Hello, and welcome to the Integer Holdings Corporation Third Quarter 2024 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. I would now like to turn the conference over to Andrew Senn, Senior Vice President of Strategy, Business Development and Investor Relations. You may begin.

Good morning, everyone. Thank you for joining us, and welcome to Integer's third quarter 2024 earnings conference call. With me today are Joe Dziedzic, President and Chief Executive Officer; and Diron Smith, Executive Vice President and Chief Financial Officer. As a reminder, the results and the data we discuss today reflect the consolidated results of Integer for the periods indicated. Except for cash flow measures prior period amounts have been recast to exclude the Electrochem business, consistent with US GAAP continuing operations presentation. Unless otherwise stated, all results and comparisons are presented on a continuing operations basis. In the appendix of today's presentation, we have provided supplemental information which will help you update your financial models to reflect the impact of discontinued operations. 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 and Diron will then review our adjusted financial results for the third quarter 2024 and provide an update on full year 2024 outlook. Joe will come back to provide his closing remarks, and then we'll open up the call for your questions. With that, I'll turn the call over to Joe.

Thank you, Andrew, and congratulations on the new role, and thank you to everyone for joining the call today. This morning, in addition to our strong earnings announcement, we also announced the promotion of Payman Khales into the newly created role of Chief Operating Officer for Integer. Payman joined Integer in 2018 as President of our Cardio & Vascular business. I'm also excited to announce that Andrew Senn will become the President of the Cardio & Vascular business succeeding Payman. Andrew has been with Integer for the last 18 years in a variety of leadership roles, primarily within our Cardio & Vascular business. You know him currently as our Investor Relations, Business Development, and Strategy Leader for Integer. Both Payman and Andrew have been integral leaders in the development, execution, and success of our strategy. Payman and Andrew will transition into their new roles in the first quarter of 2025. In the third quarter, we delivered another quarter of strong year-over-year results. Sales grew 9% and our adjusted operating income grew 17%. On a year-to-date basis, sales have grown 10% and operating income is up 23%, or 2.3 times the rate of sales growth. We are narrowing our sales outlook to deliver 10% to 11% growth in 2024. 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 and additional guidewire capacity in Ireland. In addition to this above-market sales growth, we are driving margin expansion across the business. We are raising the midpoint of our full year profit and earnings per share outlook. Our manufacturing excellence initiatives are delivering operational improvements in direct labor turnover, direct material scrap reduction, lower overtime, and direct labor efficiency. Combined with our strong OpEx leverage, we are confident in our ability to meet our increased full year profit outlook. At the midpoint of our outlook, we expect 20% adjusted operating income growth, an increase of $4 million over our prior guidance and nearly two times the rate of sales growth at midpoint. We are also raising the midpoint of our adjusted earnings per share outlook to 16% year-over-year growth, an increase of $0.07 per share at midpoint over our prior guidance. On September 30, we announced our entry into a definitive agreement to divest Electrochem. The divestiture of our non-medical segment makes Integer a pure-play medical technology company. The transaction is expected to be EPS neutral and generate $50 million in cash to support the execution of our strategy. The strong execution of our strategy by all Integer associates is enabling us to meet or exceed our strategic financial targets of growing sales at 200 basis points above the market, expanding adjusted operating income at two times the rate of sales growth and maintaining a debt leverage between 2.5 times and 3.5 times adjusted EBITDA. We believe our strategic financial objectives demonstrate differentiated results that will drive a valuation premium for our shareholders. I'll now turn the call over to Diron.

Thank you, Joe. Good morning, everyone, and thank you again for joining today's call. As a reminder, unless otherwise noted, all results presented are on a continuing operations basis and exclude the Electrochem business, which has been classified as a discontinued operation. Knowing this is the first time we are seeing our results without the business, I will first share our third quarter year-to-date results from continuing operations, followed by the discrete third quarter 2024 financial results. As usual, I will end with an update to our 2024 outlook. Through three quarters of 2024, we have delivered strong financial performance. Sales of $1.267 billion delivered 10% year-over-year growth on a reported basis and 6% on an organic basis, which excludes the impact of our recent InNeuroCo and Pulse acquisitions, the strategic exit of the portable medical market, and foreign currency fluctuations. We delivered $266 million of adjusted EBITDA, up $48 million compared to the prior year or an increase of 22%. Adjusted operating income grew 23% versus last year, 2.3 times the rate of sales growth as we continue to make progress on our year-over-year margin expansion. Third quarter year-to-date adjusted operating income as a percent of sales was 16.5%, which represents approximately 177 basis points of improvement versus a year ago, reflecting the continued improvement in manufacturing efficiency and operating expense leverage. Adjusted net income for the third quarter 2024 year-to-date is $133 million, delivering $3.87 of adjusted earnings per share, up $0.67 or 21% from a year ago. In the third quarter of 2024, we again delivered strong financial results. Sales of $431 million delivered 9% year-over-year growth on a reported basis and 4% on an organic basis. We delivered $96 million of adjusted EBITDA, up $15 million compared to the prior year or an increase of 18%, while adjusted operating income grew 17% versus last year or two times the rate of sales growth. As we continue to make progress on our year-over-year margin expansion, third quarter 2024 adjusted operating income as a percent of sales improved by 126 basis points to 17.5%. Adjusted net income for the third quarter of 2024 is $50 million, delivering $1.43 of adjusted earnings per share, up $0.14 or 11% from the third quarter 2023. Both C&V and CRM&N product lines continue to deliver above-market sales growth on a trailing four quarter basis. The Cardio & Vascular product line trailing four quarter sales increased 15% year-over-year. C&V growth is driven by above-market growth across all markets, new product ramps in Electrophysiology and Structural Heart, and the InNeuroCo and Pulse acquisitions. Cardiac Rhythm Management and Neuromodulation trailing four quarter sales increased 7% year-over-year, driven by double-digit Neuromodulation growth from emerging PMA customers and normalized low single-digit growth in Cardiac Rhythm Management. Further product line details are included in the appendix of the presentation, which can be found on our website at integer.net. On a third quarter 2024 year-to-date basis, we delivered $25 million more adjusted net income than we did in the first three quarters of 2023. Strong sales, acquisition performance, and operational improvements, which include improving manufacturing efficiencies and operating cost leverage delivered $32 million of the increase. This was partially offset by higher interest expense of approximately $7 million. The year-to-date increase in interest expense is primarily due to a higher average debt balance during the period, driven by the previously discussed acquisitions of InNeuroCo and Pulse Technologies. Our year-to-date adjusted effective tax rate was 18.7% for 2024, consistent with the same period a year-ago. Increases in the effective tax rate are primarily due to the Pillar 2, 15% global minimum tax and the impact of the Malaysian tax holiday expiration, fully offset by discrete items such as higher research tax credits and other tax planning initiatives. Historical GAAP and non-GAAP cash flow measures have not been adjusted to remove Electrochem consistent with the applicable GAAP presentation on the statement of cash flows. Leverage, also a non-GAAP measure has similarly not been adjusted. In the third quarter 2024, we generated $72 million of cash flow from operations, up $9 million from a year ago and up $24 million from the prior quarter. This strong performance was driven by improved operational execution, primarily from higher sales, improved margins, and continued management of working capital. In the third quarter, we generated $46 million of free cash flow, inclusive of $26 million of capital expenditures. On a year-to-date basis, we have generated $142 million in cash flow from operations, a 14% increase versus a year ago. Strong cash flow from operations has supported $86 million of year-to-date investments in capital expenditures, resulting in year-to-date free cash flow of $56 million, an increase of 33% compared to the same period last year. Net total debt is $1.055 billion at the end of the third quarter 2024, which is a $41 million reduction compared to the second quarter ending balance. As a result, our net total debt leverage at the end of the third quarter was 3.0 times trailing four quarter adjusted EBITDA, which is at the midpoint of our strategic target range of 2.5 times to 3.5 times. As Joe mentioned earlier, we are narrowing our 2024 sales outlook and raising the midpoint of our 2024 profit and earnings per share outlook. With strong year-to-date margin performance from execution on our manufacturing excellence initiatives, we have increased confidence and are raising the adjusted operating income outlook by $4 million at the midpoint. We expect to deliver sales in the range of $1.707 billion to $1.727 billion, an increase of 10% to 11% versus last year. On an organic basis, we expect sales growth of 7% to 8%, which is approximately 200 basis points above our underlying market growth rate estimate of 4% to 6%. In addition to our organic growth, we expect the InNeuroCo and Pulse acquisitions, partially offset by the portable medical market exit to contribute approximately 3% inorganic growth. We are raising our adjusted operating income outlook by $4 million at midpoint and expect 2024 adjusted operating income to be between $280 million and $288 million, reflecting year-over-year growth of 18% to 22%. At $284 million, which is the midpoint, adjusted operating income as a percent of sales is expected to grow 133 basis points compared to the full year 2023. Adjusted EBITDA is expected to be between $358 million and $368 million, an increase of 18% to 21% compared to the prior year, similar to the adjusted operating income growth rate. Adjusted net income is expected to be between $181 million and $188 million, reflecting a year-over-year growth of 16% to 21%, up from our previous outlook of 12% to 21%. This delivers an expected adjusted EPS outlook between $5.24 and $5.43, which is growth of 14% to 18% year-over-year. Our updated adjusted EPS outlook reflects an increase versus our prior outlook of $0.07 per share at midpoint. Our outlook assumes adjusted weighted-average shares outstanding of $34.6 million shares, taking into account estimated dilutive effect of the convertible notes based upon recent stock price performance. This dilution is offset by an improvement in our adjusted operating income and improvements in our expected 2024 effective tax rate, which is projected to be between 18% and 19%, down from our previous outlook of 18% to 20%. With above-market sales growth and operational improvements from our manufacturing excellence initiatives, we have confidence in tightening our sales outlook and raising the midpoint of our adjusted operating income as a percent of sales. Since our guidance issued in July, which has been revised to exclude the impact from Electrochem, we have increased our adjusted operating income as a percent of sales by 20 basis points to 16.5%, now up 133 basis points versus 2023. As we begin the fourth quarter of 2024, we expect sales to increase versus the third quarter, driven by new product ramps, increased guidewire capacity, and growth from emerging customers of pre-market approval products. Full year organic sales of 7% to 8% would imply a fourth quarter organic growth of 11% in the midpoint of our outlook. Moving to our 2024 cash outlook, we expect cash flow from operations between $195 million to $205 million, which represents an 11% year-over-year increase at the midpoint of outlook, up from our previous outlook of 8% at the midpoint. Our outlook for capital expenditures is $100 million to $110 million as we continue to invest in organic capabilities and capacity. As a result, we expect to generate free cash flow between $90 million and $100 million. We expect our 2024 year-end net total debt to be between $970 million and $980 million. Versus our previous outlook, this represents a $45 million reduction at midpoint which is driven by the expected proceeds from the sale of Electrochem before the end of October. We expect to end the year with a leverage ratio between 2.6 and 2.7 times trailing four quarter adjusted EBITDA, well within our target range of 2.5 times and 3.5 times. With that, I'll turn the call back to Joe, and thank you.

Thanks, Diron. We are successfully executing our strategy to deliver a very strong 2024 outlook after a strong 2023. Over these two years combined, we expect to grow sales 29% and grow adjusted operating income 56% at the midpoint of outlook. We are successfully executing our growth strategy, both organically and inorganically, to meet our strategic financial objectives for sales growth, margin expansion, and debt leverage. We are confident this sustained level of performance will produce a premium valuation for our shareholders. We will now turn the call over to our moderator for the Q&A portion of the call.

Your first question comes from the line of Brett Fishbin with KeyBanc. Your line is open.

Hey guys, good morning and thanks so much for taking the questions. Just wanted to start off briefly on the organic growth trend. And I was just wondering, you talked a lot about some of the year-to-date trends and then the implied 4Q exit rate. But maybe just specifically for the third-quarter, if you could just touch on a little bit of the deceleration that we saw to 4.3% relative to the 7% year-to-date, and what you think might have driven that? Thank you.

Great. Good morning, Brett. Thanks for the question. So, I'll start with your highlights: 6% organic year-to-date, and our guidance is 7% to 8% organic for the full year, which is up slightly from our original guidance at the beginning of the year where we said 6% to 8%. So the bottom end on the organic has come up a little bit. And we had highlighted what we expected to happen throughout the year, and the biggest driver of the third quarter at 4%. The biggest driver is as we expected based on our order book and the ordering patterns that we saw at the beginning of the year, CRM was down versus the trend line that we had in the first half of the year. And we expected that because we could see that in the demand based upon the order book that we have. We would have been a little higher. We were 4% organic for the quarter; it would have been more like 5%, but we had a little bit of an impact from Hurricane Helene that happened at the end of the quarter for us. We had to shut down our facility in Florida and the Dominican Republic to protect our associates. That had a little bit of an impact. It wasn't a material or meaningful impact, but we would have been 5% organic growth. The C&V segment would have been about 7%, a little higher than the reported 6% organic growth. So when we look at the quarter, it's really what we expected in terms of all the moving parts. We had said on our February fourth quarter earnings call back in February that our order pattern showed that CRM would normalize in the second half of the year from an ordering and shipments perspective. And that's what happened. So our neuromodulation business continued to perform very strongly. We saw continued growth there in the emerging PMA customers. In fact, the $100 million to $120 million that we had guided the year to for those emerging PMA customers are actually tracking to the high end of that range. And we have strong shipments in the fourth quarter for those emerging PMA customers. So we feel great about the fourth-quarter outlook and the guidance.

All right. Thanks for the color. And then just wanted to ask one quick follow-up and congratulations to Andrew and Payman on the new roles. And I was just curious if you can maybe give a little bit more background around maybe the impetus for some of those changes and how you think the new team can build on some of the existing initiatives under this new structure? Thanks again.

Yeah. So it's really about continuing to execute our strategy and to outperform on a sustainable basis as we get bigger and continue to grow the size of the business. So it's really about executing the strategy and continuing to meet or exceed our financial objectives of sales growth above the market organically and operating profit double. Payman and Andrew have been integral parts of the strategy for not only the C&V business, but the whole company because different leaders have ownership over enterprise-wide elements of our strategy. And Andrew and Payman have been here since the beginning of the strategy in 2018. Payman joined the company in early '18. Andrew has been with the company much longer, but he's been in the C&V business. During Payman's tenure leading the Cardio & Vascular business, we've almost doubled the sales for Cardio & Vascular; we’re up over 90% since Payman stepped into that leadership role. Andrew has been in the Cardio & Vascular business for his entire career with Integer. He's done everything from lead R&D to sales to marketing. You know him more recently as the enterprise-wide leader for the strategy process for M&A and Investor Relations. They both know our customers and the industry incredibly well. So this is really about accelerating the execution of our strategy and giving two highly successful leaders broader responsibilities to help us continue to deliver for our customers and then ultimately for shareholders.

Your next question comes from the line of Craig Bijou with Bank of America. Please go ahead.

Good morning, everyone. Thank you for taking my questions. I would like to start by discussing the growth trends of your EP business over the past few quarters. Additionally, regarding PFA, has your anticipated benefit from PFA products changed at all as we conclude Q3? I'm asking because I believe investors are looking for some acceleration in the C&V business, especially with the product launches happening now and the upcoming one in 2025. Could you please elaborate on the EP business, PFA, and how investors should consider the potential contributions from that emerging market?

Thanks for the question, Craig. I'll start with, we remain incredibly excited about PFA as a therapy and a technology and what it can do for patients, and we're excited to be part of what's happening in the industry with this growth of PFA. Our view and outlook hasn't changed. In fact, it continues to get better with every passing new clinical study and announcement of progress across the industry on it seems like every participant coming out with another evolution of their therapy and getting closer and closer to having more and more products in the market to deliver this new innovative therapy. For us, I'll highlight electrophysiology is an important part of our business, but it's one of many. It's one of our four targeted growth markets. And then even then within electrophysiology, I think we've talked a lot about how we play across the full procedure. Everything from access with guide wires, transseptal crossing, as well as the diagnostic catheters that help perform the mapping and then to the ablation therapy itself where pulsed field ablation specifically comes into play. So, electrophysiology is an exciting high growth market. We are highly vertically integrated. We have a very strong position and footprint across the full procedure. And we expect it to continue growing, and we expect to be a strong participant. And so our outlook hasn't changed, and every day I think it just gets brighter and brighter with the industry's progress. But I'll just highlight it's one of many growth factors for us, and I would not expect any one product or end market to be the single biggest driver or materially change the company outlook. So it's in our guidance. As we continue to work with customers on their new product rollouts, we continue to factor that into our outlook. Our electrophysiology business continues to outperform the market. We track our customers' reported sales by end market. We then look at our sales by those end markets, and we're still growing 1.5 times the end market growth rate on a trailing four quarter basis and we expect that to continue to accelerate as more and more products come to market.

Thanks, Joe. I'd like to ask about the expected acceleration in organic growth for Q4. I understand there are several factors at play, including the divestiture of Electrochem and the phase-out of portable medicals. Could you clarify the expectations for organic growth acceleration across the different segments, specifically C&V, CRM&N, and advanced surgical? I'm looking to gain a better understanding of where that organic growth is expected to increase.

Sure. So when you look at fourth quarter, it will be a little different from a split between organic and reported than the first three quarters. In the first three quarters, you had roughly 400 basis points of difference between reported and organic. In the fourth quarter, there's very little net inorganic in the quarter. One of the acquisitions rolls off its rolling 12 months and becomes organic. And then the other acquisition is offset by portable medical coming down in the fourth quarter. So when you look at that fourth quarter guidance number, think of that as both reported and organic in the quarter. So that will be a little nuance there as you stare at organic and inorganic split. So Q4 reported and organic are roughly the same number, same percentage in the fourth quarter. And we do expect to see continued improvement or acceleration in the growth rate in Cardio and Vascular because of the new products that continue to ramp in that segment. And then on the CRM and neuro, we do expect the neuro sales to be stronger in the fourth quarter, in particular from the emerging customer PMA. I commented earlier that the $100 million to $120 million range of emerging PMA customers. We expect to be at the high end of that. And there's a slightly higher percentage of those sales in the fourth quarter relative to a normal 25% for any given quarter because of the ramp plans and the commercialization plans of those customers. These are orders that we had visibility to at the beginning of the year because Neuromod, in particular, we have very long order patterns and very good visibility, multiple quarters out. So we've seen this all year, and this was our expectation for the flow of that demand. So, and to your question on the advanced surgical and ortho, we do have portable medical coming down, which will be an inorganic decline. And on an organic basis, that's a very small piece of our business that functions more flattish in the trend line. Thank you.

Your next question comes from the line of Rich Newitter with Truist Securities. Please go ahead.

Hi, excuse me. Thanks for taking the questions. A couple from me. I guess just one, you mentioned the hurricane impact in the third quarter. I guess, is that going to have any lingering impact into the fourth quarter? What divisions, if there were specific ones, were more impacted there? And that segues into just my additional question on CRM and neuro. Was it that division? And if not, just a little more color on why that was so soft at least relative to our expectations and seemingly consensus expectations? Thanks.

Sure. So thanks for the question, Rich. The first answer is, it's mostly cardio and vascular coming out of the Florida facility and the Dominican Republic facility. The lingering impact will likely be cost, because of having to shut down and then ramp back up and run some overtime to catch up on the few days, two or three days that we had to shut down. So in the fourth quarter, we would expect to incur a little bit more cost. It was a small impact, but it was at the end of the quarter. And so you have really no time to react when it was the last few days of the third quarter. So that's on the hurricane impact. Fortunately, all of our associates are safe, and the impact was far less than what was expected from that particular hurricane. On the cardiac rhythm management, neuromod question, I'll go back to what we said at the beginning of the year on our fourth quarter earnings call back in February. We looked at our order patterns that we saw from customers given our order book, and we could see that the demand for CRM products was less than the second half, which I would not point to or indicate necessarily has anything to do with the broader market trends because you look at the market trends, some of the CRM participants had pretty strong growth; some had a little bit lower growth. But I don't know what I would point to it necessarily a market trend. I would look at this and say this is how customers were planning to run their facilities and the demand they placed on us across the year. We saw that at the beginning of the year. We said on our earnings call that we expected CRM to normalize in the second half, which meant be at a lower run-rate than it had been in the first half and in 2023. That played out like we expected that it would. We've got the fourth quarter baked expectation out of that order pattern baked into our guidance. I mean, we're sitting here now. We're in the end of the fourth week of the quarter. We've got nine weeks to go, and we've got really good visibility to the rest of the year. So we feel really good about the top line guidance that we've given and the split by segment that we guided to in our product line summary slides in the appendix of the presentation.

Great. Maybe just one last one. Joe, any selling day considerations we should be thinking about in 3Q and/or coming up in 4Q?

Nothing significant. There might be some variations. I'd need to check with Diron. Internally, we haven't really noticed this since we transitioned to a calendar year at the end of 2019. For the year, it balances out. We previously operated on a fiscal year, which had an additional week every six or seven years. Now, since we're on a calendar year basis, there might be a day or two variation. However, for our business operations, we don't consider that to have a meaningful impact.

Thank you. Thanks for the question.

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

Good morning, and thank you for taking the question. I know we're a little early on this, but can you provide any commentary for how you're thinking about 2025?

We are continuing to concentrate on achieving our strategic goals, specifically targeting organic growth at least 200 basis points above the market. At the beginning of the year, we anticipated that 2024 would see normal market growth compared to 2023, which was above the norm. Based on current market observations, it seems that we are experiencing a typical organic growth year for the industry. I have no reason to think that 2025 will be any different. Therefore, we are committed to reaching our strategic goals of sales growing at least 200 basis points organically above the market, while our operating profit grows at double the rate of sales. Additionally, we expect to be at the low end of our leverage range by the end of this year, with leverage projected to be between 2.6 and 2.7 times EBITDA.

Thank you. And just to confirm what you're currently seeing in terms of your market growth that you think you'll be growing 200 basis points faster?

That's not our guidance; that's our objective. We'll provide formal guidance in February on our fourth quarter earnings call.

Okay. Thank you so much.

Thanks, Joanne.

Your next question comes from the line of Matthew O'Brien with Piper Sandler. Please go ahead.

Good morning. Thanks for taking the questions. Maybe just sticking on Q4 for a second, and before I do that, just congratulations to Payman and Andrew. But sticking on Q4, it does look like a little bit of a deceleration in terms of the two-year stack. So I'm just curious, is that entirely CRM? Is there any of the hurricane impact there that would cause that slowdown, or is it just you guys being somewhat conservative?

Sure. I may not be tracking the two-year stack. At midpoint, we see sales growth of about 11%, operating profit in that same order of magnitude. So we think for the fourth quarter, we see strong sales growth based upon the new products we are rolling out and supporting in C&V and the neuromod acceleration of the emerging customer PMA. And so we feel good about that, given that we are sitting here four weeks into the quarter with nine to go. In the fourth quarter last year, thinking about the comps, fourth quarter last year was the highest quarter of the year. It was over $400 million of sales and the prior quarters were well below $300 million, and it was also the highest profitability of the year. It was a 16.7% AOI margin rate last year, compared to the full year was 15.2%. So you see the quarterly improvement. So on a year-over-year basis, the fourth quarter is the toughest comp. And if you look at our guidance for the fourth quarter, the midpoint from a profitability standpoint is the average operating margin rate for year-to-date. So we think the fourth quarter guidance is very consistent with year-to-date. And I'll take this opportunity to highlight, on a year-to-date basis, our operating margin is up 180 basis points year-over-year. We're at a 16.5% operating margin rate year-to-date. That compares to 14.7% last year, and that's 100 bps from gross margin. So we are expanding gross margins, which has been a big focus for us this year, in particular coming out of all of the pandemic disruption; and we're very focused on getting margin expansion in gross margin. But we're also getting 80 basis points of leverage on OpEx. So we're pleased with the progress we're making both in gross margin and getting operating leverage. So I'm sorry if I didn't answer your question, but I'll take another shot at it.

No, Joe, that's perfect. Appreciate that. And then in the electrophysiology business, I'm just curious, just given the shift we've seen so quickly to PFA, are you guys feeling any kind of inventory work down on the traditional energy products, be it cryo or RF that's kind of even weighing a little bit on that part of your business? And then at some point, does that really, I guess, move to the side, and you start to really see some of the PFA contribution to the business? Is that a dynamic that we should consider at all?

We haven't observed any significant changes or shifts. Clearly, there is a consensus that cryo will eventually be affected by the emergence of pulse field ablation. Therefore, we are incorporating the general industry outlook regarding the decline in cryo into our assumptions. However, in other applications, we continue to experience strong demand, and our customers remain very optimistic about the overall electrophysiology market. Given our extensive presence in the market and our substantial vertical integration, we believe we are exceptionally well-equipped to assist the industry during this transition and to support our customers in bringing products to market quickly and safely. We are still excited and have not detected any substantial changes beyond what is currently observed in the wider industry. When we evaluate electrophysiology, our broad market presence and vertical integration indicate that this will be a net positive for the company moving forward.

Got it. And sorry, can I sneak in one more?

Yes.

The big R&D cut in the quarter, why was that? And is that anything to be cautious about in terms of '25 or '26 in terms of investment there? I don't know if there was an adjustment that I missed in the release. Thanks.

No adjustments. It's a great question. First off, we didn't cut R&D; in fact, we continue to increase our spending in that area. What you're observing is higher reimbursement levels, or perhaps a long-term understanding of reimbursement for our customers. There has been an increase in our customers compensating us for development work during the third quarter compared to other quarters. Over the last couple of years, we've discussed how our development revenues influence the R&D line. The costs associated with our development activities remain consistent from quarter to quarter due to the fact that our R&D engineers are on payroll year-round. Revenue generation or payments from customers are tied to achieving milestones in various development programs. In prior years, we often noticed that more revenues were realized later in the year, especially in the fourth quarter, as we and our customers aimed to reach those milestones on schedule. This year, we have concentrated on normalizing and leveling out revenue throughout the year. I mentioned last quarter that we've been experiencing much more consistent revenue for that kind of work this year. In fact, in the third quarter, we generated higher revenues for that work compared to other quarters, which is the main reason why R&D expenses appear lower. This isn’t due to cost reductions, but rather due to increased revenues from the work we're undertaking. We anticipate that the fourth quarter will reflect a more typical average for the year, in contrast to previous years when the fourth quarter was particularly strong for development revenues. It's important for me to clarify that we have not reduced costs; instead, we've generated more revenue from our efforts.

Very helpful. Thank you.

Your next question comes from the line of Kristen Stewart with CL King. Please go ahead.

Hi, thanks for taking the question. I was wondering if you could just give a little bit more detail on gross margins in the quarter. What drove kind of the increase? And then how should we think about it going forward just from a sustainability perspective of the increase year-to-year, and whether or not you can get back to that 31% pre-COVID level and if there's any time horizon associated with that achievement?

Thank you for the question. We absolutely expect to return to 31% gross margins and then build from there. We don’t plan to stop at 31%. We have made significant progress year-to-date, with an increase of 100 basis points year-over-year. This improvement is largely due to recovering from the inefficiencies caused by supply chain disruptions and direct labor turnover. Our supply chain is currently very stable, thanks to the team's effective management. Additionally, our total direct labor turnover is now below pre-pandemic levels, which is promising. We are focused on engaging our direct labor associates, and we are seeing positive results from our manufacturing excellence initiative. We are equipping our associates with tools and implementing lean processes. There remains significant opportunity for improvement, such as reducing direct material scrap, decreasing overtime, and enhancing direct labor efficiency. There are still opportunities for automation as well. Now that our plant management teams can concentrate on driving individual projects—many of which are small and accumulate over time—we are beginning to see the financial benefits of the team’s hard work. We expect this trend to continue and are excited about the progress being made. We anticipate growing operating profit at twice the rate of sales. Our sales growth objective will come from both expanding gross margins and continuing to leverage our operating expenses. Currently, we are 180 basis points ahead of last year's operating margin rate on a year-to-date basis, with 100 basis points from gross margin and 80 from operating expenses, which is a solid mix that we will continue to pursue.

And then as your leverage is coming down, I was wondering if you could just give us an update on how you're thinking about M&A?

By the end of the year, we expect to be at the low end of our range, which indicates a capacity of $250 million to $300 million on a rolling annual basis. We have a strong pipeline that we continually refine. Many of the acquisitions we pursue involve working with targets over several years to build relationships and understand their businesses. We don't dictate when they're ready to engage in a transaction. If we could, we might end up paying a premium, but we prefer to pay a fair price and multiple. This pipeline is managed by Andrew and his team, and we anticipate continuing to execute our inorganic strategy moving forward. Additionally, we now have the full capacity we aim for within our targeted debt leverage range.

Thanks very much.

Thank you.

Your final question comes from the line of Suraj Kalia with Oppenheimer. Please go ahead.

Good morning, Joe, Diron. Can you hear me all right?

Yes, Good morning, Suraj.

So, Diron, one question for you, and Joe, one question for you. Diron, let me start out with you. So the 1% shortfall in organic growth because of Hurricane Helene, I guess I want to ask the question a slightly different way. Given the visibility of your customer orders from long term contracts, should we start thinking about a relative concentration in the last week of a quarter also? I mean, logic would have dictated it would be a relatively steady cadence throughout the quarter. Maybe you can help us reconcile, Helene in the last week of September and just tie it into how you all see customer orders throughout the quarter?

Sure, Suraj. Yeah. I mean, when you look at our order pattern, there's a couple of different variables that happen. One of them is the normal order pattern is relatively smooth. We do about $33 million a week. And so when you look at the timing of that, most are relatively smooth. You have some that you have sterilization near the end of the quarter where that happens a little bit more in bulk. And when you talk about Hurricane Helene specifically, it all happened right in the last few days of the quarter. So we ended up closing our facility for about three days, and that was right when things were in the process of getting packed, shipped, and final sterilization. So you have a little bit of an outsized impact. Again, it ultimately is about a 1 percentage point impact to our overall organic growth that we will be caught up in the fourth quarter. And as Joe mentioned earlier, be primarily a cost pressure or a cost headwind as we kind of work through getting re-ramped up.

We should focus on the hurricane impact and the usual timing and avoid concentrating too much on the end of the quarter. Is that an appropriate perspective?

Yeah, yeah, correct. Not from a kind of an ongoing basis, yes, you should not think of kind of last couple of days concentration.

Fair, fair enough. Joe, one question for you. I do appreciate all the color. Joe, in terms of the comment about new structural heart products, I know you guys are talking about the tricuspid component in structural heart. Maybe if I can push you on TriClip, remind us, is it based on just minimum volumes or are there any adjustments based on price volumes? How should we think about as we roll out into Q4 and FY25? Any color you could give us would be great. Gentlemen, thank you for taking my questions.

Great. Thanks for the question. I can't comment on any specific programs or customers, but generally speaking, some of our agreements include tiered pricing based on volume levels. As we reach certain volume thresholds, we achieve additional synergies and efficiencies of scale, and we share some of those benefits with our customers so that both sides can grow. Our goal is to support our customers' success, which involves helping them expand their patient care and market presence. When we participate in that growth, there's a structured way we share in some programs, which is quite typical during new product launches. Initially, pricing may be higher due to inefficiencies as we introduce and ramp up new products, which includes training associates and dealing with less-than-optimal yields. As we transition to full-scale production, pricing aligns more closely with expected costs for that level of manufacturing. This dynamic involves aligning pricing with any inefficiencies during the ramp-up phase and moving swiftly toward efficient full-scale production and competitive pricing that aids our customers' success in the market.

Thank you.

This concludes the question-and-answer session. I will turn the call to Andrew for closing remarks.

Great. Thank you, everyone, for joining the call today. As always, you can access the replay of this call on our website as well as the presentation that we covered. Thank you for your interest in Integer, and that concludes today's call.

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