Integer Holdings Corp

NYSE:ITGR

Earnings Call Transcript 2020-Q4

[Operator]

Ladies and gentlemen, thank you for standing by, and welcome to the Integer Holdings Corporation Q4 2020 Earnings Call. [Operator Instructions]

Please be advised that today's conference is being recorded. [Operator Instructions]

I would now like to hand the conference over to your speaker today, Tony Borowicz, Senior Vice President of Strategy, Corporate Development and Investor Relations. Thank you; please go ahead.

[Tony Borowicz, IR]

Good morning, everyone. Thank you for joining us, and welcome to Integer's Fourth Quarter 2020 Earnings Conference Call. With me today are Joe Dziedzic, President and Chief Executive Officer; and Jason Garland, Executive Vice President and Chief Financial Officer.

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 measures. For a reconciliation of these non-GAAP measures, please see the appendix of today's presentation and the notes to the financial statements in today's earnings release, 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 review the status of our long-range strategy. Jason will then review our financial results for the fourth quarter and for the full year and provide our outlook on both the full year and first quarter of 2021. Joe will come back on to provide his closing remarks, and then we will open up the call for your questions. With that, I'll turn the call over to Joe.

[Joe Dziedzic, President & CEO]

Thank you, Tony, and thanks to everyone for joining the call today. I'd like to start by recognizing the Integer associates who worked every day during 2020 to produce products for our customers and patients. The dedication and sacrifice they make to deliver for our customers and their patients are the reason I can join this call today with confidence that Integer is well positioned to continue delivering on our commitments.

We delivered fourth quarter sales at the high end of our guidance and profit above our guidance. The fourth quarter was the start of the recovery for Integer, and our sales increased 14% from the third quarter. Our profit margin rate increased 350 basis points from the third quarter, recovering with the expected volume increase, and exceeded our guidance by 50 basis points.

On our last earnings call, we estimated the industry would grow low single digits year-over-year during the fourth quarter, which would have been an improvement from the third quarter. Our view on the fourth quarter today is that the industry declined low single digits on a year-over-year basis, similar to the third quarter industry results. Since our fourth quarter sales were at the high end of our expectations, we think our customers built some inventory during the fourth quarter. We expect this inventory will be depleted over the first and second quarters of this year, and we have incorporated this impact into our 2021 guidance.

Despite the pandemic, we reduced net total debt by 15% last year, a reduction of $123 million, demonstrating our continued strong focus on cash management. During 2020, we remained focused on executing our strategy, and it delivered for both our associates and our customers through improved safety, quality and on-time delivery. We increased our overall investment in manufacturing capabilities and capacity, additional R&D engineers and numerous other areas of the business. Our 2021 outlook reflects our view of the trajectory of the industry recovery, including our margins expanding with the volume recovery. Jason will cover this in more detail later.

I presented this slide 1 year ago to highlight the strong trajectory we were on after 2019. We had achieved 2 of the 3 financial objectives of our strategy, operating profit growth at twice the sales growth rate, and debt leverage between 2.5% to 3.5%. This pre-COVID view demonstrated that our strategy was delivering the intended results. Just a few weeks after presenting this slide, we were all in lockdown due to COVID.

We've added 2020 to this slide to reflect the impact that pandemic had on our sales and profit. Our priorities during the pandemic were clear, and we shared them throughout the year -- protect our associates, execute our strategy and continue paying down debt. Although the financials don't reflect it because of the pandemic, we made meaningful progress improving Integer last year. But first, let's cover our view of the COVID impact on the industry and Integer sales during 2020.

This is the fourth time we've shown this quarterly graph and possibly will be the last. We believe this graph has been helpful to depict the timing difference of COVID's impact on our customers and Integer. The dark blue line in the graph represents the industry sales and the orange line represents Integer's sales. The table at the bottom of the slide reconciles our estimated industry decline to Integer's growth or decline. The first of the 2 rows in the middle represents our estimates of the COVID timing difference and the second row, labeled non-COVID, quantifies 3 Integer-specific items. I need to highlight that the industry estimates represent our aggregation of public companies' reported sales in the markets we serve. We tried to correlate our customers' reported sales by end market that would match our sales in those end markets.

A quick recap of how to interpret the table at the bottom is as follows. In the first quarter of 2020, we estimate the industry declined 6% and Integer grew 4% on a year-over-year basis. Because our customers did not change their orders to Integer during the first quarter of 2020, Integer did not have any impact from the pandemic. This created a COVID-driven 10-percentage-point difference between the industry results and Integer's results. Each quarter can be interpreted in this manner with the non-COVID line representing the impact of the Nuvectra bankruptcy, fewer days in the fiscal 2020 versus fiscal 2019 and the Electrochem business unit's sales decline from the oil and gas industry decline. The full year column reflects an industry decline of about 12% compared to an Integer decline of 15%. The non-COVID impact was a negative 4% and the estimated timing difference impact of COVID was a positive 1% on Integer's year-over-year sales.

Our estimate of why COVID had a 1% positive impact on the full year points specifically to the fourth quarter. As I mentioned earlier, on our third quarter earnings call, we estimated the industry would grow low single digits in the fourth quarter, and our sales guidance reflected that growth. Our current view is the industry declined low single digits in the fourth quarter, whereas Integer sales were at the high end of our guidance. Our conclusion is the industry built some inventory during the fourth quarter versus our prior expectations, and we have incorporated this into our 2021 sales guidance.

I appreciate this slide has a lot of moving parts. Hopefully, the takeaway is clear. For the full year 2020, we believe the Integer sales decline was about the same as the industry sales decline when considering the non-COVID items. We expect our full year 2021 sales growth versus 2020 to track the industry growth. But we expect the quarterly year-over-year growth rates to be very different than the industry because of the timing differences COVID had during 2020. We expect the sequential growth during 2021 to be more consistent with the industry. This reflects our view of the COVID impact on both the industry and Integer sales last year. Despite this difficult environment, Integer has continued to lead through the pandemic, and the next slide covers how.

It starts by taking care of our associates, who take care of our customers and patients. We continued to deliver for our customers, and despite the pandemic, we won more product development programs than we projected and further expanded our pipeline of new opportunities. We adjusted cost with volume and protected our infrastructure so we could continue executing on our imperatives. Our focus on cash generation enabled us to spend a similar amount on CapEx in 2020 as we did in 2019, while increasing investments in R&D, SG&A and operations to execute our strategic imperatives. Our ability to continue serving our customers and delivering for patients during the pandemic is a testament to the dedication and commitment of our associates. I remain convinced that if we equip and empower our associates with the tools they need to serve our customers, our shareholders will reap strong returns.

The pandemic definitely consumed a significant amount of energy in 2020, but it did not stop us from continuing to execute our strategy. In the next few slides, I'm going to share some of the highlights on how we strengthened Integer in 2020 and built on the strong trajectory we had entering the year, which I'm confident will enable us to deliver on our financial objectives.

It starts with our culture. Two of our 6 operational strategic imperatives are focused on building leadership capability to deliver performance excellence. This slide explains how we are going to accelerate the growth of Integer. If you think about what you want as an investor, sales growth and cost reduction at the same time, or at least you want sales growing faster than cost. This means one must do more with less or deliver more with the same amount of resources. But how do we do that?

It starts with a commitment to personal and professional growth. Defined workstreams under each of these imperatives outline how we are going to accelerate the growth of the leaders and the associates at Integer. The 4 examples underneath each imperative demonstrate the ways we are growing our leadership. We've summarized the results in 4 areas for each imperative to provide examples of how we're turning the intangible word culture into something very measurable and impactful.

We are improving our selection process through interviewer training and psychometric assessments, which enables us to develop more clear and effective individual development plans for associates once they join Integer. We've trained frontline supervisors and developed tools to assess performance and provide coaching and mentoring. We measure associate engagement to know whether we're succeeding, and we're differentiating pay based on performance. We've hired a senior leader to accelerate our diversity and inclusion efforts to enable every associate to bring their full selves to work, which will lead them to making their maximum possible contribution to Integer. By growing our leaders and associates, we propel the growth at Integer and deliver sustained outperformance.

Manufacturing excellence is another imperative that made significant progress in 2020. We've previously shared the 4 workstreams of this imperative shown on the left side of this slide, highlighting that it all starts with the Integer Production System. The Integer Production System consists of 5 categories with 16 elements, all built on the foundation of our values at the bottom of the pyramid. We are systematically and rigorously implementing each of these 16 elements across the Integer manufacturing sites based on the prioritization for each site that will accelerate their achievement of excellence in everything they do.

We have added the lean expertise and continuous improvement resources across the organization to provide the training and tools that empower our frontline associates to improve the safety, quality, on-time delivery and efficiency in our operations all over the world. The operational results demonstrate we are making manufacturing a competitive advantage for Integer.

We have initiated the next evolution of our manufacturing excellence strategy by launching our first implementation of a manufacturing execution system. This implementation will enable us to eliminate manual processes and paperwork, provide real-time data analytics and ultimately drive increased quality and efficiency in our operations. This is another transformative investment that will further differentiate our manufacturing capability from our competitors.

Another evolution of our strategy is our investment in Mechatronics, which combines the utilization of collaborative robots, automation, vision and the overall mechanization of work currently being performed manually. We are in the early stages of both of these strategies and expect to see efficiencies grow throughout 2021 and accelerate into 2022 and beyond.

The results of our manufacturing excellence efforts are demonstrated in the results we're delivering for customers. Since the implementation of our strategy in 2018, we have improved quality by 49% and on-time delivery by 12%. We have reached a level of excellence for on-time delivery where there isn't much room left to improve, so we are redefining the measure to be even more customer-centric to drive greater customer satisfaction in how we serve them. Customers are recognizing our improvement, and I would point to the 70% of sales we have under multiyear agreements as evidence that we're being recognized and rewarded for our improved service levels.

Our strong cash generation has enabled us to continue investing in the manufacturing capabilities and capacity needed to accelerate top line growth at Integer. The manufacturing execution system implementation I referenced earlier is included under the capabilities investments column. In terms of capacity expansion, I would highlight the Galway, Ireland, R&D center we opened last year as another way we're supporting our customers' demand for more product development work. Furthermore, we have recently invested in the expansion of our Alden, New York, implantable battery facility, where we recently broke ground on a project to significantly increase our capacity to manufacture lithium ion batteries to support the increasing demand for these products.

The far right column highlights the talent additions we made during 2020 to enable and accelerate the execution of our strategy. These additions support all 6 of our operational strategic imperatives and demonstrate the investment we're making in human capital at Integer. I am confident these carefully selected leaders will accelerate our journey to excellence.

Even while we weathered a 15% decline in sales and continued to accelerate investments in our strategy, we reduced our net debt by 15%, another

$123 million, during 2020. Although our leverage ratio went up because of the EBITDA reduction caused by COVID, I'm confident we will get back within our targeted range of 2.5% to 3.5% during 2021.

I'll conclude my summary by highlighting that we were on a strong trajectory exiting 2019 after expanding our margins and continued debt deleveraging. During the pandemic, we protected our associates and continued our journey to excellence by investing in the business, both in our associates and in our manufacturing plants. Our strategic objectives have not changed, and know that our pursuit of these objectives has only accelerated.

I'll now turn the call over to Jason to discuss our financial results.

[Jason Garland, EVP & CFO]

Thank you, Joe. Good morning, everyone. Thank you again for joining our call. I'll take this time to provide more details on our fourth quarter and full year 2020 adjusted financials. I'll provide an update on our cash flow and conclude with our expectations for 2021.

I'll start with our fourth quarter results, which continued to be meaningfully impacted by the COVID-19 pandemic. Fourth quarter sales were at the high end of our guidance and up $33 million sequentially over the third quarter. At $269 million, this was down 17% versus the prior year. At $38 million, our adjusted operating income exceeded the high end of our guidance and was up $13 million sequentially over the third quarter. This was 38% lower than prior year. As projected, our fourth quarter profitability improved significantly over the third quarter on the increased sales, combined with the continued focus on manufacturing excellence and cost containment. Having maintained strategic investments throughout the pandemic, we remain confident that Integer, our customers and the patients we ultimately serve will benefit.

Moving to Slide 20. Our full year financials clearly reflect the impact of the pandemic. Sales decreased by 15% to $1,073,000,000. Adjusted operating income decreased 39% to $144 million and we reported $92 million of adjusted net income, a decrease of 41%.

Turning to Slide 21. We see the graphical representation of the impact that a 15% year-over-year reduction in sales had on our full year 2020 adjusted net income. Our balanced approach to cost management during a temporary but steep reduction in sales is also included in the operational drivers column. We saw a $76-million reduction in our adjusted net income in 2020 versus the prior year due to the impact COVID had on our volume and deleveraging.

Our strength in cash flow generation, continued focus on debt reduction, along with lower LIBOR, all contributed to the reduction of our interest expense by $10 million and contributed $0.31 per share of growth.

The impact from our effective tax rate also contributed $5 million of year-over-year income growth. 2020 benefited from discrete items related to the favorable finalization of 2017 tax reform regulations, tax credits that exceeded our original 2019 return provisions and our tax planning strategy to optimize foreign tax credits. These discrete items drove a more pronounced reduction in our effective tax rate as the absolute dollars of tax savings is applied to a greatly reduced income before taxes due to the pandemic. Given this, our full year adjusted effective tax rate was 12.2% for 2020. As the impact of the discrete items will not repeat, we expect our 2021 effective tax rate will increase over 2020, but will be better than 2019 from our ongoing strategic tax planning actions.

In the fourth quarter, we continued a strong conversion of income to cash and generated $71 million in cash flow from operating activities and

$59 million in free cash flow. This included $29 million of cash collected as a result of the patent litigation judgment being affirmed in Integer's favor by the United States courts of appeal.

In the fourth quarter, we reduced our net total debt by $59 million and for the full year by $123 million despite the COVID-19 pandemic. We continued to steadily reduce our net total debt, consistent with our strategy. However, our debt leverage ratio did increase to 3.6x adjusted EBITDA as our trailing 4-quarter adjusted EBITDA is lower given the impact of the COVID-19 pandemic on the second, third and fourth quarter profit. We also continued investing in our strategy with $47 million in primarily growth-related capital expenditures in 2020, a level similar to our investment in 2019.

Next, we'll talk about our expectations for 2021. You may recall that we suspended our financial guidance in early 2020 due to the significant uncertainty created by the COVID-19 pandemic. While we remain in the midst of the pandemic and still face considerable uncertainty, we are resuming financial guidance in keeping with our commitment to provide as much clarity and transparency as possible.

We will begin with sales on Slide 24. We expect 2021 sales to be in the range of $1,160,000,000 to $1,200,000,000, an increase of 8% to 12% versus 2020. We project sequential improvement for the second consecutive quarter, with the first quarter of 2021 growing over the fourth quarter of 2020. This growth is supported by our current orders backlog and incorporates the slower industry recovery during the fourth quarter of 2020. We expect the second quarter to be similar or slightly better than the first quarter, with improvements in the second half of the year to be largely determined by the pace of market recovery. We also expect that our quarterly year-over-year growth rates will continue to differ from the industry due to the timing differences of the COVID impacts we saw in 2020.

Let me now turn to our outlook for the full year 2021. As shared on the prior page, we expect sales for the full year to be in the range of $1,160,000,000 to $1,200,000,000, an increase of 8% to 12%. We expect 2021 adjusted operating profit to be between $170 million to $190 million, reflecting a growth of 18% to 32%. We expect adjusted net income to be between $113 million to $130 million, reflecting a growth of 23% to 41%.

Our projected profit growth is driven by the expected volume recovery and strong productivity from our manufacturing excellence imperative, partially offset by an estimated increase in costs from incentive compensation. The stock-based compensation component of this expense is estimated to increase by approximately $9 million from the increased tenure of our leadership team and lower expense in 2020, as the pandemic caused the 2018 organic sales growth equity awards to yield no payout.

Turning to Slide 26. I'll provide some color on our first quarter outlook. Because of the unprecedented impact of the pandemic, we suspended guidance in early 2020. We provided fourth quarter 2020 guidance because we felt we had solid near-term visibility and it would help investors interpret the pace of the recovery on Integer. We are providing a full year 2021 view of the recovery with specific guidance for the first quarter of 2021 to provide insight into the pace of the recovery as we entered the new year. We do not intend to provide quarterly guidance as a regular practice, but felt during this period of greater uncertainty, this additional insight would be particularly helpful to investors.

With our backlog continuing to improve, we expect continued sequential improvement in sales, and the first quarter will be between $280 million to $290 million, up approximately $10 million to $20 million over the fourth quarter of 2020. It is important to highlight, the year-over-year decline of 12% to 15% versus first quarter of 2020 is because Integer sales were not impacted by COVID during the first quarter of last year. We expect adjusted operating income margin rates to continue to grow with increased volume, consistent with the 2 prior quarters, including our strategic investments. As a result, we expect the first quarter 2021 adjusted operating income margins to be 90 to 210 basis points higher than the fourth quarter of 2020.

Finally, on Slide 27, we expect to generate cash flow from operations and free cash flow in the range of $145 million to $165 million and $90 million to $110 million, respectively. In 2021, consistent with our strategy to increase our strategic investments in the business to drive growth, we expect to increase capital spending to a range of $50 million to $60 million. Given the free cash flow projection, we anticipate a reduction of net total debt between $90 million to $110 million in 2021 and expect to return to a target debt to adjusted EBITDA leverage range of 2.5x to 3.5x.

With that, I'll turn the call back to Joe. Thank you.

[Joe Dziedzic, President & CEO]

Thank you, Jason. Our journey to excellence slide has been updated to reflect our 2021 outlook that Jason just explained. Our strategic objectives remain the same, and I believe that despite the disruption of last year, we strengthened our company, and we are well positioned to resume our march to our long-term objective of sales growth that is 200 basis points above the market and to deliver sustained operating profit that is 2x the sales growth rate, all while maintaining a debt leverage ratio between 2.5% and 3.5%.

I'll conclude our remarks today by offering our view on why now is a good time to be an Integer shareholder. We believe we have a clear vision, a compelling strategy and strong values, combined with the most talented associates amongst all medical device outsourcers. The industry dynamics of mid- single-digit growth and high barriers to entry, combined with Integer's breadth of product portfolio, creates a very resilient business model. Integer's world-class research and development capabilities, our global manufacturing footprint, combined with our deep customer relationships, creates a compelling growth strategy. Our commitment to our associates and investment in their growth, coupled with our focus on building leadership capability to deliver performance excellence, creates a performance culture that is creating a competitive advantage. Finally, our recent track record of delivering on our financial commitments and generating strong cash flow reinforces our financial strength. I am confident in our strategy, in our associates and our ability to earn a valuation premium for our shareholders.

Thank you for joining our call this morning. I will now turn the call back to our moderator for the Q&A portion. Thank you.

[Operator]

[Operator Instructions] Your first question comes from Jim Sidoti with Sidoti & Company.

[Jim Sidoti, Sidoti & Company]

I hope you all have power and are feeling well. I know it seems like it's a rough week to be in Texas.

[Joe Dziedzic, President & CEO]

We are managing through, Jim. Thanks for the greetings.

[Jim Sidoti, Sidoti & Company]

Okay. As far as the guidance goes, and I was pleasantly surprised at the fact that you were able to give both quarterly and annual guidance for 2021 -- I think that's a good sign. What are you assuming for the nonmedical piece of the business in terms of revenue? Do you think that will grow at a faster rate, slower rate? And is that more second half growth?

[Joe Dziedzic, President & CEO]

Jim, I think you just called it. Good summary. We -- our expectation for Electrochem on our last earnings call was we expected no growth in 2021 versus 2020. And as you've seen in the financial results, the business declined from $58 million to $35 million in sales due to the oil and gas energy decline.

What we're seeing right now is we really expect the first half to continue in the same trajectory that it's been on throughout 2020, so little to no growth in the first half of 2021. We do anticipate some uptick in the second half of the year. Maybe we get a little bit of growth in that business. But even a 10% growth on a $35-million business is only $3 million, so it's not meaningful to the total company growth rate or sales, but it would be nice to see the beginning of the recovery in the oil and gas industry. So our expectation is the second half, we begin to see some sort of a pickup in volumes. So maybe there's a few million dollars of year-over-year revenue growth for the full year '21 versus '20.

[Jim Sidoti, Sidoti & Company]

And on the medical side, are there any key new products in the industry that you think will help drive the recovery? Maybe the neuromodulation business or one of the other businesses that you think are going to drive the growth for 2021?

[Joe Dziedzic, President & CEO]

We would point to all of the areas that we've been focused on. I think neuromod is a great example, where they were particularly impacted by the pandemic in 2020. We saw that almost immediately back in March when the pandemic hit because it's such an elective surgery. And we saw neuromod start to really come back strongly in the June, July time frame last year. And we saw really, really good growth or volume return in the third quarter, early fourth quarter. And then, unfortunately, with the increased hospitalizations and infection rate in mid-fourth quarter, we saw that pullback. And I think you've heard that from all of our customers that have talked about their neuro business.

I think it points to just how elective that surgery is in the short term. As we think about that business and that product, it's not elective in the long-term in the sense that there's tremendous patient need. It's a -- we think and we believe it's highly underpenetrated, and we think the amount of innovation that is happening in that space, not just with the emerging players, but also the large players now are beginning to introduce more innovation this year and into next year. We absolutely expect the neuromod business to recover and to have high-single-digit, low-double-digit growth looking forward. We love how we're positioned to support both the large players with component technology and with the smaller emerging players with full system design and development in high-volume manufacturing, so neuromod is definitely an area that we would expect to see recover earlier than some of the other segments.

So we're actually pretty excited about 2021 and putting 2020 behind us more broadly. And we think that, as you've heard from others in the industry, we will continue to see linear sequential improvement month-over-month, quarter-over-quarter. And I point to -- if you contrast Integer with the industry, the industry's bottom was 2Q of 2020. It was very much a V-shaped recovery, down 35%-ish in the second quarter, down low single digits third quarter. We actually had 2 quarters that we were at the bottom because of how our customers managed their inventory. The fourth quarter was the beginning of the recovery for us. You've seen in our very specific guidance for the first quarter of '21, we expect a continuation of that improvement on a sequential basis. Fourth quarter was up $33 million over the third. First quarter, we're guiding to be up $10 million to $20 million over the fourth quarter. Second quarter, maybe not as much of an improvement, but by the second half, we should start to see even more improvement.

So we're excited about 2021 and putting 2020 behind us, and getting back on the growth trajectory that we and the industry were on pre-COVID.

[Jim Sidoti, Sidoti & Company]

All right. And the last one for me, if you look at your EPS guidance, the non-GAAP versus the GAAP guidance, really the biggest delta there is the amortization expense. And then the other one-time charges really trickled down to less than $0.20 annually. Does that indicate that at this point you're done with the restructuring?

[Joe Dziedzic, President & CEO]

Jim, we reduced the non-GAAP adjustments to, like you said, it's single-digit, kind of, millions, single-digit millions. Maybe you're thinking back to 4 or 5 years ago when that number was $40 million to $50 million that was related to the integration of Greatbatch and Lake Region. We've gotten that number down to -- as you described, it's the amortization. It's the stock-based comp that's very commonly adjusted out in the industry metrics. The restructuring that we have now is more selective, more very targeted. And I think you'll continue to see it in the single-digit millions of dollars.

[Operator]

Your next question comes from Matthew Mishan with KeyBanc.

[Matthew Mishan, KeyBanc]

Hey, Joe, just bigger picture, after the last couple of very strange years, what kind of changes are your medical device customers thinking through with their supply chain and how they manage that supply chain over the long run after this last couple of years? And how does that benefit you? Or how could that benefit you?

[Joe Dziedzic, President & CEO]

Great. Thanks for the question, Matt. I think the thing that the pandemic as well as some of the national disasters that have occurred over the past 2 to 3 years have done is, it's reinforced the importance of the supply chain, both from a resiliency, from a financial stream, and I think even more so from the innovation perspective. Our customers are looking to us to do more innovation, to bring more technology to the table. And then they expect us to be able to perform and deliver for them in the same way that their own plants do.

What is clear from all of our customers, they want to spend more money developing therapies. They want to spend more money on clinical trials. They want to spend more money commercializing products and putting them in the hands of hospitals and doctors to help patients. They don't want to invest in manufacturing. Although you can get a good return on investing in manufacturing, on a relative basis, the returns are much higher on therapy development, clinical trials and commercialization. So they're looking for us to do more, and they're looking for us to cover the full suite of capabilities, which we can provide today.

So the reason we continue to invest in the technologies that we do is to ensure that we can fulfill -- enable their strategy and help them focus on therapy development. We see that in their desire for redundancy and business continuity plans. We see that in their desire for quick-turn prototyping. We've invested in a number of our locations to add dedicated lines for quick-turn capability. We've invested in adding specific technologies in order to be able to support their needs and accelerate their time to market. They are looking for more outsourcing, and they want to partner with people who they know and trust, and they know that can deliver for them on a sustainable basis.

Some of the supply chain disruptions that have occurred over the past couple of years, whether it's the pandemic, whether it's suppliers in Asia, whether it's natural disasters, redundancy and business continuity is paramount to them. They know that if they can't supply and meet market demand, there's someone else in the industry who will step in. And so that's foundational. And so a company like ours that have -- has the redundancy and the financial strength, the technology, the proven quality, the proven capability to deliver on time, and that's continuing to invest and has the financial wherewithal to do so, is putting us in, we think, a very differentiated position.

And so we feel that our strategy is very clear about enabling their success. We feel our strategy is very clear to understanding their technology needs and then delivering from and being the best manufacturer in the industry. So we think we're well positioned to meet their needs and to meet how they're thinking about their investment allocation going forward.

[Matthew Mishan, KeyBanc]

Joe, as you see this recovery progress for you guys on a sequential basis from here, how do you -- how are you thinking about commodity prices or potential supply chain shortages through the industry? Do you think the industry can handle the pace of change?

[Joe Dziedzic, President & CEO]

I know Integer can. I'm confident we can. I'm confident that we've demonstrated the agility during COVID to address the potential supply chain disruptions, to modify how we've run our business, protected our associates and still delivered for our customers. I think this is a strong industry. It's mid-single-digit tailwinds across the industry. I think the providers like us, who understand our customers are investing in the innovation, investing in manufacturing and being great at manufacturing, while delivering innovation, are the ones who are going to succeed and who are going to be able to enable our customers' growth and deal with whatever challenges that the environment presents to us. So I'm confident that we have the agility.

The industry, I think, has proven to be fairly resilient during the pandemic. I think that the hospitals have done a phenomenal job of adapting and adjusting. And I think supply chains overall have held up reasonably well in the med device sector.

[Matthew Mishan, KeyBanc]

Okay. And I'll combine the last 2 questions into one. You made 2 smaller acquisitions in US BioDesign and then [Inomec]. First, how have those acquisitions contributed to the new product introductions or the backlog of companies under development that you were talking about last quarter? And then also, just trying to understand what the pipeline looks for you guys into '21, and if you have -- and if you're getting closer towards your target debt to EBITDA, does that mean you can be a little bit more acquisitive next year?

[Joe Dziedzic, President & CEO]

So then specific to the 2 acquisitions we've done, they've delivered exactly what we had hoped they would and expected they would. They've brought differentiated capability. They've bought the ability to enable our customers' design development and speed to market. We've made and are making investments in both of those acquisitions to add capacity and capability so that they can serve our customers more broadly and address and support the increased demand.

We've talked about the increased development work we're doing for our customers. And even though we were in the midst of a pandemic last year, we added more R&D engineers that we had in our budget because the customer demand was there. And we've continued to do that. We've added 18% more -- or 15% more R&D engineers since 2018 because the demand is so strong. And so we feel that we're incredibly well positioned there. And those 2 acquisitions are just examples of how we've continued to add capability that our customers want and that our customers need. So we're filling not only gaps in our capability, but in the industry, and closing needs there.

We absolutely -- given our ability to continue paying down debt, where we paid down 15% -- or reduced net debt 15% more in the midst of the pandemic, over $120 million. When our EBITDA is back to a pre-COVID or even a 2021 guidance level, we're at the low end of our range of 2.5x to 3.5x leverage. And so we continue to look for acquisitions. We've been very targeted and focused on specific capabilities, but as the leverage goes lower, that does create the capability to do more significant acquisitions, if the right acquisition at the right price presents itself. But it's all about the returns. And if you overpay on the way in, you'll never generate the return all the way out when you own it. So we are absolutely continuing to focus on those specific capabilities, and if we can find a business that is bigger than a tuck-in, that fits, and at the right price, we certainly have the capability to do more than just a tuck-in these days.

[Operator]

There are no further questions at this time. I will now turn the call back to Tony Borowicz for closing remarks.

[Tony Borowicz, IR]

Great, thank you, Mariana, and thanks, everyone, for joining us on today's call and your continued interest in Integer. Please note this conference call is available on our website. Thanks again, and that concludes our call.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.