Robert Mehrabian: Yes. First, if you look at the FLIR businesses year-over-year the margins are up almost 200 basis points year-over-year. And the reason that happened is very simple, we took about $52 million worth of cost out last year and we’re taking additional $10 million to $15 million cost off this year, early on. So that is affecting the margin. If you look at the DALSA, e2v, which is our traditional businesses, our estimates are that by the end of second quarter we’d have taken another $40 million out of that altogether. We’re talking about almost $100 million in cost offs, and we anticipate that DALSA, e2v margins were the lowest have been for a long time. They’re at 19.5% in Q1. We expect that to recover and frankly we expect the overall margins for Digital Imaging to be flat with last year on much lower revenue.
So it basically says that we have taken the cost offs, and if need be we’ll take more. But I think right now we’re doing okay. We’re just not very aggressive in our hiring.
Greg Konrad: Thank you.
Operator: Our next question comes from Joe Giordano with TD Cowen. You may begin.
Joe Giordano: Hi. Hey guys, how are you doing?
Robert Mehrabian: Hi.
Joe Giordano: Maybe I’ll start on DI as well. Just, I’m curious on the timing of this, right, because if you look at some of the pure players within vision, they had huge declines last year and you guys did okay relative to them last year and now this year it seems like. Well, they are yet to report largely, but it sounds like they’re going to be sequentially improving offload levels starting like now. And it seems like now is when you guys are starting to see declines, so I’m just curious your thoughts on what that timing mismatch is because it’s pretty short cycle stuff.
Robert Mehrabian: It is. We know a couple of businesses that took a pretty good hit, but their quarters are kind of a little different and their years are a little different from ours. They took a pretty big hit and lowered their numbers significantly. So now they’re coming up from the bottom slightly bettered. We didn’t take a hit because we didn’t have short cycle declines of the magnitude we saw. We anticipated it could happen, but it happened fast and we took the cost out. The flip side of it is that, in even Digital Imaging we have, of course, the short cycle businesses, but we also have long cycle businesses like Space and Defense, and those markets are doing really well. So I got to be a little careful when we designate what is Digital Imaging be, basically the average, we think in the second half we will recover because of the Space and Defense business.
Joe Giordano: And then just to follow up on the question earlier about, is Teledyne different today? I think, what you guys have been known for, for so long is being very good estimators of your own businesses and with high precision. And when you think about all the M&A company you’ve done, does that become just inherently more challenging today versus a decade ago, just because you have so many more businesses? And is there maybe, like — does there need to be a tinkering of the process with how you communicate upwards from the businesses towards management to finetune the budgeting process in light of some of these being caught off-guard here?
Robert Mehrabian: Well, I mean, you’re right in one respect, and I’ll kind of paraphrase what is that. The estimating the short cycle businesses actually has always been inherently challenging. The flip side of it is the part that you mentioned, we have a lot of businesses, etc., that part is actually a help to us rather than a hindrance, because it opens up the platform from which you can make acquisitions. And that is true, and it will remain true. So we will accelerate that. The only thing we don’t want to do is make stupid acquisitions with very high prices that are not going to be accretive, but acquisitions we will do. We have a larger platform to do that with. And like, we just bought something in our Marine business, Valeport in the U.K., and we have Adimec, which is a Digital Imaging business in the Netherlands, that we are going — we are in the process of buying.
The only difference between that business and our short cycle businesses is that they do a lot more custom imaging design and they have a significant market in imaging in the Defense domain. So I think, this is an opportune time for us. Let’s see what happens to the rest of the earnings and crawls that come out. We didn’t lower our numbers significantly. If we lowered, we’d be up now. Right? So all we’re saying is we’re going to be flat with last year. Our margins are going to be the same by the end of the year. Our revenue is going to be about the same, with that’s without making any acquisitions, and we have got — we have enough muscle to buy our shares, and that’s a good place to be with. Even after those purchases, I think we’ll end the year, let’s say we bought $200 million of our stock.
We’ll still end the year below 1.5 debt-to-EBITDA ratio, which is below our target of 1.5 to 2.5. So I think we’re doing fine. I’m not worried.
Joe Giordano: Thank you.
Robert Mehrabian: Thank you.
Operator: Our next question comes from Andrew Buscaglia with BNP. Please go ahead.
Andrew Buscaglia: Hey. Good morning, guys.
Robert Mehrabian: Good morning, Andrew.
Andrew Buscaglia: So I wanted to get a sense of how much this guidance is really de-risked. Maybe number one, are you assuming buybacks in the guidance? And then secondly, why should we have confidence, given the low visibility, that there’s not another step down here in some of these shorter cycle areas?
Robert Mehrabian: A very good question, Andrew. First, no, the buybacks are not built into the numbers, primarily because when we buy back it’s really going to affect next year’s EPS, not this year’s. So that’s fairly neutral for this year, depending on, of course, how much we bought. So I would put that aside. The second part of the question, we’ve struggled with that mightily over the last 10 days, and with our Board in the last two days trying to decide how conservative we should be or how aggressive we should be. We’ve ended up being somewhere in between the two. We think that we’ve de-risked some of the downside. On the other hand, we haven’t de-risked it all. Flip side, our Defense businesses have relatively good backlog, and the overall backlog in the company is 1.06.
So the Defense and Space businesses are going to come back in the second half. So they’re going to balance that. In a situation like this, you can do one or two things. You can really lower the numbers and just play it very safe, or you can do what is a reasonable judgment of what you see in the market and go forward. We’ve taken the latter approach.
