Earnings Call Transcript
Integer Holdings Corp (ITGR)
Earnings Call Transcript - ITGR Q3 2025
Operator, Operator
Good morning, and thank you for joining us. My name is John, and I will be your conference operator today. I would like to welcome everyone to the Integer Holdings Corporation Third Quarter 2025 Earnings Call. I will now turn the conference over to Sanjiv Arora, Senior Vice President, Strategy, Business Development and Investor Relations. Please proceed.
Sanjiv Arora, Senior Vice President, Strategy, Business Development and Investor Relations
Good morning, everyone. Thank you for joining us, and welcome to Integer's Third Quarter 2025 earnings conference call. With me today are Joe Dziedzic, President and Chief Executive Officer; Payman Khales, President and CEO elect; Diron Smith, Executive Vice President and Chief Financial Officer; and Kristen Stewart, Director of Investor Relations. As a reminder, the results and data we discuss today reflect the consolidated results of Integer for the periods indicated. During our call, we will discuss some non-GAAP financial measures. For reconciliation of non-GAAP financial measures, please refer to the appendix of today's presentation, today's earnings press release, and trending schedules, which are available on our website at integer.net. Please note that today's presentation includes forward-looking statements. Please refer to the company's SEC filings for a discussion of the risk factors that could cause our results to materially differ. On today's call, Joe and Payman will provide opening comments, Diron will then review our adjusted financial results for the third quarter of 2025 and provide an update for the full year 2025 outlook. Payman will then share our preliminary 2026 and 2027 outlooks and then we'll open up the call for your questions. With that, I'll turn it over to Joe.
Joseph Dziedzic, President and Chief Executive Officer
Thank you, Sanjiv, and thank you to everyone for joining the call today. Today is my last call as Integer's President and CEO and my 64th and final as a public company CEO or CFO. As I reflect on the past 8 years as Integer's CEO, I am incredibly proud of what we've accomplished together. We've built a company with a clear vision, a compelling growth strategy, and a strong values-based culture. When the CEO transition process began, I did not envision my last earnings call would include a reduction in our financial outlook. The recent customer forecast changes reflect the reality that not all new products achieve the level of success we expect or want. We expect this dynamic to be short-lived. Despite this news, we are still delivering strong results over the last 3 years. Our sales are up 39% from 2022 to 2025 at the midpoint of our outlook. Adjusted operating income is up 77% and adjusted EPS is up 73%. Our strategy and execution have delivered. And despite what the next few quarters hold, we remain confident in our strategy because when measured over time, it is working. I'm excited for Integer's future under Payman's leadership. He has played a pivotal role in shaping and executing our strategy and fostering our high-performance culture. As the President of our Cardio & Vascular business for 7 years, Payman delivered outstanding results, doubling sales and improving profitability. Tomorrow, Payman will become CEO and join the Integer Board. Thank you for your support of Integer during the last 8 years. I am now officially passing the baton and turning the call over to Payman to lead the remainder of the call, including the Q&A.
Payman Khales, President and CEO Elect
Thank you, Joe. On behalf of the entire Integer team, we extend our deepest gratitude for your exceptional leadership and strategic vision over the past 8 years. Your unwavering commitment to excellence has made Integer stronger, more innovative, better positioned to serve our customers and create value for our shareholders. The legacy you leave behind will continue to shape our future. I believe our strategy will continue to deliver for patients, customers, and shareholders over the long term. I'm truly honored to step into the role of President and CEO. With great enthusiasm, I look forward to leading Integer in its next chapter of growth. We will build on the strong foundation that you've created and continue to advance our strategy with purpose and passion. We wish you well in your retirement. Now let's turn to our quarterly results and outlook. We delivered a strong third quarter in line with our expectations. Sales grew 8% on a reported basis and 7% organically, reflecting solid demand and execution. Our adjusted operating income increased 14%, driven by continued focus on operational excellence and expanding margins. Our adjusted earnings per share grew 25% year-over-year to $1.79. Despite this strong third quarter, we recently received customer updates related to the adoption of new products in the market that we expect will impact the next 3 quarters. The magnitude of these changes on multiple products at the same time is highly unusual. As a result, we are reducing the midpoint of our 2025 sales outlook by $16 million. This reflects recent changes in customer demand within our CRM&N product line, primarily related to select emerging customers with PMA products. We are actively managing our costs to minimize the profit impact. As a result, we have reduced the midpoint of our adjusted operating income range by only $3 million and our adjusted EPS range by $0.02. For the full year 2025, we now expect to grow our sales between 7% and 8% or 7.6% at midpoint. We expect adjusted operating income to grow between 12% and 14% and adjusted EPS to grow between 19% and 21%. All in, this is a strong performance for the year. We usually provide our outlook for the upcoming year during our fourth-quarter call in February after the completion of our annual budgeting process. However, given recent customer updates, we are providing a preliminary outlook for 2026. Based on the recent customer updates, we expect sales of 3 new products to decline in 2026, 2 electrophysiology products, and 1 neuromodulation product for an emerging customer. The market adoption of these products has been slower than forecasted. We anticipate this will represent a 3% to 4% headwind to our total company sales for the next year. As a result, we expect organic sales in 2026 to be flat to up 4%. The impact of these specific products is expected to be more pronounced in the first half of 2026, leading to organic sales decline during that period. We anticipate a recovery to market growth during the second half as the new product headwinds moderate. On a reported basis, we expect sales to be down 2% to up 2%. This includes the final decline in Portable Medical as we complete the delivery of the last time buy orders in the fourth quarter of 2025, which is a headwind of approximately 2% to our total sales in 2026. While our 2026 outlook is not where we would like it to be, we remain confident in the strength of our long-term growth strategy, our portfolio, and the depth of our customer relationships. Our continued focus on being designed into high-growth products early in the development process positions us well in the fastest-growing markets. Our product development pipeline continues to expand, fueled by close collaboration with our customers as they advance the next generation of medical technologies. Given the strength of this pipeline and our strategic positioning, we expect to return to above-market organic sales growth in 2027, which is consistent with our long-term financial strategic objective. I'll now turn the call over to Diron to review the quarter and the 2025 outlook in greater detail.
Diron Smith, Executive Vice President and Chief Financial Officer
Thank you, Payman. Good morning, everyone, and thank you again for joining today's call. I'll provide more details on our third-quarter 2025 financial results and provide an update on our full year 2025 outlook. In the third quarter of 2025, we delivered strong financial results. Sales totaled $468 million, reflecting 8% growth on a reported basis and 7% growth on an organic basis. Organic sales growth removes the impact of the Precision and VSI acquisitions, the strategic exit of the portable medical market, and foreign currency fluctuations. We delivered $106 million of adjusted EBITDA, up $10 million compared to the prior year or an increase of 11%. Adjusted operating income grew 14% versus last year as we continue to make progress on our year-over-year margin expansion. Adjusted operating income as a percentage of sales expanded approximately 80 basis points year-over-year to 18.4%, comprised of 10 basis points from gross margin and 70 basis points from operating expense leverage. Adjusted net income for the third quarter of 2025 was $63 million, up 27% year-over-year, while adjusted earnings per share totaled $1.79, up 25% from the same period last year. On a year-to-date basis, we are delivering strong results with sales up 9%, adjusted operating income up 14%, and adjusted EPS up 20%. Turning to our sales performance by product line. Cardio & Vascular sales increased 15% in the third quarter of 2025, driven by new product ramps in electrophysiology and incremental sales related to the Precision and VSI acquisitions as well as strong demand in neurovascular. On a trailing 4-quarter basis, C&V sales increased 18% year-over-year with strong growth from new product ramps in electrophysiology and neurovascular, as well as contribution from acquisitions. For the full year 2025, we expect C&V sales to grow in the mid-teens compared to full year 2024, which is consistent with what we shared on our July earnings call. In the fourth quarter of 2025, we expect C&V sales growth to decelerate from recent trends, reflecting a decline in the 2 new products in electrophysiology mentioned earlier. This is consistent with our prior outlook. However, we now expect this impact to continue into 2026, primarily the first half. Cardiac Rhythm Management & Neuromodulation sales increased year-over-year 2% in the third quarter of 2025 and 4% on a trailing 4-quarter basis, driven by strong growth from emerging neuromodulation customers with PMA products and normalized CRM growth, partially offset by the planned decline of a neuromodulation program. For the full year 2025, we now expect CRM&N sales to grow low single-digit versus 2024 compared to our previous expectation of mid-single-digit growth. This is primarily due to lower demand related to select emerging customers with PMA products. Product line detail for other markets is included in the appendix of the presentation, which can be found on our website at integer.net. In the third quarter of 2025, we delivered $63 million of adjusted net income, up $13 million versus a year ago. This increase was driven mainly by operational improvements, which include higher sales volume, manufacturing efficiencies, gross margin expansion, operating expense management, and acquisition performance. We also benefited from lower interest expense as a result of our convertible debt offering in March 2025 as well as a slightly lower adjusted effective tax rate. Our adjusted effective tax rate was 16.3% for the third quarter of 2025, down from 17.2% in the prior year. We now expect our full year 2025 rate to be within the range of 17% to 18%, which is 150 basis points better than our guidance in July. This improvement is primarily due to an improved outlook regarding R&D tax credits given our higher R&D investments. The year-over-year increase in adjusted weighted average shares outstanding drove approximately $0.02 reduction to our adjusted EPS. In aggregate, third quarter 2025 adjusted net income is up 27% year-over-year and adjusted earnings per share is up 25%, both growing much faster than our 8% sales growth, a very strong profit performance in the third quarter. In the third quarter of 2025, we generated $66 million of cash flow from operations, and our CapEx spend in the third quarter was $19 million. Free cash flow was $46 million in the third quarter, flat with the prior year. At the end of the third quarter, net total debt was $1.158 billion, which is a $46 million decrease compared to the second quarter 2025 ending balance. Our net total debt leverage at the end of the third quarter was 3x trailing 4-quarter adjusted EBITDA at the midpoint of our strategic target range of 2.5x to 3.5x. As Payman mentioned earlier, we are adjusting our sales and profit outlook ranges for 2025. Starting with our sales outlook. For the full year, we now expect reported sales to be in the range of $1.840 billion to $1.854 billion, reflecting growth of 7% to 8% on a reported basis. This includes inorganic growth of approximately $59 million from the Precision and VSI acquisitions, offset by an approximate $29 million decline from the previously announced Portable Medical exit, which is expected to be completed by the end of 2025. On an organic basis, we now expect sales to increase 5% to 6%. Our updated outlook represents a $16 million reduction at the midpoint compared to our July outlook, reflecting reduced expectations for our CRM&N product line. As mentioned earlier, the reduction in CRM&N sales was primarily driven by reduced customer demand for select emerging customers. For the fourth quarter, we expect reported sales growth of 2% to 5%. On an organic basis, sales are expected to be down 1% to up 2%. We have a more challenging year-over-year growth comparison as last year we benefited from new product ramps in both our C&V and CRM&N product lines. Consistent with our prior outlook, we expect lower sales in our electrophysiology business. The fourth quarter also reflects our reduced outlook for CRM&N. Even though we are adjusting our sales outlook, we continue to expect strong margin expansion driven by improvement in manufacturing efficiency and operating expense leverage. At the midpoint of our outlook, we continue to expect adjusted operating income as a percentage of sales to be 17.4% in 2025, an 85 basis point expansion compared to the full year 2024. This would result in a 13% increase in adjusted operating profit, a strong performance for the year. For adjusted operating income, we now expect a range of between $319 million to $325 million, growth of 12% to 14%, reflecting cost management actions to minimize the impact of our lower sales outlook. While still maintaining the same low end of our previous outlook range, this represents a $3 million reduction at the midpoint. For adjusted net income, we now expect a range of between $222 million and $227 million, an increase of 21% to 24% versus 2024, reflecting the strong operational performance, reduced interest expense, and a lower adjusted effective tax rate. Lastly, we now expect adjusted earnings per share of between $6.29 and $6.43, which is a strong growth of 19% to 21% on a year-over-year basis. Our outlook assumes an adjusted weighted average diluted shares outstanding of 35.4 million shares for the full year 2025. Given the changes in our profit outlook, we are also updating our cash flow projections. We expect cash flow from operations to be between $230 million to $240 million, which represents a 15% year-over-year increase at the midpoint of the outlook. We now expect capital expenditures to be $95 million to $105 million. As a result, we expect to generate free cash flow between $130 million and $140 million, which represents a 35% year-over-year increase at the midpoint. We expect our 2025 year-end net total debt to be between $1.098 billion and $1.108 billion. This would result in a leverage ratio of between 2.7 and 2.8x trailing 4-quarter adjusted EBITDA, which is towards the lower end of our target range of 2.5 to 3.5x. I'll now turn the call over to Payman to discuss our preliminary outlook for 2026 and 2027.
Payman Khales, President and CEO Elect
Thank you, Diron. Due to the recent customer updates reducing the volume of select new products in 2026 because of lower adoption in the marketplace and its expected impact on our 2026 sales, we are sharing our preliminary 2026 outlook earlier than usual. We remain confident in our long-term growth based on our robust development pipeline and the strong visibility we have to new product launches. This is why we're also providing a preliminary 2027 outlook. We expect 2026 reported sales to be down 2% to up 2% versus 2025, which includes an approximate 2% headwind from the planned portable medical exit that we will complete in 2025. On an organic sales basis, we expect to be flat to up low single digits. As I mentioned earlier, we recently received customer updates regarding 3 new products. Based on these updates, we now anticipate our sales for these 3 products to decline in 2026, which we expect to be a 3% to 4% headwind to our sales outlook. This offsets the expected 4% to 7% growth across the remaining portion of the business. The new product headwinds will be more pronounced in the first half of 2026. As a result, we expect our organic sales to decline low single digits in the first half of the year, with a recovery to market growth in the second half of the year. We expect the inorganic headwind from the portable medical exit to be similar in the first half and the second half of 2026. From a product line perspective, we expect both C&V and CRM&N to be flat to up low single digits on a reported basis as we navigate the select new product headwinds. In other markets, we expect a decline of approximately $30 million to $35 million, primarily driven by the Portable Medical exit. We're actively taking steps to align our costs with manufacturing volumes. Based on our preliminary assessment, we expect adjusted operating income in 2026 to range from a decline of 5% to an increase of 4% and adjusted EPS to range from down 6% to up 5%. As we look beyond 2026, we have a strong development pipeline with good visibility to new product introduction schedules over the next couple of years. Given the strength of this development pipeline, we expect to return to above-market growth in 2027. We continue to expand our product development pipeline with a focus on getting designed in early to new products in higher-growth markets. Since 2017, we project that by the end of 2025, our product development sales will increase by over 300%. This is up from the 270% growth that we shared at the end of 2024. Our mix continues to be approximately 80% in emerging and growth markets and 20% in more mature markets. We remain confident in our strategy and the long-term outlook for the business. The markets in which we compete are growing at a steady mid-single-digit rate in aggregate, and our approach is to secure early design wins in higher growth end markets. Approximately 70% of our sales are under multiyear agreements. In addition to driving strong organic growth, we plan to continue our tuck-in acquisition strategy while maintaining our leverage ratio within our targeted range of 2.5 to 3.5x. We have demonstrated that our strategy delivers results over the long term and remain focused on execution while we navigate the next 3 quarters. In summary, we delivered strong results for the third quarter, with sales growth of 8%, adjusted operating income growth of 14%, and adjusted EPS growth of 25%. On a year-to-date basis, sales are up 9%, adjusted operating income up 14%, and adjusted EPS up 20%. While we're updating our 2025 sales and profit outlook and expect a more flat sales performance in 2026, we are confident in our ability to return to 200 basis points above market growth in 2027, driven by our strong new product development pipeline. We will now turn the call over to our moderator for the Q&A portion of the call.
Operator, Operator
Our first question comes from Brett Fishbin with KeyBanc.
Brett Fishbin, Analyst
Just a couple on the early 2026, if you can hit on the specific headwinds in a second. I was just curious, the green bar that related to the rest of the portfolio, organic growth is 4% to 7%. And I was hoping you could maybe touch on that part of the plan, given the deviation from the typical 6% to 8% when looking at it, excluding some of those new product introduction headwinds?
Payman Khales, President and CEO Elect
Yes, let me take that question. So what drives above-market growth of the 6% to 8% that you talked about is the new product introductions. Without new product introductions, the rest of our portfolio will grow at the rate of market. Now the headwinds that we're talking about, these 3 programs that we've highlighted that have given us headwinds in 2026, they're actually declining in 2026, which is - which normally that would have helped us drive growth and get to that 6% to 8% range. So when you remove new products, the rest of the portfolio is expected to grow at the rate of market.
Brett Fishbin, Analyst
All right. Helpful. And then maybe specifically on the Cardio & Vascular items. I was hoping you could elaborate just a little bit on kind of the nature of the expected headwinds, whether it's a matter of loss of customer share of wallet for either of the 2 programs or whether it's tied to actual end market demand on both sides there? And then maybe I'll just squeeze in, like 1 quick follow-up. Just any thoughts on level of visibility into the return to market growth by 2H of next year, like how you get confident in such an improvement from, call it, like 2Q '26 into 3Q '26?
Payman Khales, President and CEO Elect
Thank you for your question. Let me expand on the first part. The headwinds we are encountering for 2025 and 2026 are not linked to loss products, loss of market share, insourcing, or products being withdrawn from the market. We are still the supplier for these products, which remain available. Regarding your Cardio & Vascular inquiry, the challenges we are facing are related to two electrophysiology products that exhibited strong growth in the first half of 2025. We expected their growth to steady, but they have since declined a bit in the latter half of 2025. We anticipated an increase in these programs as we move into 2026, but during the third quarter, we discovered that market adoption of these products has been lower than expected. This is new information, and we have been in talks with our customers since the third quarter to address it. The outlook we are providing for 2026 reflects this revised forecast. As for your second question regarding our visibility, we still believe our visibility remains strong. Our backlog has stayed consistent, starting the year at over $728 million and currently around $730 million. This stability offers us good insight. We receive ongoing customer forecasts for 12 months, which further supports our visibility. However, the changes we are discussing today have raised some concerns. I want to clarify that while new product launches can be unpredictable, and some may perform better than others, generally we stay within our anticipated range. What is unusual now is that several programs are experiencing significant changes simultaneously, which is not typical.
Operator, Operator
Next question comes from the line of Travis Steed with Bank of America.
Travis Steed, Analyst
Is this a PSA product or an RF product that has changed in EP? It seems like this is a customer that we only became aware of in Q3. I want to clarify that. It looks like this customer has a different perspective on end market demand, and that is the only change on the EP side. Is that correct?
Payman Khales, President and CEO Elect
Yes. So let me try to frame it in the context of 2 EP products. I can't be specific about the type of product, Travis, but it is 2 EP products. Now what you stated about the customer's learning about their demand is accurate. So what happened is that they had given us a forecast based on what they anticipated the rate of adoption in the market would be. There was a ramp period in the first half of 2025 and there was a leveling out and a little bit of a lowering as they were trying to gauge the rate of market adoption and their rate of sales. And then we had a forecast entering into 2026 that would be then stepping up. What changed is that they came to us in the third quarter effectively telling us that the rate of adoption has not been as they had anticipated. As a result, 2026 is going to be impacting.
Travis Steed, Analyst
Okay. And you didn't know about it until Q3, it sounds like?
Payman Khales, President and CEO Elect
We did not know about it until the third quarter. And as I mentioned earlier, when we learned about this, obviously, we worked with them to try to understand the rate of change, the magnitude, our production plans because, obviously, you can't change your production plans very quickly. So these discussions also continued into the fourth quarter.
Travis Steed, Analyst
Okay. And is it a U.S. product or an international product? Or both?
Payman Khales, President and CEO Elect
I can't provide more details than that, Travis. I wish I could. However, due to the confidentiality agreements we have with our customers, I must ensure that I do not disclose too much information that would make the product identifiable, other than mentioning that there are two products in the EP space.
Operator, Operator
Your next question comes from the line of Joanne Wuensch with Citi.
Joanne Wuensch, Analyst
I have an idea of what's happening in EP. Could you clarify if there was a similar situation in neuromodulation, where growth was expected to occur at a specific pace but then in the third quarter, people indicated that was not the case? Is it a similar situation or something different?
Payman Khales, President and CEO Elect
We believe that it has to do with the rate of market adoption of select products in this space. So this book of business, our emerging customers with PMA product has done really well over the past many years. We've talked about the rate of growth of this book of business. And as we entered in 2025, we continue to have very strong growth. In fact, I would even say into the third quarter, that book of business was growing well in the rate of 15% to 20%, and we had anticipated the same rate of growth in the second half that we had seen in the first half. But what happened is that in the third quarter, some of these customers, we learned that the forecast that we had anticipated is not materializing for some of these customers. And we think what's happening is that the primary reason for the change is they are trying to align the purchases from us to match the market demand that they're seeing.
Joanne Wuensch, Analyst
That's in both sections, sorry...
Payman Khales, President and CEO Elect
Yes, I apologize. So I think your question was, to make sure that I'm answering your question accurately. I think your question was related to 2025 because the impact that I talked about is specific to the fourth quarter of 2025. Was that your question?
Joanne Wuensch, Analyst
No. Actually, I thought you did a great explanation of EP, and I was curious if it was a similar explanation for neuromod?
Payman Khales, President and CEO Elect
We believe that a few of these customers are not experiencing the level of market adoption they expected. This situation is similar in nature. However, the business from these emerging customers continues to grow, even though there was a decline in the fourth quarter. The growth rate is expected to be in the high single digits, which aligns with neuromodulation. We think this is simply a matter of a few of these customers utilizing what they have purchased from us in light of current market conditions.
Joanne Wuensch, Analyst
Okay. Have you ever had an experience where you've had multiple customers, 3 in this case, sort of change their path in terms of their forecast and their ordering patterns with you? Or do you view this as sort of an aberration in your history of this business?
Payman Khales, President and CEO Elect
This is an aberration and is highly unusual. We see a rate of variation with new products. This is just normal. Our customers see that too. And we always take a step back and we look at what do we think the outcomes would be for each of these new products. And we kind of calculate a low case, if you will, a balanced view on the low case and a balanced view on the high case and on aggregate, we provide our guidance based on that. Some products do better than others, but usually washes out. So what we're talking about today is a number of them happening at the same time with a high level of magnitude. This is highly unusual.
Operator, Operator
Next question comes from the line of Matthew O'Brien with Piper Sandler.
Matthew O'Brien, Analyst
Joe, best of luck in retirement. Payman, I apologize for staying on this topic regarding C&V. I've calculated that there might be about a $70 million reduction in your outlook for C&V next year due to those two EP products. I'm not certain if that's the exact figure, but is that reduction evenly distributed between these two programs? Also, when you mention emerging customers, are you referring to those who are not in the top three, which make up about 45% of total sales? Is that the correct way to understand it?
Payman Khales, President and CEO Elect
In response to your first question, your calculations are generally accurate, but I want to clarify that these figures pertain to three products, not just the two electrophysiology products. We are facing challenges with three products in 2026: two in electrophysiology and one in neuromodulation. Regarding your second question about emerging customers with PMA, these customers are indeed emerging, which is why we categorize them that way. We are currently working with about 39 customers on our development pipeline, of which ten have products either on the market or at various stages of launch. It's important to note that we are not solely focusing on neuromodulation with our larger clients; this group consists of newer, emerging customers.
Matthew O'Brien, Analyst
Okay. And the same goes on the EP side. It's people that are emerging versus those that are maybe a little bit more established for you guys again. You've got customer concentration among 3 big providers out there that I think is just under half of total sales. So it's the people that are not in that top 50 for you guys, top 50%, it's other providers.
Payman Khales, President and CEO Elect
Yes. Our EP business is very broad. So obviously, we have a good book of business with the largest OEMs as well as others. So it's a pretty broad business that we have. And we have products across the procedure. So any ablation procedure has different steps into it from the access to body, from navigating the body, from mapping, diagnosing, and, of course, doing ablation. We have product across the board with a different range of customers. Beyond that, I hope you understand that I can't be more specific.
Operator, Operator
Your next question comes from the line of Nathan Treybeck with Wells Fargo.
Nathan Treybeck, Analyst
Can you provide some insight on the two EP products and the neuromod product? How long have they been on the market? I'm trying to understand if there was an inventory buildup in 2025 that led to sales growth, and now the end market demand isn't matching up. Is that what occurred?
Payman Khales, President and CEO Elect
These products have been launched recently and are experiencing growth. All three of them had strong growth in 2025. The EP product specifically demonstrated strong growth in the first half of the year, particularly in the first two quarters, which is typical when our customers launch new products. There's usually a ramp-up period as they ensure they have enough product in their distribution channels. Following this, there was a leveling off, which we anticipated once our customers proceeded with their launches and waited to see the rate of adoption. As I mentioned earlier, they are experiencing a lower rate of adoption, which is why they revised their forecasts, mainly affecting 2026. The neuromodulation product faced a similar situation in that it showed strong demand and growth in 2025, but like the EP product, it is not seeing the expected rate of adoption and is encountering marketplace challenges, leading to a decline.
Operator, Operator
Okay. And just to confirm the 2 EP products, they are from 2 separate customers?
Payman Khales, President and CEO Elect
I'm not at liberty to specify that again because we need to make sure that we maintain the confidentiality. So I had to be a little bit less specific in terms of how many customers, but I can tell you that there are 2 products.
Operator, Operator
Next question comes from the line of Richard Newitter from Truist Security.
Richard Newitter, Analyst
Maybe I want to just go back to the process you have for forecasting the business. I appreciate that things are unpredictable and you're reliant on customer orders. Historically, I think you mentioned having three months or more visibility. Generally, things tend to balance out, especially when you don’t have three customers demanding at the same time. However, given the recent events this year, could you discuss any changes needed in your forecasting processes or how you might have accounted for the possibility of a similar situation occurring again next year, especially concerning the guidance you're providing? I’m trying to understand your visibility and how we should interpret your outlook for '26 from a conservative perspective.
Payman Khales, President and CEO Elect
Yes. We have been thinking about this a lot. We receive customer forecasts and purchase orders, and we have good visibility from our backlog, which is still around $730 million. This gives us at least 1.5 quarters of visibility, along with the forecasts we get from our customers. This situation is quite unusual. We are evaluating our algorithm and how we calculate our forecasts, which has not changed. For products in the longer-term pipeline, we adjust the risks based on our customers' range of outcomes. Typically, these factors balance out, and we end up within our expected range for longer-development products. For the shorter term, our production plan relies on customer instructions. If customers instruct us to build and deliver a specific amount, we will proceed accordingly. What is unusual is that multiple customers revised their forecasts, affecting a shorter timeframe than we usually expect. We are discussing the unusual nature of having multiple customers and products involved, all within a brief period. We do not expect this to happen again in the future; this is an exceptional occurrence.
Richard Newitter, Analyst
Okay. And then, hello, can you hear me?
Payman Khales, President and CEO Elect
Yes, yes, of course.
Richard Newitter, Analyst
Sorry. Just maybe going back to the differences in the EP products, the electrophysiology products and the neuromod products. These are both products that were on the market and generating revenues throughout 2025 and in prior periods. These are not new and emerging PMA products where the PMA is about to get going or waiting for approval, correct? They just fall in the bucket of your PMA kind of R&D division. Is that right?
Payman Khales, President and CEO Elect
Both the electrophysiology products and the neuromod products have been available on the market since 2025 and are expected to continue being available in 2026. We supply these products, and there have been no changes in the supply aspect. The focus is on the pace at which our customers are adopting these products.
Richard Newitter, Analyst
Okay. And just to follow up on that, are any of these situations related to finished goods? I know your team is involved in many parts of the manufacturing processes, sometimes in small segments for different product areas. Are any of these connected to finished goods where you hold a larger share of the overall manufacturing?
Payman Khales, President and CEO Elect
We have had a good portion. What I can be specific on is that we have a good portion of a bill of material beyond that, Rich, I can't be more specific.
Operator, Operator
Your next question comes from the line of Suraj Kalia with Oppenheimer.
Suraj Kalia, Analyst
Good morning, gentlemen. Joe, congrats on your retirement. Wish you the very best. Payman, can you hear me all right?
Payman Khales, President and CEO Elect
Yes, I can.
Suraj Kalia, Analyst
So Payman, Diron, many topics have been discussed in this call. Please forgive me if my question is lengthy; I hope it makes sense. Payman, by definition, demand schedules are established to create your backlog, correct? You mentioned that your backlog remains largely unchanged, but two EP customers are experiencing a decline. I'm having difficulty reconciling the contractual agreements with the sudden shift in the demand curve. Additionally, Payman, I'm just trying to piece everything together on the EP side. You're optimistic about a new product in the second half of 2026. It seems bold, considering BSX is already in the market, yet two customers have seen their demand schedules decline. It leads me to believe there might be a change with Medtronic. I understand this is a lengthy question, Payman. Please help clarify, as it feels like a lot has been introduced into this overall narrative.
Payman Khales, President and CEO Elect
Suraj, I fully appreciate the question and what you're talking about. Yes, there are a number of moving parts, and that's what I keep referring to as being highly unusual for us. So let me talk specifically about your first question, which had to do with our backlog and our visibility to orders. Yes, customers place orders. Again, if we have about $730-ish million in backlog, that is about 1.5 quarter worth of orders, right? I mean, if you want to just kind of look at it on average. So that's where we have good visibility to. Now let me highlight the following: we always work with our customers to meet their demand needs. If our customers tell us that they have purchase orders that they need us to then exceed and try to increase our capacity, we do everything that we can to do that, and we do the opposite as well. We try to work with them. If they come and tell us, look, I have more demand on you that I need, and I would like to scale that down. We work with them to do this in an orderly manner. And not necessarily look at, if you will, contracts and whatnot. We try to work with them to try to meet their demands and needs. Now let me highlight and be specific that the impact of electrophysiology products is 2026. We don't expect an impact on that in 2025, and our C&V business is still expected to grow per our previous guidance, which was in the mid-teens. So that has not changed, that is purely a 2026 impact. And let me also highlight that we are mostly sole sourced in our business. And ultimately, we see the products that end up in the marketplace even though if there are fluctuations in the shorter term and a little bit of variability, where we are sole sourcing the products, we end up seeing that demand over time.
Suraj Kalia, Analyst
I completely understand, Payman, and I hope you all appreciate this. That's why we're all working to gather the necessary information. Now, regarding the second part of my question, in the Q2 call, you mentioned $5 million to $10 million in revenues, if I recall correctly. Can you clarify if this was specifically in EP? The reason I ask is that there seemed to be a developing softness on the EP side. It's challenging to align other companies' comments in the EP sector with what you are observing. We’ve already noted the RFA softness, and I doubt that is the cause of the issue. It makes sense to think there may be something unfolding in PFA. I'm just trying to connect all the pieces here. I apologize for the lengthy question.
Payman Khales, President and CEO Elect
No, fully understand Suraj, thanks for all the questions. So let me try to address them one by one. The shift between 3Q and 2Q was multiple products. There were about 3 separate events that I had mentioned that were not specific to EP. So that was multiple products. With regards to what you're talking about the strength in the EP space, you're absolutely correct. The EP market is doing really well. And we have and in 2025, continue to do well and will do so in 2016 as well if you exclude the impact of the 2 products in question that are declining. So our portfolio in the electrophysiology continues to do really well, and we expect it to grow at the rate of market in 2026, excluding the negative impact of these 2 EP products. And once we anniversary in the second half of the year, the impact of the ramp that we had in the first half of 2025, we fully expect to get back to growth for our total business, but of course, in EP as well to the rate of market growth and then be above market growth in 2027. We see this as a 3-quarter headwind, in the fourth quarter and the first half of 2026, and we fully expect to get back to growth in the second half of '26 and above market growth in 2027.
Operator, Operator
Your next question comes from the line of Andrew Cooper with Raymond James.
Andrew Cooper, Analyst
I'm going to ask maybe 1 more on the EP side, similar to 1 that was already asked. I know you can't get into the specific products, but like mentioned, EP procedures aren't really inflecting away from expectations from a market perspective. So given you talk about that breadth of portfolio, is there any potential for you to recapture some of this volume elsewhere with other customers? And what would that look like? And when could we think about seeing that if or when it potentially could play out?
Payman Khales, President and CEO Elect
Thank you for your question. Our electrophysiology business is performing well, despite the challenges posed by two specific products. Additionally, we have new products set to launch in the second half of 2026 and in 2027. These launches will take place across all our growth markets, including electrophysiology, neurovascular, structural heart, and neuromodulation. We are optimistic about returning to growth. Specifically in electrophysiology, we anticipate growth because we will be reflecting on the strong growth rate we experienced in the first half of 2025 during the second half of 2026. We no longer have those associated costs, and when we consider the strength of our overall electrophysiology portfolio along with the upcoming product launches, we are confident in achieving growth in the latter half of 2026 and exceeding market growth by 2027.
Andrew Cooper, Analyst
Okay. Helpful. And then maybe a second one, just on margins and your ability to sort of offset the drag here looking for close to flat profitability similar to what you're expecting for revenue. So how do we think about the magnitude of potential cost out that you might be able to achieve here? Or is this, hey, we've got to be able to drive volume back to where we would expect and that's when we get back to more of that margin expansion like a typical year?
Diron Smith, Executive Vice President and Chief Financial Officer
Yes. And Andrew, this is Diron. Just to confirm, you're referring to the 2026 margin?
Andrew Cooper, Analyst
2026, correct, sorry. Correct.
Diron Smith, Executive Vice President and Chief Financial Officer
Yes. So when we look at the '26 profit, as you know, we have put in a range of our adjusted operating income of down 5% to up 4%. That range, first of all, to note is very consistent with our sales range that we have also provided. So we're matching the sales range with that. Our profit algorithm, essentially, we rely on operating expense leverage on volume as well as our gross margin expansion primarily from an Integer Production System. As you can imagine, the volume piece of that algorithm will be a little bit more challenging in 2026. But we still have a very strong foundational process in our Integer Production System we focus on direct labor efficiency, where we reflect a focus on direct material efficiency as well. And we believe that's where we'll still be able to drive continuous improvement and see margin expansion. At the same time, with the lower volumes, we will be very disciplined in our cost management as we manage through these 3 quarters of headwind that we're facing. And so we believe next year, although down 5% to up 4% on the AOI range, we believe that we will be able to deliver on that, and we'll work to narrow that range as we get into February.
Andrew Cooper, Analyst
Okay. I'll stop there. And Joe, congrats and enjoy your retirement.
Operator, Operator
Your next question comes from the line of Richard Newitter from Truist Security.
Richard Newitter, Analyst
Maybe I want to just go back to the process that you guys have for forecasting the business. I appreciate your comments; things are lumpy. You're dependent on customer orders. Historically, I think you said you have 3 months or more visibility. And usually, things work out, right, when you don't have 3 customers coalescing at once. So the puts and the takes work out. But I guess just in light of the fact that this happened this year, can you talk to us about any of the processes that need to be changed for your forecasting or how you potentially took into account the possibility for something like this happening again next year with the guidance that you're providing, where you guys are more of a steady Eddie even with some of the quarterly variability. So I'm just trying to get a sense for how much visibility and then with the outlook that you're putting out now in '26, how we should be interpreting that from a conservatism standpoint.
Payman Khales, President and CEO Elect
Yes. We have been reflecting on this a lot. We receive customer forecasts and purchase orders, which provides us with good visibility thanks to our backlog, which is still around $730 million, giving us visibility for at least 1.5 quarters. This situation is highly unusual. We are reviewing our forecasting algorithm and how we calculate our forecasts, which has not changed. For longer-term products in our pipeline, we adjust for risk based on customer input. Customers provide a certain range of outcomes, and we assess and adjust those accordingly. However, overall, these adjustments typically balance out, and we usually remain within expected ranges for longer-term products. In the shorter term, our production plans rely on customer instructions. If customers request specific quantities to be built and delivered, we comply with that. What stands out in this case is that multiple customers revised their forecasts impacting the short term in a manner we wouldn’t normally expect. This unusual occurrence involves multiple customers and products, all happening over a brief timeframe. We do not anticipate this being a recurring issue. This is an atypical situation.
Operator, Operator
And that's all the time we have for questions. I will now turn the call back over to Payman Khales for closing remarks.
Payman Khales, President and CEO Elect
Okay. Thanks, everyone, and I'd like to summarize our conversation today. We're facing a 3-quarter sales headwind, and we expect to return to growth in the second half of 2026. We have a strong development pipeline and expect to get to above market growth in 2027 and as I take on the helm, I'm excited to lead our team to deliver for patients, customers, and shareholders. And thank you again for your time and interest in Integer.
Operator, Operator
Thank you again for joining us today. You can access the replay of this call as well as the presentation on Integer's investor website at integer.net. This concludes today's conference call. You may now disconnect.