ITGR - NYSE

Good morning, and thank you for standing by. My name is John, and I will be your conference operator today. At this time, I would like to welcome everyone to the Integer Holdings Corporation Third Quarter 2025 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Sanjiv Arora, Senior Vice President, Strategy, Business Development and Investor Relations. Please go ahead.

Good morning, everyone. Thank you for joining us, and welcome to Integer's Third Quarter 2025 earnings conference call. With me today are Joe Dziedzic, President and Chief Executive Officer; Payman Khales, President and CEO elect; Diron Smith, Executive Vice President and Chief Financial Officer; and Kristen Stewart, Director of Investor Relations. As a reminder, the results and data we discuss today reflect the consolidated results of Integer for the periods indicated. During our call, we will discuss some non-GAAP financial measures. For reconciliation of non-GAAP financial measures, please refer to the appendix of today's presentation, today's earnings press release and trending schedules, which are available on our website at integer.net. Please note that today's presentation includes forward-looking statements. Please refer to the company's SEC filings for a discussion of the risk factors that could cause our results to materially differ. On today's call, Joe and Payman will provide opening comments, Diron will then review our adjusted financial results for the third quarter of 2025 and provide an update for the full year 2025 outlook. Payman will then share our preliminary 2026 and 2027 outlooks and then we'll open up the call for your questions. With that, I'll turn it over to Joe.

Thank you, Sanjiv, and thank you to everyone for joining the call today. Today is my last call as Integer's President and CEO and my 64th and final as a public company CEO or CFO. As I reflect on the past 8 years as Integer's CEO, I am incredibly proud of what we've accomplished together. We've built a company with a clear vision, a compelling growth strategy and a strong values-based culture. When the CEO transition process began, I did not envision my last earnings call would include a reduction in our financial outlook. The recent customer forecast changes reflect the reality that not all new products achieve the level of success we expect or want. We expect this dynamic to be short-lived. Despite this news, we are still delivering strong results over the last 3 years. Our sales are up 39% from 2022 to 2025 at the midpoint of our outlook. Adjusted operating income is up 77% and adjusted EPS is up 73%. Our strategy and execution have delivered. And despite what the next few quarters hold, we remain confident in our strategy because when measured over time, it is working. I'm excited for Integer's future under Payman's leadership. He has played a pivotal role in shaping and executing our strategy and fostering our high-performance culture. As the President of our Cardio & Vascular business for 7 years, Payman delivered outstanding results, doubling sales and improving profitability. Tomorrow, Payman will become CEO and join the Integer Board. Thank you for your support of Integer during the last 8 years. I am now officially passing the baton and turning the call over to Payman to lead the remainder of the call, including the Q&A.

Thank you, Joe. On behalf of the entire Integer team, we extend our deepest gratitude for your exceptional leadership and strategic vision over the past 8 years. Your unwavering commitment to excellence has made Integer stronger, more innovative, better positioned to serve our customers and create value for our shareholders. The legacy you leave behind will continue to shape our future. I believe our strategy will continue to deliver for patients, customers and shareholders over the long term. I'm truly honored to step into the role of President and CEO. With great enthusiasm, I look forward to leading Integer in its next chapter of growth. We will build on the strong foundation that you've created and continue to advance our strategy with purpose and passion. We wish you well in your retirement. Now let's turn to our quarterly results and outlook. We delivered a strong third quarter in line with our expectations. Sales grew 8% on a reported basis and 7% organically, reflecting solid demand and execution. Our adjusted operating income increased 14%, driven by continued focus on operational excellence and expanding margins. Our adjusted earnings per share grew 25% year-over-year to $1.79. Despite this strong third quarter, we recently received customer updates related to the adoption of new products in the market that we expect will impact the next 3 quarters. The magnitude of these changes on multiple products at the same time is highly unusual. As a result, we are reducing the midpoint of our 2025 sales outlook by $16 million. This reflects recent changes in customer demand within our CRM&N product line primarily related to select emerging customers with PMA products. We are actively managing our costs to minimize the profit impact. As a result, we have reduced the midpoint of our adjusted operating income range by only $3 million and our adjusting EPS range by $0.02. For the full year 2025, we now expect to grow our sales between 7% and 8% or 7.6% at midpoint. We expect adjusted operating income to grow between 12% and 14% and adjusted EPS to grow between 19% and 21%. All in, this is a strong performance for the year. We usually provide our outlook for the upcoming year during our fourth quarter call in February after the completion of our annual budgeting process. However, given recent customer updates, we are providing a preliminary outlook for 2026. Based on the recent customer updates, we expect sales of 3 new products to decline in 2026, 2 electrophysiology products and 1 neuromodulation product for an emerging customer. The market adoption of these products has been slower than forecasted. We anticipate this will represent a 3% to 4% headwind to our total company sales for the next year. As a result, we expect organic sales in 2026 to be flat to up 4%. The impact of these specific products is expected to be more pronounced in the first half of 2026, leading to organic sales decline during that period. We anticipate a recovery to market growth during the second half as the new product headwinds moderate. On a reported basis, we expect sales to be down 2% to up 2%. This includes the final decline in Portable Medical as we complete the delivery of the last time buy orders in the fourth quarter of 2025, which is a headwind of approximately 2% to our total sales in 2026. While our 2026 outlook is not where we would like it to be, we remain confident in the strength of our long-term growth strategy, our portfolio and the depth of our customer relationships. Our continued focus on being designed into high-growth products early in the development process positions us well in the fastest-growing markets. Our product development pipeline continues to expand, fueled by close collaboration with our customers as they advance the next generation of medical technologies. Given the strength of this pipeline and our strategic positioning, we expect to return to above-market organic sales growth in 2027, which is consistent with our long-term financial strategic objective. I'll now turn the call over to Diron to review the quarter and the 2025 outlook in greater detail.

Thank you, Payman. Good morning, everyone, and thank you again for joining today's call. I'll provide more details on our third quarter 2025 financial results and provide an update on our full year 2025 outlook. In the third quarter of 2025, we delivered strong financial results. Sales totaled $468 million, reflecting 8% growth on a reported basis and 7% growth on an organic basis. Organic sales growth removes the impact of the Precision and VSI acquisitions, the strategic exit of the portable medical market and foreign currency fluctuations. We delivered $106 million of adjusted EBITDA, up $10 million compared to the prior year or an increase of 11%. Adjusted operating income grew 14% versus last year as we continue to make progress on our year-over-year margin expansion. Adjusted operating income as a percentage of sales expanded approximately 80 basis points year-over-year to 18.4% comprised of 10 basis points from gross margin and 70 basis points from operating expense leverage. Adjusted net income for the third quarter of 2025 was $63 million, up 27% year-over-year, while adjusted earnings per share totaled $1.79, up 25% from the same period last year. On a year-to-date basis, we are delivering strong results with sales up 9%, adjusted operating income up 14% and adjusted EPS up 20%. Turning to our sales performance by product line. Cardio & Vascular sales increased 15% in the third quarter 2025, driven by new product ramps in electrophysiology and incremental sales related to the Precision and VSI acquisitions as well as strong demand in neurovascular. On a trailing 4-quarter basis, C&V sales increased 18% year-over-year with strong growth from new product ramps in electrophysiology and neurovascular, as well as contribution from acquisitions. For the full year 2025, we expect C&V sales to grow in the mid-teens compared to full year 2024, which is consistent with what we shared on our July earnings call. In the fourth quarter of 2025, we expect C&V sales growth to decelerate from recent trends, reflecting a decline in the 2 new products in electrophysiology mentioned earlier. This is consistent with our prior outlook. However, we now expect this impact to continue into 2026, primarily the first half. Cardiac Rhythm Management & Neuromodulation sales increased year-over-year 2% in the third quarter 2025 and 4% on a trailing 4-quarter basis, driven by strong growth from emerging neuromodulation customers with PMA products and normalized CRM growth, partially offset by the planned decline of a neuromodulation program. For the full year 2025, we now expect CRM&N sales to grow low single digit versus 2024 compared to our previous expectation of mid-single-digit growth. This is primarily due to lower demand related to select emerging customers with PMA products. Product line detail for other markets is included in the appendix of the presentation, which can be found on our website at integer.net. In the third quarter 2025, we delivered $63 million of adjusted net income, up $13 million versus a year ago. This increase was driven mainly by operational improvements, which include higher sales volume, manufacturing efficiencies, gross margin expansion, operating expense management and acquisition performance. We also benefited from lower interest expense as a result of our convertible debt offering in March 2025 as well as a slightly lower adjusted effective tax rate. Our adjusted effective tax rate was 16.3% for the third quarter of 2025, down from 17.2% in the prior year. We now expect our full year 2025 rate to be within the range of 17% to 18%, which is 150 basis points better than our guidance in July. This improvement is primarily due to an improved outlook regarding R&D tax credits given our higher R&D investments. The year-over-year increase in adjusted weighted average shares outstanding drove approximately $0.02 reduction to our adjusted EPS. In aggregate, third quarter 2025 adjusted net income is up 27% year-over-year and adjusted earnings per share is up 25%, both growing much faster than our 8% sales growth, a very strong profit performance in the third quarter. In the third quarter of 2025, we generated $66 million of cash flow from operations, and our CapEx spend in the third quarter was $19 million. Free cash flow was $46 million in the third quarter, flat with the prior year. At the end of the third quarter, net total debt was $1.158 billion, which is a $46 million decrease compared to the second quarter 2025 ending balance. Our net total debt leverage at the end of the third quarter was 3x trailing 4-quarter adjusted EBITDA at the midpoint of our strategic target range of 2.5x to 3.5x. As Payman mentioned earlier, we are adjusting our sales and profit outlook ranges for 2025. Starting with our sales outlook. For the full year, we now expect reported sales to be in the range of $1.840 billion to $1.854 billion, reflecting growth of 7% to 8% on a reported basis. This includes inorganic growth of approximately $59 million from the Precision and VSI acquisitions, offset by an approximate $29 million decline from the previously announced Portable Medical exit, which is expected to be completed by the end of 2025. On an organic basis, we now expect sales to increase 5% to 6%. Our updated outlook represents a $16 million reduction at the midpoint compared to our July outlook, reflecting reduced expectations for our CRM&N product line. As mentioned earlier, the reduction in CRM&N sales was primarily driven by reduced customer demand for select emerging customers. For the fourth quarter, we expect reported sales growth of 2% to 5%. On an organic basis, sales are expected to be down 1% to up 2%. We have a more challenging year-over-year growth comparison as last year we benefited from new product ramps in both our C&V and CRM&N product lines. Consistent with our prior outlook, we expect lower sales in our electrophysiology business. The fourth quarter also reflects our reduced outlook for CRM&N. Even though we are adjusting our sales outlook, we continue to expect strong margin expansion driven by improvement in manufacturing efficiency and operating expense leverage. At the midpoint of our outlook, we continue to expect adjusted operating income as a percentage of sales to be 17.4% in 2025, an 85 basis point expansion compared to the full year 2024. This would result in a 13% increase in adjusted operating profit, a strong performance for the year. For adjusted operating income, we now expect a range of between $319 million to $325 million, growth of 12% to 14%, reflecting cost management actions to minimize the impact of our lower sales outlook. While still maintaining the same low end of our previous outlook range, this represents a $3 million reduction at the midpoint. For adjusted net income, we now expect a range of between $222 million and $227 million, an increase of 21% to 24% versus 2024, reflecting the strong operational performance, reduced interest expense and a lower adjusted effective tax rate. Lastly, we now expect adjusted earnings per share of between $6.29 and $6.43 which is a strong growth of 19% to 21% on a year-over-year basis. Our outlook assumes an adjusted weighted average diluted shares outstanding of 35.4 million shares for the full year 2025. Given the changes in our profit outlook, we are also updating our cash flow projections. We expect cash flow from operations to be between $230 million to $240 million, which represents a 15% year-over-year increase at the midpoint of the outlook. We now expect capital expenditures to be $95 million to $105 million. As a result, we expect to generate free cash flow between $130 million and $140 million, which represents a 35% year-over-year increase at the midpoint. We expect our 2025 year-end net total debt to be between $1.098 billion and $1.108 billion. This would result in a leverage ratio of between 2.7 and 2.8x trailing 4 quarter adjusted EBITDA, which is towards the lower end of our target range of 2.5 to 3.5x. I'll now turn the call over to Payman to discuss our preliminary outlook for 2026 and 2027.

Thank you, Diron. Due to the recent customer updates reducing volume of select new product in 2026 because of lower adoption in the marketplace and its expected impact on our 2026 sales. We are sharing our preliminary 2026 outlook earlier than usual. We remain confident in our long-term growth based on our robust development pipeline and the strong visibility we have to new product launches. This is why we're also providing a preliminary 2027 outlook. We expect 2026 reported sales to be down 2% to up 2% versus 2025, which includes an approximate 2% headwind from the planned portable medical exit that we will complete in 2025. On an organic sales basis, we expect to be flat to up low single digits. As I mentioned earlier, we recently received customer updates regarding 3 new products. Based on these updates, we now anticipate our sales for these 3 products to decline in 2026, which we expect to be a 3% to 4% headwind to our sales outlook. This offsets the expected 4% to 7% growth across the remaining portion of the business. The new product headwinds will be more pronounced in the first half of 2026. As a result, we expect our organic sales to decline low single digits in the first half of the year, with a recovery to market growth in the second half of the year. We expect the inorganic headwind from the portable medical exit to be similar in the first half and the second half of 2026. From a product line perspective, we expect both C&V and CRM&N to be flat to up low single digits on a reported basis as we navigate the select new product headwinds. In other markets, we expect a decline of approximately $30 million to $35 million, primarily driven by the Portable Medical exit. We're actively taking steps to align our costs with manufacturing volumes. Based on our preliminary assessment, we expect adjusted operating income in 2026 to range from a decline of 5% to an increase of 4% and adjusted EPS to range from down 6% to up 5%. As we look beyond 2026, we have a strong development pipeline with good visibility to new product introduction schedules over the next couple of years. Given the strength of this development pipeline, we expect to return to above-market growth in 2027. We continue to expand our product development pipeline with a focus on getting designed in early to new products in higher-growth markets. Since 2017, we project that by the end of 2025, our product development sales will increase by over 300%. This is up from the 270% growth that we shared at the end of 2024. Our mix continues to be approximately 80% in emerging and growth markets and 20% in more mature markets. We remain confident in our strategy and the long-term outlook for the business. The markets in which we compete are growing at a steady mid-single-digit rate in aggregate, and our approach is to secure early design wins in higher growth end markets. Approximately 70% of our sales are under multiyear agreements. In addition to driving strong organic growth, we plan to continue our tuck-in acquisition strategy while maintaining our leverage ratio within our targeted range of 2.5 to 3.5x. We have demonstrated that our strategy delivers results over the long term and remain focused on execution while we navigate the next 3 quarters. In summary, we delivered strong results for the third quarter, with sales growth of 8%, adjusted operating income growth of 14% and adjusted EPS growth of 25%. On a year-to-date basis, sales are up 9%, adjusted operating income up 14% and adjusted EPS up 20%. While we're updating our 2025 sales and profit outlook, and expect a more flattish sales performance in 2026. We are confident in our ability to return to 200 basis points above market growth in 2027, driven by our strong new product development pipeline. We will now turn the call over to our moderator for the Q&A portion of the call.

[Operator Instructions] Our first question comes from the line of Brett Fishbin with KeyBanc.

Just a couple on the early 2026, if you can hit on the specific headwinds in a second. I was just curious, the green bar that related to rest of portfolio, organic growth is 4% to 7%. And I was hoping you could maybe touch on that part of the plan, given the deviation from the typical 6% to 8% when looking at it, excluding some of those new product introduction headwinds?

Yes, let me take that question. So what drives above-market growth of the 6% to 8% that you talked about is the new product introductions. Without new product introductions, the rest of our portfolio will grow at the rate of market. Now the headwinds that we're talking about, these 3 programs that we've highlighted that have given us headwinds in 2026, they're actually declining in 2026, which is -- which normally that would have helped us drive growth and get to that 6% to 8% range. So it's -- when you remove new products, the rest of the portfolio is expected to grow at the rate of market.

All right. Helpful. And then maybe specifically on the Cardio & Vascular items. I was hoping you could elaborate just a little bit on kind of the nature of the expected headwinds, whether it's a matter of loss of customer share of wallet for either of the 2 programs or whether it's tied to actual end market demand on both sides there? And then maybe I'll just squeeze in, like 1 quick follow-up. Just any thoughts on level of visibility into the return to market growth by 2H of next year, like how you get confident in such an improvement from, call it, like 2Q '26 into 3Q '26?

Yes, no problem. Thank you. So let me actually broaden your first question a little bit. I know your question was related to C&V. None of the products and customers that are talking about giving us headwinds either in 2025 or 2026 are loss products, loss of share, in-sourcing or products that are being pulled from the market. We are still the supplier for these products, and these products, all of them are still in the marketplace. Now getting specific to your Cardio & Vascular question, the headwinds that we are seeing is related to 2 electrophysiology products that had strong ramp in the first half of 2025, that we had anticipated would level out and that set down a little bit in the second half of 2025. And then we had visibility to the rate of growth kind of entering into 2026. These EP programs were scheduled to step up as we enter 2026. What we learned during the course of the third quarter is that the market adoption of these products has been less than what we had anticipated. This is new news. And as you can imagine, with the changing production plans and whatnot, we were -- we have been in discussion with our customers, since -- during the course of the third quarter, entering into the fourth quarter to kind of get our arms around it and the outlook that we're giving you right now for 2026 is as a result of this reduction in forecast. Now you talked about your second question being the level of visibility that we have. We still believe that we have very good visibility in our business. We have -- our backlog has remained steady. We entered the year at above $728 million of backlog and our backlog is still around the same number, around $730 million. That gives us good visibility. We have rolling customer forecasts from our customers for 12 months. We still have that visibility. Now what brings into question is the change that we're talking about today. And what I would like to highlight is maybe a little bit of a delineation between -- the -- some of the variability that we have in new product launches and how that can change over time as the products ramp, get into the market, get adopted at different rates and how our customers see changes that's what we're talking about. New product launches are inherently lumpy, if you will. But generally speaking, we see some do better, some do worse, Net total is that we kind of end up in the range that we had anticipated. What is unusual in this case is that we have a number of these programs having a big magnitude of change all at the same time. That is unusual. Let me just add 1 more answer to the question. I think one of the questions that you had is, in the second half of 2026, we are going to be anniversarying the big ramp, the growth that we had in the first half of 2026, which gives us also confidence in getting back to growth -- of 2025, pardon me, the first half of 2025.

Next question comes from the line of Travis Steed with Bank of America.

I guess one, just -- is this a PSA product or an RF product that's changed in EP? And is it -- basically, it sounds like it's a customer who as of Q3 you didn't really know about it until Q3. I just want to make sure that's clear. And it sounds like it's a customer where they just have a different view of the end market demand, and that's really the only change in the EP side. Is that right?

Yes. So let me try to frame it in the context of 2 EP products. I can't be specific about the type of product, Travis, but it is 2 EP products. Now what you stated about the customer's learning about their demand is accurate. So what happened is that they had given us a forecast based on what they anticipated the rate of adoption in the market would be. There was a ramp period in the first half of 2025 and there was a leveling out and a little bit of a lowering as they were trying to gauge the rate of market adoption and their rate of sales. And then we had a forecast entering into 2026 that would be then stepping up. What changed is that they came to us in the third quarter effectively telling us that the rate of adoption has not been as they had anticipated as a result, 2026 is going to be impacting.

Okay. And you didn't know about it until Q3, it sounds like?

We did not know about it until the third quarter. And as I mentioned earlier, when we learned about this, obviously, we worked with them to try to understand the rate of change, the magnitude, our production plans because, obviously, you can't change your production plans very quickly. So these discussions also continued into the fourth quarter.

Okay. And is it a U.S. product or an international product? Or both?

We -- I can't be more specific than that Travis. I wish I could be. But because of the confidentiality that we have with our customers, I need to be -- I need to make sure that I can't be overly specific that the product is identifiable other than these are 2 products in the EP space.

Your next question comes from the line of Joanne Wuensch with Citi.

So it sounds -- I think I have an idea of what's going on in EP. Could you please explain if it was a similar dynamic that went on in neuromodulation, where things were supposed to ramp at a particular rate. And then in the third quarter, people came back and said, "No, no, that's not what's really going on." Is it a similar dynamic or a different dynamic?

We believe that it has to do with the rate of market adoption of select products in this space. So this book of business, our emerging customers with PMA product has done really well over the past many years. We've talked about the rate of growth of this book of business. And as we entered in 2025, we continue to have very strong growth. In fact, I would even say into the third quarter, that book of business was growing well in the rate of 15% to 20%, and we had anticipated the same rate of growth in the second half that we had seen in the first half. But what happened is that in the third quarter, some of these customers, we learned that the forecast that we had anticipated is not materializing for some of these customers. And we think what's happening is that the primary reason for the change is they are they're trying to align the purchases from us to match the market demand that they're seeing.

That's in both section, sorry...

Yes, I apologize. So I think your question was, to make sure that I'm answering your question accurately. I think your question was related to 2025 because the impact that I talked about is specific to the fourth quarter of 2025. Was that your question?

No. Actually, I thought you did a great explanation of EP, and I was curious if it was a similar explanation for neuromod?

It's similar in the sense that we believe that a handful of these customers are not seeing the rate of market adoption that they had anticipated. This is -- it's a similar dynamic from that perspective. Now the book of business of these emerging customers is still growing. It's growing in 2025, even with a decline in the fourth quarter. The rate of growth is going to be in the high single-digit rate, which is in alignment with neuromodulation. So it is -- we think there are -- we think this is just a question of a handful of these customers chewing up what they've bought from us with what they're seeing in the marketplace.

Okay. Have you ever had an experience where you've had multiple customers, 3 in this case, sort of change their path in terms of their forecast and their ordering patterns with you? Or do you view this as sort of an aberration in your history of this business?

This is an aberration and is highly unusual. We see a rate of variation with new products. This is just normal. Our customers see that too. And we always take a step back and we look at what do we think the outcomes would be for each of these new products. And we kind of calculate a low case, if you will, a balanced view on the low case and a balanced view on the high case and on aggregate, we provide our guidance based on that. Some products do better than others, but usually washes out. So what we're talking about today is a number of them happening at the same time with a high level of magnitude. This is highly unusual.

Next question comes from the line of Matthew O'Brien with Piper Sandler.

Joe, best of luck in retirement. So Payman, just -- and sorry to stay on this topic on the C&V side. But as I calculated, I think it's about a $70 million reduction to your outlook for C&V for next year for those 2 EP products. I don't know if that's exactly the right number, but is that split evenly between these 2 programs? And then you say emerging customers, is that people coming along that were outside of maybe the top 3, your big 3 that are -- that make up about 45% of total sales. Is that how we should think about it?

So with regards to your first question, the math that you did is generally in the ballpark, but let me remind you that, that would be for 3 products, not for 2 EP products. So we have 3 products that have given us headwinds in 2026. 2 in electrophysiology, 1 in neuromodulation. Your second question is related, I think, to the emerging customers with PMA. No, these are emerging customers. That's why we put them in that bucket. These are customers that have new products, emerging therapies. We have about 39 customers that we've been working with and we have development pipeline with. Ten of those customers have products that are in the market or in different phases of launch. So these are not -- we're not necessarily talking about neuromodulation with the big customers. This is generally the grouping of customers that are newer and more emerging.

Okay. And the same goes on the EP side. It's people that are emerging versus those that are maybe a little bit more established for you guys again, you've got customer concentration among 3 big providers out there that I think is just under half of total sales. So it's the people that are not in that top 50 for you guys, top 50%, it's other providers.

Yes. Our EP business is very broad. So obviously, we have a good book of business with the largest OEMs as well as others. So it's a pretty broad business that we have. And we have products across the procedure. So any ablation procedure has different steps into it from the access to body, from navigating the body, from mapping, diagnosing and, of course, doing ablation. We have product across the board with a different range of customers. Beyond that, I hope you understand that I can't be more specific.

Got it. Okay. That's helpful. And then on the neuromod side, is it -- I guess, just kind of Joanne's question, it's an existing customer that is now seeing a little less adoption than they had expected. I mean, again, it would seem to be a pretty sizable customer. Is that a sizable amount of revenue that you hadn't been anticipating. So is that a fair assessment of kind of what's going on in the neuromod side too?

I think this is a question related to 2026. Is that correct?

That's right, yes.

Yes. So the 1 customer that you're talking about, yes, they had a sizable growth in 2025 and they were seeing less adoption in the market that they had hoped. So they have a sizable decline in 2026.

Your next question comes from the line of Nathan Treybeck with Wells Fargo.

Can you just give color on -- so these 2 EP products and the neuromod product, how long were they in the market? I'm trying to understand, was there an inventory build in 2025 that contributed to the sales growth and then the end market demand is just not panning out? Is that what happened?

So these products have been launched recently, and they have been ramping. Both of them had strong ramp in -- excuse me, all 3 of them had strong ramp in 2025. The EP product specifically had strong ramp in the first half of the year, in the first 2 quarters which is typical when our customers launch -- continue launching products, there's usually a period of ramp because they want to make sure they have sufficient product in their distribution channels as they get products out. And then there was a leveling out, which was, again, expected and anticipated once our customers then kind of proceed with launch and they wait to see what the rate of adoption is. And as I mentioned earlier, they're seeing less than rate of adoption. The -- which is why they changed their forecast on us for, which is primarily 2026 impact. The neuromodulation product was a similar scenario in the sense that they had strong demand and strong growth in 2025, but they are not seeing the rate of adoption and they're seeing headwinds in the marketplace, which is why we're seeing a decline.

Okay. And just to confirm the 2 EP products, they are from 2 separate customers?

I'm not at liberty to specify that again because we need to make sure that we maintain the confidentiality. So I had to be a little bit less specific in terms of how many customers, but I can tell you that there are 2 products.

Right. Right. So at a high level, I mean, the EP market is -- the outlook is for a pretty strong growth. It sounds like these were novel products and not tied to like existing procedures because the overall outlook is pretty positive and what we're hearing from the manufacturers is pretty strong growth. So I'm just trying to understand were these kind of products that were not tied to procedure volumes as they are right now?

These are -- so let me start with the strength of the EP market in general, you're correct. The EP market is very strong. We have seen very strong growth in our EP business over the past 4 or 5 years, actually, including in 2025. So we -- our EP business has done really well, because, again, you're referencing some new products. But even if you take any new products out of the equation, we have a portfolio that goes into a typical ablation procedure. So as the EP market grows, our business has tailwind because of that. Now -- if we -- if then I come back to the impact of these 2 products, if I remove the impact of these 2 products, our EP business still grows at the rate of market, which is doing really well. So this is isolated to the impact of these 2 EP products.

Okay. And just the last one for me. As we think about your prior outlook for the PMA portfolio, you're targeting 15% to 20%, 3- to 5-year CAGR. Is this kind of no longer intact.

No, it is still 15%, 20% CAGR over the next 3 to 5 years. We do anticipate some shorter-term headwinds, as we mentioned a little bit in the fourth quarter and during the course of 2026. Let me maybe add a little bit of color in 2026. We have -- if you take the one customer that we mentioned -- that I mentioned earlier that has headwind in 2026. If you take that out, the rest of the portfolio still grows at the rate of market, and we expect to get to above market growth in 2027 and beyond. And that's because new products that we have in the pipeline that are scheduled to launch and within that grouping of customers. We're not counting of any of the products that are giving us headwinds now to rebound in '27. It's more new product launches that we're expecting.

Your next question comes from the line of Andrew Cooper with Raymond James.

I'm going to ask maybe 1 more on the EP side, similar to 1 that was already asked. I know you can't get into the specific products, but like mentioned, EP procedures aren't really inflecting away from expectations from a market perspective. So given you talk about that breadth of portfolio, is there any potential for you to recapture some of this volume elsewhere with other customers? And what would that look like? And when could we think about seeing that if or when it potentially could play out?

Yes. Thank you for the question. So we -- our EP business, I would reiterate, as I said earlier, is doing very well, excluding these 2 products that are giving us headwind. And then I would also add that we have new products that are scheduled to launch in the second half of 2026 and 2027. In fact, we have new product launches. I'll go a little bit more broad and then I'll come back specific to EP. We have new product launches schedule in every one of our growth markets in EP, in neurovascular, structural, heart and neuromodulation in the second half of 2026 and 2027. So we fully expect that we're going to get back to growth. Now back to EP specifically, one of the reasons why we are confident that we're going to get back to growth is because we're going to be anniversarying the strong rate of growth that we had in the first half of 2025 in the second half of 2026. We're not -- we don't have those costs anymore. And when you add the strength of our EP portfolio in general and some of the other product launches that are planned, we are confident that we're going to get to growth in the second half of 2026 and to above market growth in 2027.

Okay. Helpful. And then maybe a second one, just on margins and your ability to sort of offset the drag here looking for close to flat profitability similar to what you're expecting for revenue. So how do we think about the magnitude of potential cost out that you might be able to achieve here? Or is this, hey, we've got to be able to drive volume back to where we would expect and that's when we get back to more of that margin expansion like a typical year.

Yes. And Andrew, this is Diron. Just to confirm, you're referring to the 2026 margin?

2026, correct, sorry. Correct.

Yes. So when we look at the '26 profit, as you know, we have put in a range of our adjusted operating income of down 5% to up 4%. That range, first of all, to note is very consistent with our sales range that we have also provided. So we're matching the sales range with that. Our profit algorithm, essentially, we rely on operating expense leverage on volume as well as our gross margin expansion primarily from an Integer Production System. As you can imagine, the volume piece of that algorithm will be a little bit more challenging in 2026. But we still have a very strong foundational process in our Integer Production System we focus on direct labor efficiency, where we reflect a focus on direct material efficiency as well. And we believe that's where we'll still be able to drive continuous improvement and see margin expansion. At the same time, with the lower volumes, we will be very disciplined in our cost management as we manage through these 3 quarters of headwind that we're facing. And so we believe next year, although down 5% to up 4% on the AOI range, we believe that we will be able to deliver on that, and we'll work to narrow that range as we get into February.

Okay. I'll stop there. And Joe, congrats and enjoy your retirement.

Your next question comes from the line of Richard Newitter from Truist Security.

Maybe I want to just go back to the process that you guys have for forecasting the business. I appreciate your [ CMO ], things are lumpy. You're dependent on customer orders. Historically, I think you said you have 3 months or more visibility. And usually, things work out, right, when you don't have 3 customers coalescing at once. So the puts and the takes work out. But I guess just in light of the fact that this happened this year, can you talk to us about any of the processes that need to be changed for your forecasting or how you potentially took into account the possibility for something like this happening again next year with the guidance that you're providing, where you guys are more of a [ Steady Eddie ] even with some of the quarterly variability. So I'm just trying to get a sense for how much visibility and then with the outlook that you're putting out now in '26, how we should be interpreting that from a conservatism standpoint.

Yes. And look, as you can imagine, we have been reflecting on this a lot. And we get customer forecast and we get purchase orders, as you correctly pointed out, and we got great visibility by our backlog, which, again, as I mentioned earlier, still in the range of $730-ish million, which gives us good visibility at least 1.5 quarters plus and then tie that to the forecasting that we get from our customers. This is highly unusual. We are looking at what our algorithm is and has been and how we calculate, if you will, our forecast has not changed. We -- for products that are in the longer term in our pipeline, we risk adjust those. Our customers tell us a certain range of outcomes. We look at that, we risk adjust those. And also, as you correctly pointed out, in sum total, they kind of wash out, and we usually end up in that range, that we expect 4 products that are longer, if you will, in the development cycle. In the shorter term, our production plan is based on what our customers tell us. If the customers tell us to build and deliver X, that's what we will do. So what's unusual is that they came to us and revised their forecast that impacted a shorter term than we would normally expect. So again, we're talking about the unusual nature of multiple customers, multiple products, large magnitude, all in a short period of time. We don't expect and anticipate that this will be a recurring thing. This is unusual.

Okay. And then -- hello, can you hear me?

Yes, yes, of course.

Sorry. Just maybe going back to the differences in the EP products, the electrophysiology projects and the neuromod projects. These are both products that were on the market and generating revenues throughout 2025 and in prior periods. These are not new and emerging PMA products where the PMA is about to get going or waiting for approval, correct? They just fall in the bucket of your PMA kind of R&D division. Is that right?

Both of these -- or all 3 of the products in EP and neuromod are products that have been in the market in 2025 and are still on the market and expected to be in the market in 2026. We are also the supplier for these products. In terms of the supply, nothing has changed. It just has to do with the rate of adoption of the products that our customers are seeing.

Okay. And then just a follow-up on that. Are any of them finished good situations. I know you have -- you guys insert yourselves in many parts of the manufacturing processes. You can be very small slivers for different product areas. Is this -- are any of these related to finished goods where you have a bigger percentage of the overall manufacturing?

It's -- we have had a good portion. What I can be specific on is that we have a good portion of a bill of material beyond that, Rich, I can't be more specific.

Your next question comes from the line of Suraj Kalia with Oppenheimer.

Good morning, gentlemen. Joe, congrats on your retirement. Wish you the very best. Payman, can you hear me all right?

Yes, I can.

So Payman, Diron, a lot of things have been thrown in this call. So forgive me if this question is long, just hopefully, I make sense here. So Payman, by definition, there are demand schedules established through which you'll come up with your backlog, right? You say your backlog is largely unchanged, but 2 EP customers are seeing softness. So I'm struggling to reconcile the contractual arrangements versus the suddenness of the demand curve moving leftward. I'm also struggling, Payman, just doing an exercise here, right? I'm trying to connect all the dots here on the EP side. So you're bullish about a new product in second half '26. Logic tells us that's [ bold ]. BSX already has -- is in the market, right? But there are 2 customers that you'll have seen the demand schedule move left. I mean, logic tells me you are implicitly telegraphing it's change in Medtronic. I know it's a long question, Payman. Help us understand because it's like suddenly a lot has been thrown in this whole story.

Suraj, I fully appreciate the question and what you're talking about. Yes, there are a number of moving parts, and that's what I keep referring as being highly unusual for us. So let me talk specifically about your first question, which had to do with our backlog and our visibility to orders. Yes, customers place orders. Again, if we have about $730-ish million in backlog, that is about 1.5 quarter worth of orders, right? I mean, if you want to just kind of look at it on average. So that's where we have good visibility to. Now let me highlight the following: we always work with our customers to meet their demand needs. If our customers tell us that they have purchase orders that they need us to then exceed and try to increase our capacity, we do everything that we can to do that, and we do the opposite as well. We try to work with them. If they come and tell us, look, I have more demand on you that I need, and I would like to scale that down. We work with them to do this in an orderly manner. And not necessarily look at, if you will, contracts and whatnot. We try to work with them to try to meet their demands and needs. Now let me highlight and be specific that the impact of electrophysiology products is 2026. We don't expect an impact on that in 2025, and our C&V business is still expected to grow per our previous guidance, which was in the mid-teens. So that has not changed, that is purely a 2026 impact. And let me also highlight that we are mostly sole sourced in our business. And ultimately, we see the products that end up in the marketplace even though if there are fluctuations in the shorter term and a little bit of variability, where we are sole sourcing the products, we end up seeing that demand over time. Maybe I think you had another question, Suraj, that was specific to products and customers. And of course, you understand that I can't be more specific on those.

I totally respect it, Payman and I hope you all appreciate. That's why all of us are trying to get bits and pieces here. So Payman, on the second part of my question, right, on the Q2 call, you had $5 million to $10 million, at least that was, if I remember correctly, pull-through in revenues. Payman, can you be a little more specific and tell us if it was specifically in EP? And part of the reason I ask this is if you were already -- there was already a sense of softness brewing on the EP side. Ultimately, Payman, it is hard to reconcile other company commentary in the EP space with what you all are seeing, right, the RFA softness has already been telegraphed. I cannot imagine that is the reason for the softness. So logic tells us there's something brewing in PFA. I'm just trying to connect all the dots here. Sorry for the lengthy question.

No, fully understand Suraj, thanks for all the questions. So let me try to address them one by one. The shift between 3Q and 2Q was multiple products. There were about 3 separate events that I had mentioned that were not specific to EP. So that was multiple products. With regards to what you're talking about the strength in the EP space, you're absolutely correct. The EP market is doing really well. And we have and in 2025, continue to do well and will do so in 2016 as well if you exclude the impact of the 2 products in question that are declining. So our portfolio in the electrophysiology continues to do really well, and we expect it to grow at the rate of market in 2026, excluding the negative impact of these 2 EP products. And once we anniversary in the second half of the year, the impact of the ramp that we had in the first half of 2025, we fully expect to get back to growth for our total business, but of course, in EP as well to the rate of market growth and then be above market growth in 2027. We see this as a 3-quarter headwind, in the fourth quarter and the first half of 2026, and we fully expect to get back to growth in the second half of '26 and above market growth in 2027.

Your next question comes from the line of Andrew Cooper with Raymond James.

One more follow-up here. But -- maybe just diving into this one other way. Can you share a little bit of context on the EP side of how much of this is lapping inventory build versus truly lowering how you and your customers think about the end market demand because I think that's the question we're all trying to get to. If these customers are slower, are you telling us the end market is a little bit slower and it's not getting made up for elsewhere, it's getting made up for in other customers that you don't work with or other players that you don't work with or kind of what is the situation there? Because I think that's kind of one of the key pieces here. That all these questions are going to in terms of what's going on in the EP market versus specific customers given you are broadly exposed like you talked about.

Yes, I fully understand the question. And it's as an element of both. I mean our customers had a ramp. They got products from us. They're adjusting. They're getting real-time feedback as to the rate of adoption in the marketplace, what they're seeing those products doing and they're adjusting their demand on us. So it's probably an element of both.

And that's all the time we have for questions. I will now turn the call back over to Payman Khales for closing remarks.

Okay. Thanks, everyone, and I'd like to summarize our conversation today. We're facing a 3-quarter sales headwind, and we expect to return to growth in the second half of 2026. We have a strong development pipeline and expect to get to above market growth in 2027 and as I take on the helm, I'm excited to lead our team to deliver for patients, customers and shareholders. And thank you again for your time and interest in Integer.