due to strong defense-related sales, including unmanned subsea vehicles, which increased more than 20% for applications such as anti-submarine warfare and mine countermeasures as well as sales of interconnects for U.S. Virginia and Columbia class submarines. Interconnects for offshore energy production also continued to grow. However, these were partially offset by reduced sales of marine instruments for hydrography and oceanographic research.

Sales of environmental instruments increased 6.7%. This primarily resulted from higher sales for gas safety and ambient air monitoring instrumentation, partially offset by lower sales of laboratory and life sciences instruments. Sales of electronic test and measurement systems decreased 3.7% year-over-year with greater sales of oscilloscopes, offset by lower sales of protocol analyzers. However, we continue to expect full year sales growth as semiconductor suppliers increase their shipments and data centers increasingly adopt devices, utilizing the newest, fastest data transfer protocol.

Instrumentation non-GAAP operating margin in the first quarter decreased primarily due to product mix. That is a decline in higher-margin test and measurement, [ first growth ] in autonomous underwater vehicles in marine, which generally carry lower margins. In the Aerospace and Defense Electronics segment, first quarter sales increased 14.4% due to 1 additional month of results from the Qioptiq acquisition and with organic growth of 8.4% across defense electronics, partially offset by slightly lower sales from the commercial aerospace market due to a result of a tough comparison. Non-GAAP segment margin increased nearly 200 basis points year-over-year due to higher sales and corresponding operating leverage, improved margins at companies acquired in 2025 and in this case, a relatively easy comparison.

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

Thank you, George. In conclusion, we are excited to begin 2026 with a strong first quarter with continued orders and sales momentum in our backlog-driven businesses, specifically defense where Teledyne has meaningful exposure to low-cost drone, counter drone technologies, space-based sensing, electronic counter measures and maritime surveillance. Furthermore, certain markets such as industrial inspection and health care, which have had headwinds in the past are now inflecting. Finally, with a leverage at a 5-year low, we are actively pursuing a number of acquisitions, but at the same time, we're investing more in R&D and capital expenditures to accelerate our own organic growth.

I will now turn the call over to Steve.

Thank you, Robert, and good morning. I will first discuss some additional financials for the quarter not covered by Robert, and then I will discuss our second quarter and full year 2026 outlook. In the first quarter, cash flow from operating activities was $234 million compared with $242.6 million in 2025. Free cash flow, that is cash flow from operating activities less capital expenditures was $204.3 million in the first quarter of 2026 compared with $224.6 million in 2025. . Cash flow decreased due to higher inventory purchases, partially offset by greater operating results in the first quarter of 2026 compared with 2025. Capital expenditures were $29.7 million in the first quarter of 2026 compared with $18 million in 2025. Depreciation and amortization expense was $87.2 million in the first quarter of 2026 compared with $80.7 million in 2025. Now turning to our outlook.

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

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

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

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

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

I hope that answers your question. .

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

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

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

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

This is a Zach Walljasper on for Amit today. So just 2 questions from me. Can you just help give some color on the order trends between segments? And then the second question for me is just around the full year guide.

So high level, the first quarter came in a little above and then raising a little above that. So there's not too much incremental pickup expected, but if you help flesh out the puts and takes for the balance of the year that you're seeing that will be helpful. And then like should the typical earnings seasonality still hold for 2026?

Sure. Let me start with the overall, which I mentioned, the overall book-to-bill right now is 1.16. It is led by digital imaging and specifically, both FLIR as well as DALSA e2v that's where we have probably the highest book-to-bill higher than certainly we talked about in January. Digital Imaging right now is looking like about 1.38 in book-to-bill in instruments, a lot of short-cycle stuff, but it's still holding above 1, just slightly over 1. A&D, which it's a little lumpy because both A&D and Engineered systems are lumpy because we get big orders, then there's a period of quiescence and then we pick up orders.

They're just below 1 right now. certainly A&D. But I think what's happened to us is for whatever products that we're able to put out an increased production, there's very strong demand, and that's why we think across our portfolio, we're going to do very well. We would think that we'll have a little more sales in the second half versus the first half. And in January, we were saying the first half would be a little much -- a little lower than we had.

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

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

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

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

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

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

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

Yes. So I think I will focus on test and measurement, which is where we had the decline in Q1. And there are 2 parts of that business. Really, there's the oscilloscope side of the business, where we saw year-over-year growth and continue to see good demand in high-bandwidth applications power applications, for example, the people who are designing power supplies for data centers and from sales into the in-vehicle networks market. . Protocol sales were down year-over-year, and that was really due to the timing of PCI Express Gen 6 CPUs and GPUs.

So we go through on the protocol side, kind of 2 phases. There's a silicon designer phase where we sell silicon designers, and then there's a phase of integration of chips when they come to the market. So what we expect this year is for those chips to come to market in the second half of the year, and we still expect full year growth in the low single digit in test and measurement. So overall, as Robert said, strong performance in marine, strong performance in environmental, test and measurement is a little weaker in Q1, but still expect full year growth in the low single digits.

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

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

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

Yes. [indiscernible] first, we are being approached by the government actually, the government is making some investments. We haven't announced it yet, but they're making some investments in getting our capacities increased in certain specific areas, which I can't go into until the releases are approved. Second, we're seeing obviously increased demand for anything that has to do with drones and counter drones. And we're also seeing some demand for underwater vehicles.

There are a lot of inquiries right now, some orders, but we expect orders to really start picking up in the next 6 months.

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

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

So there we are.

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

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

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

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

Yes. Let me start by saying that right now, as Steve mentioned so the George, we're investing in our businesses both from CapEx with increased CapEx, about 35% over last year in the first quarter and expect to keep doing that throughout the year. So we've investing in capacity because we, frankly, our demand is larger than our capacity in certain areas. So we're investing in that.

Second, we're also increasing some R&D expenditures. We increased our R&D by $10 million just in the first quarter. That's to us -- to me, that's about $0.14 a share that we added in our investments because we think those are going to be good investments, there's going to be good demand for you. Now having said that, I'll let George talk about Golden Dome.

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

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

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

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

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

Just any sort of color you can give there and how that might materialize over the next couple of quarters here?

Sure. Sure. Okay. Let's start with the unmanned.

As you know, we make unmanned systems air, ground and Subsea. I don't know if there are many companies that are able to do all of that, our unmanned air systems is growing very fast. Our Black Hornets, which are the nano drones. Over the last bunch of years, including this year.

Just that one drone Black Hornet 3, now Black Hornet 4 will have revenues of about $500 million over that period. We expect -- and we have received already orders for Black Hornet, both in this country and some for Europe. And of course, Middle East conflict is demanding more. Second, we've introduced the our Rogue 1, which is armed drone.

We have our first contracts. Those would increase substantially with time. We have other systems coming along the way. And then if we go to subsea, we have different kinds of underwater drones.

They're not just any. We have, for example, gliders that can stay on very long periods of time and can go to large distances. And then we also have our [ Gavia ] vehicles, various ranges of it that go to different depths. And those are the ones that are used for detecting mines, and we have some nice orders for that in Europe.

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

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

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

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

I think as George mentioned and [indiscernible] mentioned a little bit, for the quarter, our margin went up about 58 basis points. We're projecting that to continue throughout the year. So we think we'll end up the year about 60 basis points above last year, and it will be led by digital imaging at over 100 basis points, 105, 107 basis points, which is something that we've been striving for ever since the acquisition of FLIR. But now FLIR'S doing well and the legacy digital imaging with DALSA e2v is picking up.

So the margins overall would grow about 60 basis points, led by Digital Imaging. Aerospace & Defense is not far behind at about 70 basis points.

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

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

Having said that, we are already experiencing very strong defense orders across all of our portfolio from components to systems.

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

I wanted to just ask or kick off with a big picture question about M&A and the strategy. A couple of years ago, we saw new issues. IPOs business is being created that really focused on kind of roll-ups and industrial rollups with an aerospace and defense focus. More recently, they've been that plus broader industrials as well.

And when you think about the amount of new kind of industrial compounders, industrial roll-ups, companies focused on finding niche highly engineered products, et cetera, it definitely feels a little more crowded today than maybe years ago. You guys started this theme, I mean, decades ago in the history books, you started it, but even just one decade ago, you were ahead of many of the others. I wanted to just sort of take the temperature on the market at large. Are you rubbing up against competitors more?

Is it harder to get deals done? Are sellers reshaping the processes in the face of different and maybe more buyers seeking the same opportunities? I just feel like with all the IPO activity, it's worth kind of level setting, recalibrating and taking your temperature.

Yes. I don't know. It's a very kind of difficult question to answer. We've always had competition.

Some of the -- let me begin somewhere else. In the last 12 months, 13 months, we've already spent $900 million in acquisitions. In the last 25 years, we've spent $12.8 billion in acquisitions, only $4 billion of it with our stock. So $10.8 billion of it with cash, which we generate.

And in the last 12, 13 months, $900 million. So I think our -- and we've made 75 acquisitions in the past 25 years. Yes, it's getting crowded. On the other hand, people that are conglomerates that are putting things together.

They also have a tendency to put them together and then take them apart. If you look at various conglomerates, we've been the beneficiary of taking them apart. We've gotten a few businesses from conglomerates that suddenly decide, well, this thing doesn't fit or we want to concentrate. So we have been getting some really nice carve-outs in the recent past.

We've always had competition. We always have going forward. That's not what worries me. What worries me is the crazy prices that people have been willing to pay.

Fortunately, some of that is switching over to this AI and data center domain and bless them, let them spend their money in that area, and we will stick to the things we know. So I don't really see a lot of competition increases.

Okay. That was great color. And if I could just sort of clarify some of the commentary on defense and maybe a little bit on aerospace. But it's very loud and clear that defense demand signals are strong.

Bookings are strong. One of the challenges in the past at different times, with Teledyne is that the bookings are strong, but doesn't necessarily translate into the immediate quarters. And there could be some confusion about kind of short versus long cycle exposure. But when we see all these strong demand trends in defense, is that going to translate immediately? Like can you maybe just talk about the short-cycle elements of your portfolio a little bit more?

You mentioned munitions. I just want to make sure that we're all kind of hearing that loud and clear, but also translating into the models the right way.

That's a good question. That's a very good question. Let me just say it's mixed. Yes, some of our orders that we get are long 2, 3, 4 years in duration.

Some of our orders are yet to come because of the conflicts in the Middle East. And of course, there's European growth in defense, where we're getting some healthy orders. By and large, when we think about part of our portfolio growing 9%, 10% organically, that's very healthy. We haven't had that for a while.

On the other hand, I'm not going to be the one standing here and telling people that we're going to grow 20% a year, like I've heard others do. That's not us. It might happen if the munitions that are being used are replaced faster. But the government cycles are tedious even when there's urgent need.

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

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

I'll let George address that one, please?

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

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

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

Right. Let me start with the government, we had a 9% growth in U.S. government. We had in non-U.S. government total, we had another 4% growth. This is organic.

Where we grew most also was in international domain. We had a little shrinkage in the U.S. commercial, but we grew significantly internationally. What's happened to us now is our international businesses have become 48% of our portfolio now, 20 years ago, that was less than 15%. So the growth has been international and U.S. government, U.S. government being at 9% and international about 8.5%.

I don't know whether I picked up everything you asked.

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

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

That helps. And I think you've discussed this a little bit, but just the revenue number you're now providing for the full year, I think, would require the organic to slow a bit through the rest of the year. It sounds like defense orders would suggest it can hold or accelerate. Maybe [ 9 ] is just a tough large number starting point.

And then it sounds like short-cycle industrial still has room to accelerate? Why would total company organic not accelerate?

Well you got me there. I'm a little conservative. Noah as you know us to be, we expect revenue to keep growing throughout the year. Year-over-year, we had growth in the first quarter.

We expect growth in the second quarter in the third and the fourth quarter. So when I look at the rest of the year, in January, we thought the first half of the year would be 48% of the total second half, 52% of the total. We switched that now. We think the second half would be a little less.

And the reason for that is, frankly because a little conservatism. And we think we're going to have less benefit in the second half of the year from foreign exchange. We got some nice benefits in the first half of the year. In Q1, we had about 2%.

We think that will drop down to maybe 0.6% in Q2 and then we're projecting 0 in the last 2 quarters. Now if that were to flip, so when we look at the year, we're thinking now our foreign exchange is going to be 0.6%, 0.5%. If that shifts, of course, our revenue would increase correspondingly. Some of the conservatism has to do with foreign exchange.

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

Let me start by saying, historically, our instrumentation margins have been the healthiest in the company. We think with progression through the year this year, our margins will keep increasing. I think this was our lowest margin quarter and primarily because of test and measurement. We think the margins will go up every quarter, and we should end the year closer to 27.5%.

To get there, we're projecting 29% margin in the fourth quarter for that segment. So as George said, our underwater vehicles don't have as great a margin as do our test and measurement. But we're anticipating a comeback in our protocol analyzers. Our oscilloscopes are already doing well.

So I think margins will increase as the year goes on.

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

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

Or is this more some of the cost efficiencies from the Qioptiq acquisition and integration?

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

Yes, that's right. So I'll answer it maybe a couple of ways. One, on the acquisition side, our playbook is pretty simple. We acquire companies at reasonable valuations and then we work to improve them.

And we've really seen over the last year with the Qioptiq acquisition and the [ MicroPact acquisition ], in the Aerospace and Defense Electronics segment, a lot of good work there on margin improvement. Also did benefit a little bit from mix in Q1. We sell, for example, our avionics spares and high reliability semiconductors, things like that, that were somewhat better year-over-year. But fundamentally, I think cost discipline always improving the acquisitions and then, yes, a little bit of benefit from mix.

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

Let me start with free cash flow. We've been fortunate in the last -- in '24, '25 to generate over $1 billion in free cash flow. We expect that to happen again this year. First half is a little slower than that, but I will pick it up the second half of the year because we're spending more on CapEx this year, we're projecting at about $150 million, which is an increase versus last year.

And of course, we're spending a little more on inventory. We're spending a little more on where we have some cautions approach to some of the product or supply chain that comes out of China with the restrictions. So we're investing in some inventory. We're investing in some machining facilities for germanium, et cetera.

Having said all of that, [ $115 million ] CapEx, over $1 billion in free cash flow, I hope we'll get to $1.1 billion.

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

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

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

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