Integer - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered solid top-line and non-GAAP profitability: revenue $437.4M (+7.3% YoY; +6.3% organic), adjusted operating income $70.9M (+14% YoY), and adjusted EPS $1.31 (+14.9% YoY).
• Both revenue and adjusted EPS beat Wall Street consensus; GAAP EPS was a loss due to a one-time $46.7M debt conversion inducement from refinancing, while adjusted EBITDA rose 14% to $91.5M; estimates context below (S&P Global).
• Guidance raised: 2025 adjusted net income to $218–$231M (from $208–$221M) and adjusted EPS to $6.15–$6.51 (from $5.84–$6.20), driven by ~$13M interest expense reduction from the March 2030 convertible notes offering; CFO target increased to $235–$255M.
• Near-term catalysts: continued strong C&V ramps (EP, structural heart) and the coatings tuck-ins (Precision Coating, VSi Parylene), plus capital structure optimization; leadership transition announced (CEO succession effective Oct 2025) supports continuity of strategy execution.

What Went Well and What Went Wrong

• What Went Well

  • Cardio & Vascular sales up 16.7% YoY (10.9% organic), driven by new EP product ramps and acquisitions; management reiterated outgrowing EP market and broader C&V momentum.
  • Margin expansion in adjusted operating income: AOI as % of sales expanded ~100 bps YoY to ~16.2% from gross margin and OpEx leverage, supporting 14% AOI growth.
  • Strategic refinancing: $1.0B 1.875% 2030 convert issued, exchanging ~77% of 2028 notes; expected ~$13M interest expense savings and +$0.31 to 2025 adjusted EPS outlook.

• What Went Wrong

  • GAAP loss: diluted EPS from continuing ops was -$0.66, primarily due to $46.7M debt conversion inducement expense recognized in “Other loss, net”.
  • CRM&N growth slowed to 2.2% YoY (days headwind); management guides segment to low-to-mid single-digit growth near term (mix improving with PMA neuromodulation).
  • Other Markets declined 37.4% YoY (22.9% organic) due to planned multi-year Portable Medical exit; inorganic offsets are limited in 1H25 year-over-year comparisons.

Transcript

Operator (participant)

Good morning and welcome to the Integer Holdings Corporation First Quarter 2025 earnings conference call. All participants are in a listen-only mode. After the speaker's remarks, we will conduct a question-and-answer session. To ask a question at this time, you will need to press star followed by the number one on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the call over to Sanjiv Arora, Senior Vice President, Strategy, Business Development, and Investor Relations. Thank you. Please go ahead.

Sanjiv Arora (SVP of Strategy, Business Development, and and Investor Relations)

Good morning, everyone. Thank you for joining us and welcome to Integer's First Quarter 2025 Earnings Conference Call. With me today are Joe Dziedzic, President and Chief Executive Officer; Payman Khales, President and CEO-Elect and Chief Operating Officer; 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 the 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 actual results to differ materially.

On today's call, Joe will provide his opening comments. Diron will then review our adjusted financial results for the first quarter 2025 and provide an update for the full year 2025 outlook. Joe will come back and provide his closing remarks, and then we'll open up the call for your questions. With that, let me turn the call over to Joe.

Joe Dziedzic (President and CEO)

Thank you, Sanjiv, and thank you to everyone for joining the call today. Before we discuss our first quarter results, I want to comment on the planned CEO succession we announced today. I am incredibly proud of what we have built at Integer during my eight years as CEO. We have a clear vision, a compelling growth strategy, and a strong values-based culture. The business is delivering for customers, patients, associates, and shareholders. We have a ready now CEO in Payman Khales. He has been an integral part of developing and executing Integer's strategy and the creation of our high-performance culture. Payman led our cardiovascular business for seven years and delivered outstanding results, including doubling the C&V sales while improving profitability. We have expanded Payman's responsibilities over time as part of our leadership development plans, including overseeing the C&V CRM&N businesses as COO.

Now is the right time for the business to transition the CEO role to Payman from a position of strength. I am confident Payman will build on Integer's track record of success, and I look forward to retiring later this year, when I will begin exploring the world with my wife and spending more time with family and friends. This transition will be effective on October 24, 2025, and I will then stay on as an advisor through March 31, 2026. I'll hand the call over to Payman for a few words.

Payman Khales (President and CEO-Elect and COO)

Thank you, Joe. I'm thrilled to be named President and CEO at this exciting time for Integer. I would like to thank you and the board for having faith in me to lead this amazing company into our next chapter. We have a lot of momentum in the business as we continue to build differentiated capabilities and collaborate closely with our customers to deliver innovative medical device technologies to patients around the globe. I look forward to partnering with Joe over the coming months to prepare for the transition while we continue to focus on executing our strategy. Now I'll turn the call back to you.

Joe Dziedzic (President and CEO)

Thank you, Payman. Let's look at our first quarter results. In the first quarter, we delivered strong performance with sales increasing 7% year-over-year on a reported basis and increasing 6% on an organic basis. Our adjusted operating income grew 14% as we improved our gross margin rate and leveraged our operating expenses. We are reiterating our 2025 sales outlook of 8%-10% reported growth and 6%-8% organic growth. We are confident in our ability to deliver strong sales growth, given our high visibility to customer demand, including ramping programs in high-growth markets. We are also reiterating our adjusted operating income outlook of 11%-16% growth year-over-year. This includes a $1 million-$5 million estimated tariff impact. We are raising our adjusted earnings per share outlook by $0.31 to include the benefit of our March convertible note offering.

This represents strong adjusted EPS growth of 16%-23%. The strong execution of our strategy by all Integer Associates is enabling us to sustain above-market growth and expand our margins. We also continue to execute our inorganic growth strategy while continuing to manage our debt leverage within our target range of two and a half to three and a half times EBITDA. During the first quarter, we completed two tuck-in acquisitions, Precision Coating and VSi Parylene, which increased Integer's service offering to include differentiated and proprietary coating capabilities. It's an exciting time at Integer because we have a strong pipeline of new products concentrated in faster-growing end markets. Our margins are expanding as a result of our manufacturing and business excellence initiatives, and we continue to acquire and integrate tuck-in acquisitions that add or compound differentiated capabilities.

I am grateful for our associates around the world who are delivering for customers and making a difference for patients. I'll now turn the call over to Diron.

Diron Smith (EVP and CFO)

Thank you, Joe. Good morning, everyone, and thank you again for joining today's call. I'll provide more details on our first quarter 2025 financial results and provide an update on our 2025 outlook. In the first quarter of 2025, we delivered strong financial results. Sales totaled $437 million, reflecting 7% year-over-year growth on a reported basis and 6% on an organic basis. Organic sales growth removes the impact of our Precision and VSi acquisitions in the first quarter 2025, the strategic exit of the portable medical market announced in 2022, and foreign currency fluctuations. We delivered $92 million of adjusted EBITDA, up $12 million compared to the prior year, or an increase of 14%.

Adjusted operating income also grew 14% versus last year, or two-time sales growth, as we continue to make progress on our year-over-year margin expansion. Adjusted operating income as a percent of sales expanded approximately 100 basis points year-over-year to 16.2%, nearly 70 basis points from gross margin and 30 basis points from operating expense leverage. Adjusted net income for the first quarter 2025 was $46 million, up 19% year-over-year, while adjusted earnings per share totaled $1.31, up 15% from the same period last year. Cardio & Vascular sales increased 17% in the first quarter 2025, driven by new product ramps in electrophysiology and incremental sales related to the Precision Coating and VSi Parylene acquisitions, partially offset by the impact of fewer shipping days in first quarter 2025 versus first quarter 2024.

On a trailing four-quarter basis, C&V sales increased 14% year-over-year, with strong growth across targeted C&V markets driven by electrophysiology and structural heart, as well as the contribution from acquisitions. For the full year 2025, we expect C&V sales to grow in the mid-teens compared to the full year 2024. Cardiac Rhythm Management & Neuromodulation sales increased 2% in the first quarter 2025, driven by strong growth from emerging PMA customers and Neuromodulation and normalized growth in CRM. This was partially offset by the impact of fewer shipping days on a year-over-year basis. On a trailing four-quarter basis, CRM&N sales increased 6% year-over-year, driven by strong growth from emerging PMA customers and Neuromodulation and low single-digit growth in Cardiac Rhythm Management. For the full year 2025, we continue to expect CRM&N to grow low to mid-single digits as compared to the prior year.

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 first quarter 2025, we delivered $46 million of adjusted net income, up $7 million versus a year ago, which was driven by operational improvements as FX, interest, and tax had a negligible impact on a year-over-year basis. Operational drivers include higher sales volume, manufacturing efficiencies, operating expense management, expanding margins, and acquisition performance. Our adjusted effective tax rate was 17.4% for the first quarter of 2025, down from 18.1% in the prior year. We continue to expect our adjusted effective tax rate to be within a range of 19%-21% for the full year 2025. Our first quarter adjusted earnings per share is impacted by both higher adjusted net income and higher adjusted weighted average shares outstanding.

The year-over-year increase in adjusted weighted average shares outstanding drove approximately $0.04 reduction to our adjusted EPS. This is primarily due to strong performance of the Integer stock price and the resulting dilutive effect of our 2028 convertible notes. In the first quarter 2025, we generated $31 million of cash flow from operations, up 35% from a year ago. This performance was driven by improved operational execution, primarily from higher sales and improved margins. Our CapEx spend in the first quarter 2025 was $25 million, which is in line with our full-year guidance. As a result, free cash flow was $6 million in the first quarter, an improvement of $12 million from the prior year.

At the end of the first quarter, net total debt was $1,230,000,000, which is a $275 million increase compared to the fourth quarter 2024 ending balance, reflecting the acquisitions of Precision Coating and VSi Parylene, as well as costs associated with our convertible note offering. Our net total debt leverage at the end of the first quarter was 3.3x times trailing four-quarter adjusted EBITDA, within our strategic target range of 2.5-3.5x. In March of 2025, we completed a strategic refinancing of our capital structure, which significantly increased the portion of our debt fixed at a sub-2% rate. We expect this structure to reduce our interest expense by approximately $13 million in 2025. This is reflected in the $0.31 increase to our full year 2025 adjusted EPS outlook. Additionally, this structure creates revolver capacity, allowing us to support our tuck-in acquisition strategy.

To refinance our debt, we issued $1 billion of convertible notes due in 2030, with a fixed coupon rate of 1.78% at a conversion premium of 27.5%. We used the proceeds to exchange nearly 77% of our in-the-money and outstanding 2.8% convertible notes due 2028, fully repay outstanding borrowings and accrued interest under our revolving credit facility, partially pay down our Term Loan A, and to purchase capped calls related to the notes to minimize the potential dilutive effect on shareholders by raising the effective conversion premium from 27.5%-60%. Turning to our 2025 full-year outlook, we are reiterating our 2025 sales adjusted EBITDA and adjusted operating income outlook while raising our adjusted net income and adjusted earnings per share outlook. We continue to expect sales in the range of $1,846,000,000-$1,880,000 and an increase of 8%-10% versus last year.

On an organic basis, we expect sales growth of 6%-8%, which is approximately 200 basis points above our underlying market growth estimate of 4%-6%. We reiterate our adjusted EBITDA outlook range between $401 million and $422 million, reflecting growth of 11%-17%. We also continue to expect adjusted operating income between $315 million and $331 million, a growth of 11%-16%. This is inclusive of our estimated tariff impact of $1 million-$5 million for 2025. We are raising our adjusted net income outlook by $10 million, reflecting the impact of interest expense savings net of tax. We now expect adjusted net income to be between $218 million and $231 million, an increase of 19-26% versus 2024.

This results in an adjusted EPS outlook between $6.15 and $6.51, which is a growth of 16%-23% on a year-over-year basis, a raise of $0.31 compared to our February 2025 outlook. Our outlook assumes adjusted weighted average dilutive shares outstanding of 35.5 million shares for both the second quarter and full year 2025. Our expected reported sales growth of 8%-10% for 2025 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. For the second quarter of 2025, we expect reported sales growth in the high single digits compared to the second quarter of 2024.

We expect minimal inorganic sales contribution as the second quarter year-over-year impact from acquisitions is mostly offset by the year-over-year decline in Portable Medical, similar to the year-over-year impact in the first quarter. We continue to expect adjusted operating income as a percent of sales to expand throughout the remainder of 2025, driven by continued improvement in manufacturing efficiency and sales growth, our growth in operating costs. At the midpoint of outlook, adjusted operating income as a percent of sales is expected to expand 76 basis points in 2025 compared to the full year 2024. We have raised our outlook for cash flow from operations by $10 million to now be between $235 million-$255 million, which represents a 20% year-over-year increase at the midpoint of the outlook. Our outlook for capital expenditures is unchanged at $110 million-$120 million as we continue to invest in capabilities and capacity.

As a result, we now expect to generate free cash flow between $120 million and $140 million, a $10 million increase compared to our February 2025 outlook. We expect our 2025 year-end net total debt to be between $1,115,000,000 and $1,135,000,000, reflecting the impact of our debt refinancing. We expect to end the year with a leverage ratio within our target range of two and a half and three and a half times trailing four-quarter adjusted EBITDA. With that, I'll turn the call back to Joe. Thank you.

Joe Dziedzic (President and CEO)

Thanks, Diron. Our first quarter results demonstrate a strong start to the year. We have increased our full-year earnings per share outlook after a very successful convertible bond offering and are projecting adjusted EPS growth of 16%-23%.

We are executing our strategy and delivering on our three financial objectives of growing organically above the market while expanding margins and maintaining debt leverage between 2.5-3.5x EBITDA. We are well positioned for the promotion of an experienced Integer leader to the CEO role through a well-managed process over the next year. I have never been more confident in Integer, in our strategy, in our associates, and our ability to earn a valuation premium for shareholders. We will now turn the call over to our moderator for the Q&A portion of the call.

Operator (participant)

Thank you. As a reminder, to ask a question, please press star, followed by the number one on your telephone keypad. In the interest of time, we ask that you please limit yourself to one question and one follow-up and rejoin the queue for additional questions. Thank you. Our first question will come from Brett Fishbin from KeyBanc. Please go ahead. Your line is open.

Brett Fishbin (VP and Equity Research Analyst)

Hey, guys. Thanks very much for taking the questions. Joe, congratulations on the planned retirement. I just wanted to maybe start off with kind of the news of the month around tariffs. I think we were pretty encouraged by the press release that you put out and was just interested how you got to the $1 million-$5 million estimate for impact on adjusted operating income. Maybe more specifically, how you were able to limit what you're expecting to see to that range based on some of your international footprint? Thank you.

Joe Dziedzic (President and CEO)

Good morning, Brett. Thanks for the question on tariffs. Love to clear that one off the decks here. $1 million-$5 million remains our estimated impact for 2025. We're working to make that zero. It is included in our forecast, so there's no adjustments required. Our guidance incorporates this now. We think about tariffs kind of in two different flows. We think about what we sell to customers and then what we buy from suppliers. In what we sell to customers, our customers manage the logistics of moving those products from our manufacturing facilities to their manufacturing facilities or to their distribution centers. That's their responsibility. They pay the logistics. They manage that process. For what we buy, we manage the logistics, and we're responsible for the products from taking them from our supplier's location to wherever we are consuming those materials.

That mechanism of the buyer is typically the one responsible for managing and paying for the cost of moving product, which insulates us really well on what we sell. On what we buy, we still source primarily from United States-based suppliers. That certainly insulates us from import tariffs. Of course, there are tariffs if there are tariffs on countries against product moving from the United States into those countries because we have a global manufacturing footprint. There could be exposure there, and that's really what's driving our $1 million-$ 5 million range. We source very, very, very little from China. The very high tariff on imports to and from China impacts us in a negligible manner. That's how we're confident in our $1-5 million estimate. Again, we're working to make that as close to zero as possible.

Brett Fishbin (VP and Equity Research Analyst)

All right. Thank you. And then just for my follow-up, maybe the one area to nitpick a little bit on the quarter was just the deceleration in CRM and segment. Just curious if you could walk through what you saw in that segment this quarter, if there were any headwinds. Maybe just more broadly, I think you might have commented low to mid-single-digit growth expectation for this year, which is a bit of a slowdown from the past couple of years as well. Yeah, just trying to think through if that's the right run rate to think about longer term or if there are specific factors this year that are maybe negatively impacting it versus the past couple. Thanks again.

Joe Dziedzic (President and CEO)

Certainly. I'll start with we delivered the high end of our sales guidance for the quarter, so we feel like we're doing our job in managing all the moving parts. Every quarter, there's always moving parts. In this case, with CRM&N and in 2% growth, I'd start with we did have fewer selling days in the quarter, so that's a bit of a headwind when you look at all the sales across the board. We had that factored into our guidance and our expectation. The emerging PMA customers continue to grow very nicely. We gave guidance that we expect the three- to five-year outlook for that group of customers to grow in the 15%-20% range, which is 2x the market. Those customers, those products continue to grow nicely.

CRM&N has normalized back to a low single-digit growth rate, especially when you adjust for the headwind on days. CRM&N came in where we expected. You did see some strength in C&V where we continued to do well with our new product launches and helping customers get products to market quickly. That is where we continued to see strength, and it got us to the high end of our range. No surprise from us for CRM&N. In aggregate, we ended at the high end of our sales guidance range. On your question about low to mid-single digits on a go-forward basis, I'd probably lean a little more towards the mid-single digit on a go-forward basis as the Neuromodulation products become a higher percentage of that total.

That will improve the mix and the growth rate for that segment as you look out over multiple years.

Brett Fishbin (VP and Equity Research Analyst)

All right. Thank you.

Joe Dziedzic (President and CEO)

Thanks, Brett.

Operator (participant)

Our next question comes from Craig Bijou from Bank of America. Please go ahead. Your line is open.

Craig Bijou (Equity Research Analyst)

Hey, guys. Good morning. Thanks for taking the questions. I want to start with C&V, and obviously, nice growth there as you have been delivering for several quarters. You called out electrophysiology, and I know that's been an area of strength for you guys for a number of quarters. I guess in the past, you've talked about how that growth, your own EP growth has compared to the market. I think in the past, it's been ahead of what the market's growing. Basically, I just wanted to get your updated thoughts on how that growth is relative to the market, if that EP growth is maybe accelerating within C&V, or if it's some of the other smaller but important areas that you've called out like structural heart or even RDN now.

Joe Dziedzic (President and CEO)

Sure. We continue to see strong growth overall in the cardiovascular segment. We've talked about the four targeted growth markets. Three of them are in cardiovascular. We do continue to build that pipeline and launch new products. Electrophysiology does continue to outgrow the markets very nicely there. We've reiterated that we participate in many steps in that procedure. It's not just the ablation step. That volume growth in the industry is contributing to our growth. The pulsed field ablation is also an opportunity for us as we get higher, we're getting higher content on average on the ablation catheter in that step. We remain excited about electrophysiology. It continues to be a strong contributor to our growth. We are growing above the market. As you highlighted, there's other growth factors as well in the business that we remain excited about.

It starts with that development pipeline that gives us confidence in our ability to sustainably outgrow the markets organically.

Craig Bijou (Equity Research Analyst)

Great. Thanks, Joe. Maybe a follow-up on tariffs. I understand that it's not a big dollar amount for 2025, and you guys are working to get it even lower. How should we think about that impact in 2026? I appreciate the comments on what is driving the tariff impact for you guys. Is there anything within contracting or anything that may potentially make 2026 a little bit higher from a tariff impact other than just maybe it's running through the balance sheet?

Joe Dziedzic (President and CEO)

It is a good question. If I could predict the future and all the variables that go into that, I would give you a really specific answer. I will just take the current view of tariffs and what is out there now. We would expect 2026 to be really the run rate of what we are seeing this year, somewhere in that one- to five-range. We would not change the estimate for 2026. Meaning, if we end up somewhere in that range this year, I would not expect a meaningful increase in tariff cost in 2026 compared to 2025. It would be in that one- to five-range. We are pretty confident in the products we sell and how those flow from our plant to our customers. On what we buy, I will reiterate, the majority of what we buy comes from U.S.-based suppliers.

We're insulated from import tariffs into the U.S., and we feel good about where we're sourcing from. Again, we're not really impacted by sourcing from China because we source very, very little from China. We feel good about the one to five estimate this year. I would say if we end up with two or three this year or one, it would still be in that cumulative one to five when you get into 2026.

Craig Bijou (Equity Research Analyst)

Got it. Very helpful. Thanks, guys.

Joe Dziedzic (President and CEO)

Thanks, Craig.

Operator (participant)

Our next question comes from Richard Newitter from Truist Securities. Please go ahead. Your line is open.

Richard Newitter (Managing Director)

Hi. Thanks for taking the question. Joe, congratulations. Best wishes to you. I wanted to just ask, are the conversations or the strategic outlook and the way that you fit into some of your key OEM customers, are they engaging you differently or more aggressively than maybe prior to Liberation Day, if you will? I'm just trying to get a sense for kind of how this, taking a step back, potentially accelerates the trend to diversification or vertical integration of supply chains and things like that. Anything that you could provide there? In the context of that, if you could also just give us an update on what the backlog trend looks like.

Joe Dziedzic (President and CEO)

Sure. I guess I'd start with you've read what I think most of the OEMs in the industry have said, which is something like, until we have greater clarity on the direction of tariffs, the permanency or lack of permanency, or clarity on the amount of tariffs, it's really hard to do a thoughtful economic analysis of what your manufacturing footprint should be. You could go down the path of making meaningful changes in your manufacturing footprint and your, I'll call them country pairs, where you make stuff, where you sell stuff. Then tariffs change. The amount of tariffs or the tariff and the direction that the tariff is imposed on changes. You maybe have made a strategic decision and an investment that turns out to be a really bad decision.

It does feel like, from what you're reading publicly, what we're hearing is that everyone's being thoughtful about, let's see how this plays out, and let's get to what we might consider to be a more stable environment beyond whatever negotiations are going to occur and trade agreements are going to take place. My answer is we're not seeing any rush or race to make any substantive meaningful changes. Of course, everyone is looking at, based upon the current footprint and where things are manufactured, where they are sold, where they are distributed, people are reflecting on, within that existing structure, what can we do? I'll just reinforce the industry has a very global manufacturing footprint. Yes, there's plenty of manufacturing occurring in the U.S. You know there's manufacturing hubs in Ireland, particularly Galway, but across Ireland, there's significant manufacturing in med device.

Costa Rica is a large manufacturing location - Mexico, Southeast Asia. All of those products that are made all over the world are distributed all over the world. It really is a globally integrated supply chain with product and materials flowing across the globe. These tariffs are disruptive to that flow and that process. You also got to consider the wage rates. There is a meaningful wage rate differential between some of the locations I just mentioned outside the U.S. and the U.S. That is very much a variable that we're hearing everyone talk about, think about, and consider. I guess my answer is we're not seeing a race to any significant structural changes, but of course, everyone's looking to optimize within the existing footprint today.

Richard Newitter (Managing Director)

Okay. Very helpful. [crosstalk] Oh, go ahead. Yeah.

Joe Dziedzic (President and CEO)

You asked about our backlog trend or the order book. We published a number, I think it was $728 million in our 10-K for year-end. We're actually closer to $800 million now. As we continue to introduce and bring new products to the market, we ask customers to place orders for those new products to give us certainty for some period of manufacturing as we ramp up a manufacturing line, hire associates, train them. We want a certain amount of kind of fixed guaranteed. We know we're going to build a certain amount while we're investing in that ramp. That's caused our order book to actually go up closer to $800 million. We still think, based upon the factors we've talked about for the last three or four years, that that number is going to come down as we get closer to year-end.

We absolutely expect it to, based upon the orders for our facility in Ireland that we opened. We were asking customers to place orders 18 months out so we could better manage the allocation of that capacity. We're not asking customers to place orders that far on anymore, so we know that's going to come down. We've talked about Portable Medical and how we finished shipping those last-time byproducts in 2025, so we know those orders go away. A strong order book today gives us excellent visibility to the rest of this year. Just remember, we do expect that number to come down for the factors I just mentioned.

Richard Newitter (Managing Director)

Thank you.

Operator (participant)

Our next question comes from Nathan Treybeck from Wells Fargo. Please go ahead. Your line is open.

Nathan Treybeck (VP for Equity Research)

Hi. Thank you for taking the questions. I just wanted to clarify on the tariffs. Does this contemplate a scenario where the 90-day pause ends and many of the proposed tariffs go into effect?

Joe Dziedzic (President and CEO)

Yes, it does.

Nathan Treybeck (VP for Equity Research)

Okay. That's helpful. For my second question, just around the PMA launches that you had in Q4, they impacted gross margin in that quarter. As you ramp the manufacturing lines, do you expect this to be a material driver of gross margin expansion this year? Will this offset the tariff impact?

Joe Dziedzic (President and CEO)

The offset to the tariff impact is really us just managing the business. Every year, there are moving parts. There are positive things and negative things that happen throughout the year. The guidance range we provided on operating profit of $315 million-$331 million allows for some of those moving parts. In this case, I would not call out anything specific as to an offset of tariffs other than it is a rounding error in the sense of $325 million at midpoint on operating profit, but maybe to add a little color to the gross margin. The first quarter gross margin was 28.7%. That is up 60 basis points on the full year. Gross margin rate for 2024 is up 120 basis points from our fourth quarter margin rate. I know we talked about gross margins quite a bit in the fourth quarter.

Like we said last quarter, the gross margin, it can be impacted by the timing of new product launches, by hiring associates, training them while you're not shipping product yet, or you ramp a line. Until you get that manufacturing line up to a certain volume, you've got inefficiencies just baked into the throughput of that line until you get up to manufacturing yields. What we saw in the first quarter was an improvement in some of those operating lines and those new products. What I would caution everyone is that for the full year, I would not take the first quarter gross margin and just add to it from there. You've heard me say many times, life isn't linear. Business isn't either. We would expect some variability in gross margins going forward for all the reasons we've talked about over the years.

What I would reiterate is our guidance for the full year is intact. We still expect for the full year to deliver margin expansion at midpoint at 76 basis points on operating margin. That operating margin increase will come from some gross margin expansion. We are off to a great start in the first quarter on doing that, as well as leveraging our operating cost. We have said that for the full year, we expect SG&A to grow more in line with sales, so not as much operating leverage there. That is a result of the acquisitions bringing SG&A in. On the RD&E, we would expect to continue to grow the amount of revenues we generate from customers for that development work. We would expect our RD&E expense line to grow slower than sales. We would expect to get some operating leverage there.

Nathan Treybeck (VP for Equity Research)

If I could just sneak one more in, just on customer inventory levels. I mean, you've gotten this question a lot, but now I'm thinking about it the other way where, given the 90-day pause and tariffs, are you seeing customers build inventories kind of as a precaution? Could this be a tailwind for you?

Joe Dziedzic (President and CEO)

We are not. We would look at that as purely timing. If that were to happen, that would be disruptive to our manufacturing processes because what you're suggesting is if customers were to want to order a lot more during this 90-day pause, they would then order less because at the end of the day, we're almost entirely sole source on what we do. We're going to get whatever the end market demand is. Something like you described would simply be timing of when we would be manufacturing and shipping product, which would be inefficient. We would be having conversations with customers about those inefficiencies. If there was something meaningful or material like that, we would be communicating that to you so you would know the impact that it would have on our sales and the timing of our sales.

Nathan Treybeck (VP for Equity Research)

Great. Thank you.

Joe Dziedzic (President and CEO)

Thanks for the question.

Payman Khales (President and CEO-Elect and COO)

Our next question comes from Andrew Cooper from Raymond James. Please go ahead. Your line is open.

Andrew Cooper (VP for Equity Research)

Hey, everybody. Thanks for the question. Joe, congrats. Diron, congrats. Sorry to only get that one earnings call with you, Joe. Maybe just to jump in on the guidance a little bit. Understand it's early, just one quarter in the books, but you did a little bit better than what you had expected in one Q. What do you guys look for to kind of let you say, "Hey, it's time to think about adjusting those ranges," given if you think about the 3% days headwind, that's not quite what you saw relative to similar to the full year that you had pointed us to for the first quarter?

Joe Dziedzic (President and CEO)

We think 8%-10% reported sales growth, 6%-8% organic is a strong guide on the top line. We believe that continues to demonstrate our third consecutive year of outgrowing the markets on an organic basis. On profitability, we baked in similar to what we'd often do at the beginning of the year, something in the range of 1.6x profit growing, 1.6x as fast as sales. What we like to see is we like to see each quarter that we make progress on making our way towards that strategic target of operating profit growing twice as fast as sales. Last year, we did that. Operating profit grew 20%. Sales grew 10%.

As we click each quarter and we make progress on that, we would look to incorporate that into our guidance going forward because once you make progress on that, that usually sets a new run rate for you. First quarter, we typically look at that and say it's very early, one quarter of the year done. This year has some particular volatility with the tariff conversation, although it's not as impactful to us from a cost standpoint. It has taken some effort to understand and manage that. We're working with customers in every way we can to minimize their cost of tariffs based on how we ship or how we manufacture and product gets delivered to them. We are working to ensure that we're doing everything we can to minimize our customers' cost of tariffs.

I would say, as the year clicks forward and we stack up quarters of continuing to do more, we look to then incorporate that into our guidance.

Richard Newitter (Managing Director)

Great. That's helpful. I certainly appreciate it's a noisy time, to put it lightly. Maybe just a two-parter next, and then I'll stop there. In terms of M&A, can you give us a little bit more flavor on sort of the early days with Precision Coating and VSi Parylene in terms of maybe most importantly, the conversations with customers around leveraging kind of those additional capabilities you can integrate into what you do for them? Secondly, just how do you think about the appetite from here, knowing where the leverage is, but knowing there's at least one kind of larger asset being talked about in the market a little bit, and maybe your willingness to step up for a bigger asset or do something creative from a structure perspective for something a little bit more transformational in size?

Payman Khales (President and CEO-Elect and COO)

Hey, good morning, Andrew. This is Payman Khales. Let me take the first question that you asked. The acquisitions that you mentioned were in cardiovascular. As you know, we've made over half a dozen acquisitions in recent years within cardiovascular. As Joe's mentioned before in the past, we have a very specific roadmap of capabilities. We have clear visibility as to what those critical capabilities are in the core markets that we want to serve. We know exactly which ones we want to grow organically and inorganically. The acquisitions that you see are a direct result of that. The two most recent acquisitions that you referenced are all related to coating. I'm glad that the opportunity came. Coating has been on our roadmap of product capabilities for quite some time.

I'm glad that these two companies were available because they add significantly to the core capabilities that we have that allows us to then further vertically integrate and be on our customers' product roadmaps. Look, we're off to a great start. In terms of integrating them, we have already begun conversations with our customers about those capabilities and how we can then serve them in the future. As you know, the product development lifecycle is quite long. We get on early as we have done. Six, seven, eight years ago, you see the results now. We are doing the very same thing with every acquisition that we do, and that includes the coating. I would highlight that we're off to a great start integrating these acquisitions. We're quite seasoned.

These are number six, seven, and eight acquisitions that we've done in the past six, seven years. We have a good playbook, if you will, for integration, and that's going well.

Joe Dziedzic (President and CEO)

I'll take the question on the appetite. We remain very committed to our 2.5-3.5x leverage. We think that's important to investors and that that's a comfortable range for most investors to be able to own the Integer stock. We've highlighted that we estimate we have $350 million-$400 million of annual capacity to do acquisitions. We don't feel that we have to do acquisitions to be successful with our strategy. Our strategy starts with growing organically above the markets, and that would put us in the 6%-8% organic growth range.

We want to supplement that organic growth with tuck-in acquisitions. Tuck-in tends to not be transformative in nature. We obviously, as one of or the largest med device manufacturer in the industry, get an opportunity to look at a lot of the opportunities out there in the space. We do not feel we have to do any acquisition. As Payman noted, we have our technology roadmap that we continuously execute on and monitor the marketplace. We remain committed to our strategy. Within that strategy, our focus is on leverage or maintaining that leverage. If you look at our guidance for the year, if you just look at the EBITDA guidance we have provided, look at the debt levels that we have guided to, we are at the low end of our range by year-end.

By year-end, you can look at us having that $350 million-$400 million of capacity by year-end. We will be deploying that in the most return on investments focused way that we can, consistent with the acquisitions we have done.

Richard Newitter (Managing Director)

Fantastic. Appreciate it.

Joe Dziedzic (President and CEO)

Thank you.

Operator (participant)

Our next question comes from Matthew O'Brien from Piper Sandler. Please go ahead. Your line is open.

[audio distortion], on for Matt. Thank you for taking our question. I guess first, we want to touch on the tariffs. Fully appreciate that you are primarily sourcing from the U.S. Could you talk a little bit about the potential that your suppliers see any impact from tariffs and raise prices? How long would it take for you all to then raise your prices to customers? Are you seeing any of this happen yet?

Joe Dziedzic (President and CEO)

That's a great question. We have been digging deep into our supply base to see. We have not seen or heard from any significant way from our suppliers that they are incurring tariffs. To your point, that does not mean that as you go deeper and deeper into the supply chain, that is not occurring and that it will not potentially make its way there. If it is not surfacing and bubbling up right now, it is probably very deep in the supply chain. That would point to it being relatively small in the context of what we buy. Again, the majority of what we buy comes from U.S.-based suppliers. We are just not hearing or seeing suppliers racing to us talking about tariff costs that they are incurring. Obviously, we will be working to manage that.

At the end of the day, it is our belief that any of these kinds of costs ultimately need to be passed all the way through to the end consumer so that the supply chain ultimately gets this cost all the way to the end. That is what we would absolutely work to do.

Great. Thank you. I know you mentioned a growing order book. I think you referenced $800 million now. I'm wondering if you're seeing any customers trying to pull forward orders ahead of the tariffs?

We are not seeing that. I would reiterate that if we did, we would view that as pure timing. We would be talking to our customers about the inefficiency impact that would have on our operations because we are primarily sole sourced in everything we do. That means that whatever the ultimate end market demand is, is what we're going to get. If customers were to pull things forward in order to avoid a tariff, that would create inefficiencies for us. We would have to adjust our manufacturing potentially to output more in the short term and less in the medium term. That inefficiency would be a conversation that we would have that would have to be balanced against the impact of tariffs. We are not seeing any significant or meaningful change in orders or timing of orders that would indicate that behavior.

Great. Thank you. If I could sneak in just one last one. I know you previously mentioned renal denervation as a target market, which is a hot topic right now. I am just wondering if you can give any update on any demand you are seeing and how you expect that market to contribute to your growth rate?

I wish I could give you tremendous detail on that. It's a market that we feel our existing capabilities match up very well with the needs for that therapy. We're excited for the potential impact on patients to bring that therapy to the market. We highlighted it because it's now getting closer and closer to being commercially available on a wider scale. We do think that has the potential to have a meaningful difference for patients. We look forward to supporting our customers in any way possible to supporting bringing that therapy to the marketplace.

Great. Thank you so much.

Thank you for the questions.

Operator (participant)

Our next question comes from Joanne Wuensch from Citi. Please go ahead. Your line is open.

Joanne Wuensch (Managing Director)

Good morning. Thank you so much for taking the questions. Congratulations to Joe and Payman. Amazing.

Two quick questions. Fewer shipping days. Did you quantify the impact of that on the quarter?

Joe Dziedzic (President and CEO)

It was about 300 basis points of impact on the first quarter. Because last year was a leap year, I think there's one full-day impact on a year-over-year basis. The 300 basis points partially unwinds in our third quarter. Our second and fourth quarter, we expect to be a comparable number of days year-over-year with a slight offset in the third quarter.

Joanne Wuensch (Managing Director)

Thank you for that. A lot of focus has been on how does the company as an OEM manufacturer fit in the tariff regime. I have a slightly different question, which is, when could we move into a recessionary environment? How does OEM manufacturing work in that kind of situation? I did not cover the company previously back in 2008 and 2009, but I am sort of curious to think about that environment and OEM manufacturing and what you can do during that period. Thank you.

Joe Dziedzic (President and CEO)

Sure. I'll start with we have the benefit of being in an industry that's very recession resilient in treating patients. The vast majority of our business, we support therapies that we view as not elective therapies. We feel like we're pretty well insulated from that. The analysis we've done, probably you and others as well, when there is a recession, whether it's U.S. or global, you tend to see slower growth in med devices, but still growth. I mean, our analysis indicates maybe 100-200 basis points of industry-wide slower growth. We are in the industry. We're not immune to the trends in the industry.

We've obviously been very focused on accelerating our growth by concentrating our new product development on those four targeted faster-growing markets where our customers are bringing new therapies that expands the available market, treating new and undertreated patients. That accelerated growth is what we're working to participate in. We believe there would be an impact on the industry and that we would feel the ripple effect of that. I'd say we would likely move with the industry in aggregate, but we feel we're pretty well insulated because most of the therapies that we're supporting customers on are not elective in nature. We feel we're pretty well protected by potential recession relative to most other industries.

Joanne Wuensch (Managing Director)

Do you think that people will send out or not send out? That's not the right word. Send to you more OEM product manufacturing in that environment or maybe pull more in-house? I don't know. I'm trying to figure this out. Thank you.

Joe Dziedzic (President and CEO)

Sure. We see our customers continuously looking to do more outsourcing. Our customers are great at therapy development and commercialization. They can be great at manufacturing, but when they look at the returns on their investments, getting a new therapy to market first and getting that first-mover advantage and the pricing that comes with an innovative therapy that treats patients who are currently undertreated or untreated, that's the single biggest return for our customers and drives their growth. They want to allocate all of their capital towards new therapy development. They obviously have a very large commercial infrastructure that brings that therapy to market. Our expertise is in the manufacturing and the process design to be able to manufacture at high quality, competitive cost, and bringing that to helping customers get to market quickly.

We think our vertically integrated offering that we continue to add capabilities to, a very global manufacturing footprint that reflects the industry manufacturing footprint, gives them that option to partner with someone like Integer, who is in most cases our customer's largest supplier. We have anywhere from 30-80 years of experience with all of our customers. We think we're uniquely positioned to be able to help customers with their desired outsourcing. We continue to see that outsourcing trend play to our strengths.

Joanne Wuensch (Managing Director)

Thank you so much. Have a great day.

Joe Dziedzic (President and CEO)

Thanks, Joanne.

Operator (participant)

Our last question today will come from Suraj Kalia from Oppenheimer. Please go ahead. Your line is open.

Suraj Kalia (Managing Director and Senior Analyst)

Good morning, gentlemen. Joe, congrats. And Payman, same to you too. Joe, one question for you, and if I could sneak in two questions for Diron. For your cardiovascular group, Joe, should we still think about EP as roughly 1/5 of that segment? Just trying to determine sensitivity of the segment growth to PFA growth and anticipated market share shifts as the competitive wars heat up. Diron, quickly, if I could, in the interest of time for you, AR took a significant step up in the quarter sequentially. Any key drivers, especially credit terms? Also, a lot has been discussed about tariffs, fairly so. How do you all look out in terms of FX buffers or lack thereof? Gentlemen, thank you for taking my questions.

Joe Dziedzic (President and CEO)

Suraj, thanks for the questions. I'll start. I think the cardiovascular segment grew 17% in the quarter, 11 or 12% organic. Somebody help me with that. More than 11% on an organic basis. We think we delivered very strong growth in cardiovascular. That is what got us to the high end. We think that not only electrophysiology, but the other sub-markets that we're very focused on accelerating our presence in and winning new development programs. We think cardiovascular is delivering. That's our fastest-growing segment. Three of our four target growth markets are there. We feel like we're delivering and we're managing the total to deliver what we think is very strong growth for the year at 8-10% reported, 6-8% on an organic basis. I'll let Diron tackle the other two questions you asked, Suraj.

Diron Smith (EVP and CFO)

Sure. Thanks, Suraj. Yeah. On accounts receivable, I would say nothing really surprising there. There's a couple of drivers on the AR balance move versus year-end. That is primarily acquisitions is a piece of it. Again, we had the VSi and the Precision Coating acquisitions that drove a bit of the increase. The other piece is really timing of how the sales fall within a quarter. If you look at prior quarter, you're going to have a lot more sales in the first couple of months of the quarter, less at the end because of holidays. When you look at first quarter, you'll have a bit fewer in the first months and more of the sales in the latter half of the quarter. That drives a little bit of a movement on the accounts receivable. Underlying, foundationally, nothing really changed with AR.

Overall, we feel that we have a very, very strong credit profile with our customers, and collections are still remaining strong. Related to the FX buffer, I would say, first of all, we do not really think about FX as being a buffer per se to the tariffs. They are fairly unrelated in the direct sense. As we look at FX, as you can imagine, with us being a global company, we do transact in multiple currencies, with the two biggest ones being the euro and the peso in Mexico. We implement a hedging process, some natural hedges, some using forward contracts. We manage that through more of a rolling dollar cost averaging method. It helps mute the impact of any volatile movements in foreign exchange in any particular period. In the year, we do see a bit of benefit coming from the euro.

We see a bit of, sorry, a bit of pressure coming from the euro. We see a bit of benefit coming from the peso, but nothing that is large and material to our overall results.

Suraj Kalia (Managing Director and Senior Analyst)

Appreciate it. Thank you.

Diron Smith (EVP and CFO)

Yep. Thank you.

Operator (participant)

We have no further questions. I'd like to turn the call back over to Sanjiv Arora for any closing remarks.

Sanjiv Arora (SVP of Strategy, Business Development, and and Investor Relations)

Thank you, everyone, for joining today's call. You can access a replay of this call as well as the presentation on our website. Thank you for your interest in Integer. That concludes today's call. We look forward to talking to you next quarter.

Operator (participant)

This concludes today's conference call. Thank you for your participation. You may now disconnect.