UFP Technologies, Inc. Stock

Good day, and welcome to the UFPT Second Quarter 2026 Earnings Call and Webcast Conference Call. [Operator Instructions] Please note, this event is being recorded.

I would now like to turn the conference over to Ron Lataille, Chief Financial Officer. Please go ahead.

Thank you, operator. Good morning, and thank you for joining us on our 2026 second quarter earnings conference call. With me on today's call is our President and CEO, Mitch Rock.

Today, we will make some forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, the accuracy of which is subject to risks and uncertainties. Wherever possible, we will try to identify those forward-looking statements by using words such as believe, expect, anticipate, pursue, forecast and similar expressions.

Our forward-looking statements are based on our estimates and assumptions as of today and should not be relied upon as representing our estimates or views on any subsequent date. Please refer to the cautionary statement regarding forward-looking information and the risk factors in our most recent 10-K and 10-Q, including disclosure of the factors that could cause results to differ materially from those expressed or implied.

During this call, we will discuss non-GAAP financial measures, which include organic sales growth, adjusted operating income, adjusted SG&A, adjusted EPS and EBITDA and adjusted EBITDA. A reconciliation of GAAP to non-GAAP measures discussed in this call is contained in the associated press release and is available in the Investor Relations section of our website.

I'll now turn the call over to Mitch.

Good morning, everyone, and thank you for joining us. Before discussing the quarter, I want to briefly acknowledge my first earnings call as President and Chief Executive Officer of UFP Technologies. Having spent many years helping build the company and the platform we operate today, I view this transition as a continuation of the strategy that has driven our success. Our priorities remain unchanged, supporting our customers, investing in our team and capabilities, pursuing disciplined acquisitions and creating long-term values for shareholders. Our second quarter and first half results reflect solid execution across the platform and continued progress towards our long-term growth strategy.

During the second quarter, sales increased 15.1% to $174 million, gross margins increased to 29.3% and operating income grew 15.5%. We also delivered adjusted earnings per share growth of 16.8% to a company record of $2.92. These results were driven by contributions across the UFP platform and demonstrate the strength and diversity of our MedTech business.

Growth remained broad-based throughout the portfolio with our top 5 customers growing 14.7%, while the balance of our MedTech business grew 19.7%. One of the most important aspects of the quarter is that growth was not dependent on any single customer, product category or end market. Rather, performance was driven by a diverse set of customer programs, the breadth of our businesses and the continued execution of our teams across the organization.

We continue to invest in the Dominican Republic to support customer-driven growth initiatives, expand capacity and enhance our cost structure over time. These investments are generating early operational benefits and strengthening our ability to support future growth. While the full realization of those benefits is taking longer than originally anticipated, we remain confident in the long-term value of these investments and the opportunities they create for our customers and our business.

We also continued to strengthen our organization during the quarter. Recent additions in business development, operations and legal increased our leadership capacity and support our next phase of growth. As we grow with existing customers, launch new programs and evaluate acquisition opportunities, we believe investing in organizational capacity is just as important as investing in facilities and equipment.

These investments also position us to onboard additional companies into our decentralized operating model as we continue to expand the platform. Our acquisition strategy remains unchanged, and our pipeline of opportunities is robust. We continue to evaluate businesses that can expand our capabilities and strengthen our position in attractive MedTech markets. As always, we remain disciplined in our valuation approach and committed to deploying capital in ways that create long-term shareholder value.

Looking ahead, we continue to see meaningful opportunities to grow with existing customers, support new program launches, pursue disciplined acquisitions and invest in our people and capabilities. We believe the combination of our customer relationships, manufacturing footprint, robust acquisition pipeline and strengthened leadership team position us well for continued growth. The markets we serve remain attractive. Our customer relationships remain strong, and we remain focused on disciplined execution and long-term value creation for our customers and shareholders.

Most importantly, I want to thank our team members around the world for their continued dedication to our customers and each other. Their commitment, expertise and execution remain the foundation of UFP's success as we enter the next chapter of the company's growth.

With that, I'll turn the call over to Ron to review our financial results in greater detail.

Thank you, Mitch. Before reviewing operating results, I'd like to give a brief update on the impact of the conflict in Iran on our raw material input costs. Given that a portion of our raw material input cost is petroleum-based, we continue to face inflationary price increases due to the impact on oil prices from the conflict in Iran. As was true at the end of Q1, it is difficult to estimate the ultimate impact as the news changes daily, and therefore, the price of oil has been volatile. It remains our expectation that we will pass through these increases to the market in kind.

Moving to operations. As Mitch mentioned, overall sales for the second quarter were up 15.1%, fueled by strength across our platform, more specifically within the surfaces and support, cardiovascular, infection control and orthopedics submarkets. Organic sales growth for the quarter was strong at 12.4% as our launch programs accelerate and we continue to build capacity at AJR. With regard to customer concentration, sales to our top 5 customers comprised 61% of our overall year-to-date sales, but are diversified into a broad range of programs consisting of hundreds of SKUs, each subject to validation and qualification requirements.

Gross profit as a percentage of sales or gross margin increased to 29.3% from 28.8% last year. This improvement was despite continued margin pressure at AJR as programs scheduled to be transferred to the DR continue to be contingent on customer qualification.

SG&A expenses for our second quarter of 2026 increased by $4.1 million to $22.8 million. This is largely due to approximately $1.9 million in wages and benefits for back-office investments made at various times to support our larger organization. The increase also reflects growth of our senior management team as well as approximately $1 million in additional noncash equity compensation caused partially by CEO transition costs.

Adjusted operating margin for the second quarter was 17.6% of sales and adjusted earnings per share outstanding was $2.92, up significantly from last year. We generated approximately $15.6 million in cash from operations during our second quarter. Capital expenditures were $1.2 million during our second quarter, and we ended with a leverage ratio of under 1x.

With that, I now turn it back to the operator for questions.

[Operator Instructions] First question comes from Brett Fishbin with KeyBanc Capital Markets.

So a really strong quarter, especially on the revenue growth front. I was hoping you could just unpack a little bit more some of the strength that you saw. I know you called out surfaces and cardio, infection control and orthopedics as a few areas that did really well. But maybe just if you could just dive a little bit deeper into some of the trends that you saw this quarter and what got better?

Brett, thanks for the question. So we continue to see growth across several of the core markets, including cardiovascular, infection prevention, patient handling, orthopedics. We specifically called out that the robotic surgical market would be flat to down this year, and that was true.

All right. Maybe just following up on surfaces and support. I know there's been a little bit of a conversation about backlog with AJR and you guys have been ramping capacity and activities in that area. Maybe if you could just expand a little bit on if you saw any benefit specifically from the backlog or if there was anything else in surfaces and support that made it a strong end market this quarter?

We've moved through the backlog that the discussion with regard to what's going on with our customers' business where we won't address. What we can say is that business continues to grow significantly. And so we continue to see opportunity as we move forward.

All right. And then maybe just one more on the revenue front. I think like in past quarters, you guys have talked about 4 or so new programs that were expected to start ramping this year. So I was curious how like those new programs have progressed and how you're thinking about the contribution at this point for 2026?

Good question. I know we've discussed these new programs in prior quarters. What I would say is that the new program activity contributed to the quarter as expected. However, I would not characterize the quarter as being driven primarily by launches. Most of the growth came from existing customer relationships, existing product families and the continued expansion of the broad base of customer applications we have across the portfolio.

And Brett, it's Ron. To elaborate and clarify, it's really only 3 programs. The fourth program that we referred to in previous calls is an internal transfer. So it's not net new. There's 3 actual net new programs that are being transferred into us from outside.

The next question comes from Justin Ages with CJS Securities.

It seems like the investments that you're making are paying off even in the short term with the growth that we're seeing. Can you give us an indication whether we're at a new normal level for SG&A going forward?

I'll tackle that one, Justin. The answer is yes. We have made investments. I think that there's ultimately a little cushion in there because there's temporary costs that will cycle through due to the CEO transition from Jeff to Mitch. So we'll get some relief in midway through 2027. But the current level is approximately where we should be going forward.

All right. And then you mentioned leverage and being disciplined in your approach. Can you give us an indication of the pipeline? How many are you looking at in what platform, surfaces and support, infection control or any indication there?

What I can say is we were looking at anywhere from 5 to 10 opportunities that range from $5 million to $30 million of EBITDA. As stated, the pipeline is robust, so we're excited about it.

The next question comes from Andrew Cooper with Raymond James.

Maybe just to double-click on the AJR frameworks. I guess as the takeaway here, you commented that you've resolved the backlog. So is it safe to assume the labor issues feel pretty fully resolved at this point? And then I think the last backlog number we had gotten was around $8 million and that it had grown a little bit from there. So is there any normalization we need to think about from these 2Q levels back towards a rate that's maybe closer to end market pull-through versus that backlog work down?

So Andrew, what I would say about that is go back to Q2 of '25. So that's a low point, right, as far as the comp goes. We are through the backlog. So we would no longer talk about the backlog. We are through the labor issue. So we are fully ramped in St. Charles and the platform continues to grow. Our only challenge is that we continue to have activity in St. Charles that we plan to put in the DR.

Okay. Helpful. And maybe just a little bit more flavor for -- it sounds like the customer is controlling the time line there, but what percentage of product you expect to transfer to the DR is transferred at this point? And of the remaining sort of phases, how many are waiting on that sign-off from the customer versus needing more work to be done before you're able to move those down to the Dominican?

Good question. So the original thesis when we go back a little over a year ago, we have 3 programs that transfer to the DR. 2 of them have transferred and a third one is still in process. And that is delayed.

The next question comes from Max Michaelis with Lake Street.

Congrats on the great quarter. Just one for me. When we talk about sort of outside the top 5 MedTech customers growing 20%, can you kind of go into a little bit more detail on sort of those new programs ramping? And can you remind me, are one of those the 2 new robotics programs you guys announced last November? Just kind of give us a little bit more detail on how that's kind of tracking in 2026 and where you expect that to kind of go in 2027?

Okay. Max, -- two parts to the question. The broad growth across the platform really demonstrates the durability and diversity of UFP's exposure to multiple products in multiple markets, right? So the -- outside of our top customers, we grew close to 20% in the MedTech space. So that addresses that question. As it relates to the 2 programs that are in the robotic-assisted surgical space, those are all -- they have launched, they're ramping, and we expect to see more meaningful contribution as we move into '27.

Okay. I mean I can't remember if you did the last time when you guys talked about those programs, but did you give any sort of expected contribution or revenue outlook in 2026?

Yes. So I would -- so as we move into '27, it's an 8-figure contribution and growing.

There is a follow-up question from Brett Fishbin.

Just had one more quick one to kind of tie this together. Just thinking about the rest of the year, UFPT usually talks about 6% to 9% organic growth as kind of the long-term target. So just given the higher trend in 2Q, like how should we think about the rest of the year directionally from a modeling perspective? And any color on direction from here would be really helpful.

Brett, it's Ron. So you and I will chat later today. We will not obviously provide guidance for the rest of the year. The second quarter organic growth was impressive, but you have to remember that second quarter of last year was kind of the low point for the labor inefficiencies that we had. So I think as we go out through the rest of the year, the comp from a year ago will begin to improve. So I think we will be in our target range for organic growth, but I don't think you'll see the same double digits that you saw in Q2.

This concludes our question-and-answer session. I would like to turn the conference back over to Mitch Rock, CEO, for any closing remarks.

Thank you. If there's one takeaway from today, it's the strength of the UFP platform. Our growth is broad-based. Our end markets remain attractive, and our operating businesses are deeply embedded with customers across multiple medical applications. Combined with our disciplined approach to investment and acquisitions, we believe UFP is well positioned for the next chapter of growth. Thank you.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

[Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ron Lataille, Chief Financial Officer. Please go ahead.

Thank you, operator. Good morning, and thank you for joining us on our 2026 First Quarter Earnings Conference Call. With me on today's call is our CEO and Chairman, Jeff Bailly. Today, we will make some forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, the accuracy of which is subject to risks and uncertainties. Wherever possible, we will try to identify those forward-looking statements by using words such as believe, expect, anticipate, pursue, forecast and similar expressions. Our forward-looking statements are based on our estimates and assumptions as of today and should not be relied upon as representing our estimates or views on any subsequent date.

Please refer to the cautionary statement regarding forward-looking information and the risk factors in our most recent 10-K, including disclosures of the factors that could cause results to differ materially from those expressed or implied. During this call, we will discuss non-GAAP financial measures, which include organic sales growth, adjusted gross margin, adjusted operating income, adjusted SG&A, adjusted earnings per share and EBITDA and adjusted EBITDA. A reconciliation of GAAP to non-GAAP measures discussed in this call is contained in the associated press release and is available in the Investor Relations section of our website. I'll now turn the call over to Jeff.

Thank you, Ron, and thank you to everyone joining the call. I am pleased with our first quarter results and start to the year, including important progress on our strategic growth initiatives. Our revenue grew 4.1% with medical sales growing 5.9% and our nonmedical sales declining 15% as we continue to focus our efforts on best fit fast-growing segments in the MedTech space. Growth in our robotic surgery, patient surfaces & support and interventional and surgical segments of 7%, 11% and 15%, respectively, were partially offset by declines in Wound Care as 2 major customers slowed temporarily due to excess inventory.

EPS grew more slowly than revenue due in part to, number one, start-up costs related to our 4 simultaneous program launches, each of which is slowly ramping up and expected to make meaningful contributions in the second half of the year. Number two, softer results at AJR versus Q1 of 2025 as they continue to work through their labor inefficiency issues related to turnover following our E-Verify or legal right to work process last year. And number three, nonrecurring legal expenses related to a cyberattack and the CEO transition. A lot of exciting things are happening on the business expansion front. In addition to the 4 successful program launches, 3 of those 4 customers have already asked us to double our capacity on the new programs. We are also adding new buildings in both Santiago, DR and La Romana DR to expand capacity and accommodate forecast growth in patient surfaces & support and robotic surgery. In both locations, we are co-investing with our customers and will take possession of the buildings in the second quarter of this year.

We're also in the planning stages to add capacity in the APAC region to meet growing demand in Asia. Our new product development labs in La Romana and Grand Rapids are performing well, adding new programs and new talent to meet growing customer demand. On the acquisition front, we are reviewing multiple opportunities. Although we have been outbid on a couple of recent opportunities, we remain disciplined in our approach to vetting and valuing strategic acquisitions. The 3 acquisitions we completed in 2025 and the 4 in 2024 are all performing well and have increased our value to customers and strengthened our position in the market. Mitch Rock is excited to take over as CEO in June and is well prepared to succeed. We have a deep team of talented managers supporting him who understand our strategy and how they fit in. This team, together with our vendor partners, add significant value to our blue-chip customers in growing market segments. Each of these 3 critical components of our success, our team, our customers and our vendor partners, trust and respects Mitch and looks forward to continuing to grow with UFP. So for these reasons and many more, I'm very excited about the future of UFP Technologies and the value it can create for our shareholders. Thank you, and I will now hand it back to Ron to provide more color on our financials.

Thank you, Jeff. Before reviewing operating results, I'd like to give a brief update on tariffs and the impact of the conflict in Iran on our raw material input costs. In general, effective tariffs are net down from our last update. This should have a positive prospective impact on margins. Additionally, as our suppliers seek refunds from the government, we will be looking for these to flow through to us in the form of vendor credits. Countering these savings are raw material inflationary increases caused by the increased price of oil stemming from the conflict in Iran. It is difficult to estimate the ultimate impact as the news changes daily, and therefore, the price of oil has been volatile. It remains our expectation that we will pass these through to our customers. Moving to operations, as Jeff mentioned, overall sales were up 4%, fueled by a 6% increase in medical sales. Strength in this area was driven by our robotic-assisted surgery, patient surfaces and support and interventional and surgical submarkets. As anticipated, organic sales growth for the quarter was essentially flat as we are slowly ramping our new programs and our non-medical business continues to soften. We anticipate that the new program revenue growth will accelerate in the second half of the year. In addition, approximately $1 million in sales pushed into the second quarter due to a cyber event at one of our key customers. Of note, sales to our 2 largest customers collectively grew 7.5% during the first quarter. Gross profit as a percentage of sales or gross margin increased to 28.8% from 28.5% last year.

This improvement was despite continued labor inefficiencies at AJR, which, although diminishing, are still impacting cost of sales. Helping to drive the improvement was a more than 200% increase in revenue in Santiago, Dominican Republic, enabling us to leverage fixed overhead costs at this location. SG&A expenses for our first quarter of 2026 increased by $2.2 million to $21 million. This is largely due to approximately $750,000 in wages and benefits for back-office investments made at various times during 2025 to support our larger organization as well as approximately $0.5 million in noncash equity compensation.

We also incurred approximately $0.5 million in nonrecurring legal expenses due to the cyber breach incident in mid-February as well as the anticipated CEO transition. Adjusted operating margin for the first quarter was 16.7% of sales and adjusted earnings per diluted share outstanding was $2.48, up slightly from last year. We generated approximately $3.2 million in cash from operations during our first quarter. This was lower than is typical as a much stronger March sales month created a correspondingly high working capital need. Since March 31, we have paid down approximately $4 million in debt. Capital expenditures were $1.7 million during our first quarter, and we ended with a leverage ratio of approximately 1.14x. With that, I now turn it back to the operator for questions.

[Operator Instructions]The first question comes from Brett Fishbin with KeyBanc Capital Markets.

I just wanted to maybe start off with the robotics segment and I saw in the press release, you mentioned 7% growth in this category. I was hoping you could just discuss this a little bit more, maybe touch on the contribution from the new products that are starting to ramp in this segment? And then also just curious how growth is trending across your larger customer base outside of the large robotics customer?

Sure. Thanks, Brett. So the 7% growth was a blend, but it's primarily anchor programs at this -- or existing programs at this point. The new programs that we've launched are still in their infancy stage. But over time, they will be a bigger and bigger component of our growth. So we are pleased with the start to the year in the robotic surgery area, particularly at the 7%, it was a little higher than we had originally forecast. With respect to -- what was the second part of the question, I'm sorry?

I was just curious, I guess you kind of addressed it. I was asking about the new product launches and then also just how non-Intuitive customers overall are doing.

Yes. Our business is becoming more and more diverse, more and more diverse within Intuitive with additional programs and more and more diverse with additional customers. And I think you'll consider -- you'll continue to see less of a dominant position in that one customer as we go forward.

And then maybe just more broadly, you mentioned 4 large programs that are currently in the ramp phase. So maybe just a little bit more flavor around how you're thinking about those opportunities. I know you mentioned that they're expected to become significant contributors in the back half. Maybe just a little bit more detail on how you're thinking about that.

Yes. I mean 3 of the 4 programs are brand new and one was a transfer. And so the 3 new programs, each of those customers has already asked us to at least double our capacity with them. So 3 very successful launches, but the start-up revenue still is small. So the revenue will ramp into Q2 and be more robust in Q3 and Q4 and then continue on. And as we add new capacity, those 3 programs will be meaningful contributors. Two were robotic surgery and one was an infection prevention.

All right. Perfect. And last question for me. Just the nonmedical business was down a little bit more than we were expecting. I wanted to just ask if you think that's kind of the right way to think about it for the rest of the year from a growth perspective or if anything is changing in a notable way as the year progresses?

Yes, absolutely. So the dominant drop was in automotive, which I think is going to be the new normal as we literally phase out of this market. There was also a softer side in the aerospace and defense, and that will flip. We already have some activity that's going to take that from slowing back to growing. But I think you'll see advanced components continue to be little to no growth over time in certain markets like automotive, we will completely phase out of.

The next question comes from Justin Ages with CJS Securities.

You mentioned the 4 large programs ramping and contributing in the second half. Can we dig down a bit and just talk about the impact to profitability from those? How long will those headwinds -- well, I don't want to call them headwinds, but how long will those like start-up costs be in there? Are we going to see that go down once the programs start contributing more in the second half?

Yes, absolutely. So the start-up costs relate to getting the whole team there prepared, trained, et cetera, before the volume follows. So all those hires have been made, those people have been trained. And as the volume ramps up, we'll be absorbing those costs. And so the fixed costs won't go up, but the revenue will. So I think you'll see just a smooth plus. They're very slow starts. We'll ship a handful of parts and then a pallet and then eventually, they'll sort of turn on the spigot. And by the second half of the year, I think it will be robust contributions from all 3 of those brand-new programs.

Okay. I appreciate that. And then you mentioned taking control of 2 buildings, one in La Romana and one in Santiago. Can you just remind us how many buildings you have in each location then and what the capacity looks like after that? Because you mentioned already customers you have are asking for increased capacity. So just wondering if there are new additional buildings that are already kind of on your pipeline coming down the pike.

So in La Romana, this will be our sixth building. And so it's not exactly even how much capacity it adds, but it's approximately 1/6 more capacity. And so that's primarily for robotic surgery. We set up a big infection prevention program in one of the other buildings. So the La Romana campus is dominantly robotic surgery. In Santiago, we're adding our third building, and that one is predominantly patient surfaces and support. And that will probably stay that way for the time being. So if we have new low-cost country applications, we'll probably be directing them towards La Romana in the short term because that team is very experienced and their quality systems and everything have been going for literally decades, whereas Santiago is a little more of a start-up situation still.

[Operator Instructions]

The next question comes from Andrew Cooper with Raymond James.

Maybe first, I just want to touch a little bit on the Wound Care drags you called out tied to inventory. I guess can you give a little bit of a sense of magnitude for those programs? And then what gives you the confidence and comfort that this is purely an inventory dynamic that should normalize as the year progresses?

So these are both -- I mean, they're large customers within wound care, but not necessarily large customers in the whole of UFP Technologies. Both had inventory issues that they thought were in the sort of 8-month range of impact to us. But at the same time, we have 2 major programs that were in the development stage in wound care. So I'm still long term, very bullish on wound care. There seems to be a resurgence of interest in this area. So to answer your question, probably a 3-quarter impact from the slowdown in wound care and then back to normal. And then probably next year, we'd be overlaying some new programs.

Okay. Helpful. And then shifting a little bit to the AJR business. I guess 2-part question. First, can you give us a sense -- I know you called out the 200% growth in what's coming out of Santiago, but what inning of that transition of getting those products from Illinois to Santiago, would you say we're in? And then a similar question when we think about the labor headwinds, where are we in terms of temp labor versus full-time hires and really sort of getting those hires trained and back to full capacity and where you would expect to be to start working down that backlog in a more meaningful way?

Yes, absolutely. So with respect to the transfers, we think in terms of 3 major programs. So number one, completely transferred and running at rate. Number two, now completely transferred and so about to ramp up in rate. So we had sort of a tripling of volume over the last 12 months, and that will continue to grow. Program #3 has not really started. So we have the space, the lease. We've got the equipment that's shown up on site, but there's a long sort of PPAP and protocol that we have to go through before that will get up and running. And that may take more than a year, frankly, to be a meaningful contributor to Santiago. With respect to AJR, as Santiago comes up, it takes some pressure off AJR. So we have a lot of employees in Chicago. We've really fueled -- or geared up quickly to get our backlog down. The problem is not only do we have backlog, but our customer was growing rapidly. So we've been working quite a bit of overtime with a less efficient crew. And so that overtime is already beginning to subside a little. And then as we transfer more work, the less efficient employees will sort of naturally fall off and the ones that are most efficient and eligible for overtime and incentives, et cetera, will be the ones that stay. So I expect to see a smooth plus on that. With respect to progress between Q3 and Q4, I think we cut the problem about in half. Between Q4 and Q1, we made about a 25% improvement. So there's still a ways to go. But I think it will accelerate when we ramp up in Santiago because, again, we have to keep all employees, whether efficient or not right now just because we're trying to get out of backlog situation. And then we'll end up with a more efficient crew when we're done, a smaller, more efficient crew in Illinois.

Okay. Great. Super helpful. And then maybe last one, just would love a little bit more color on sort of what you're seeing in the M&A landscape and how you're thinking about it. I know you called out a couple of opportunities that were interesting, but maybe not as interesting from a dollar perspective to you as others. So just would love maybe the latest thinking on what that landscape looks like.

Yes. We have a number of discussions underway. I would say that it's a little quiet right now, frankly. There were some big deals that went through that we bid on, a couple unsuccessfully, which we are absolutely fine with, by the way. And if we get outbid, we'd rather outbid by a lot than miss it by a little. So we are very disciplined in our process, both vetting strategically, vetting for culture and then vetting for value. We do have some small ones that we're working on, and we do have still one very large one that's percolating in the background that will probably take quite a while to come to fruition if it does. But the perfect deals for us are more the medium-sized ones. And there's not as many of those as we'd like to see in the pipeline, but we are looking at deals every single week, and we have meetings with prospects every single week. So the pipeline is constantly being refilled and then vetted and some stuff falls off. So I mean, I still believe that over the next multiple years, acquisition growth will still be 50% of our overall growth. It's just hard to time. That's it.

This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Bailly, Chairman and Chief Executive Officer, for any closing remarks.

Yes. Thank you, operator, and thank you to everybody joining the call. Just to close, this is my last call as CEO, and I really appreciate all the support of our shareholders. I'm super excited about the future of the company. UFP is still the largest investment I have by multiples of greater than 10 over the next largest stock, and it's the most exciting stock in my portfolio. I think the team of people taking over is super fired up and super excited. And it's a very deep, deep team of people. And so Mitch is well respected. He is ready to go, and he's well prepared to succeed. I will be there for the next year as Executive Chair to support him with acquisitions, key strategic hires, et cetera. But I just want to say thank you, and I appreciate everybody.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the UFP Technologies Fourth Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Ron Lataille, Vice President, Treasurer and Chief Financial Officer. Please go ahead.

Thank you, operator. Good morning, and thank you for joining us on our 2025 year-end earnings conference call. With me on today's call is our CEO and Chairman, Jeff Bailly. Today, we will make some forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, the accuracy of which is subject to risks and uncertainties. Wherever possible, we will try to identify those forward-looking statements by using words such as believe, expect, anticipate, pursue, forecast and similar expressions.

Our forward-looking statements are based on our estimates and assumptions as of today and should not be relied upon as representing our estimates or views on any subsequent date. Please refer to the cautionary statement regarding forward-looking information and the risk factors in our most recent 10-K and subsequent 10-Qs and 8-Ks, including disclosure of the factors that could cause results to differ materially from those expressed or implied.

During this call, we will discuss non-GAAP financial measures, which include organic sales growth, adjusted gross margin, adjusted operating income, adjusted SG&A, adjusted EPS and EBITDA and adjusted EBITDA. A reconciliation of GAAP to non-GAAP measures discussed in this call is contained in the associated press release and is available in the Investor Relations section of our website.

I'll now turn the call over to Jeff.

Thank you, Rob. I am pleased with our 2025 results and our progress on key strategic initiatives. Sales grew 19.5% for the full year, bringing our total revenue to $602.8 million. This is a significant revenue milestone and represents nearly a tripling of revenue since 2021. During that same 4-year period, operating income grew 435% and EPS grew 419%.

We also made significant progress on several key strategic initiatives related to contract extensions, program launches, facility expansions and related moves and adding and training of new direct labor talent in St. Charles, Illinois related to our previously disclosed E-Verify attrition issues.

2025 EPS grew 15.4% despite absorbing $6.3 million in labor inefficiencies at our Illinois AJR facility. The AJR E-Verify labor inefficiency was $1.2 million in Q4, less than half of the $3 million Q3 impact, demonstrating the progress that is being made in onboarding and training new direct labor team members.

We are continuing to make progress expanding our capabilities and capacity in the Dominican Republic. In Santiago, we launched our second major program and have recently negotiated a lease for a third building, which will allow us to further expand our safe patient handling business and transfer a third major program. Each program transfer when complete, saves our customers' money and increases our profit potential.

In La Romana DR, 3 significant new programs launched. Our fifth building and related move of equipment, materials and personnel is now complete. It houses a new expanded product development center, a newly launched external capital program and a centralized warehouse to support buildings 1 through 4. We plan to take possession of a sixth building in April, which will further expand our robotic surgery capacity to support anticipated growth.

We have also expanded and extended our contract with our largest customer, materially increasing the volumes on existing programs and adding an additional program. We have also made exciting progress in other markets, signing a contract extension with our largest infection prevention customer that runs through 2030.

In the orthopedic sterile packaging space, we have also won new business and added new capabilities in Ireland, which adds significant value to our global offerings. On the human resources front, our new director level talent, one level below our corporate officers is making significant contributions in the U.S., Ireland and the DR. This group runs our day-to-day operations and is doing a great job.

On the acquisition front, integrations of the 4 acquisitions completed in 2024 and the 3 completed in 2025 are all progressing well. We continue to search for additional strategic acquisitions that will increase our value to customers while maintaining our disciplined approach.

And finally, our CEO transition planning with Mitch; Rock is essentially complete, and he is well prepared to succeed me as CEO in June. I will continue for 1 year as Executive Chair to support him and provide assistance in vetting new acquisition opportunities and key strategic hires.

With a robust pipeline of new growth opportunities, significant progress on our strategic initiatives, including multiple successful program launches, exciting new talent in our company and a strong balance sheet to fund future growth, we remain very bullish about our future.

I'll now hand it over to Ron to provide more color on our financials.

Thank you, Jeff. I am also pleased with our fourth quarter and year-end results as we delivered solid numbers despite working through the labor challenge at AJR referred to by Jeff. Before I provide more color on our results, I want to spend a few minutes on the cybersecurity breach disclosed in an 8-K last evening. The attack was detected on the morning of Saturday, February 14. By that evening, forensic incident response consultants were engaged and by Sunday evening, they were on site in Newburyport.

This was a classic ransomware attack that appears to have impacted many but not all of our IT systems. Data was taken and then destroyed. Fortunately, we had credible duplicate backups and a thorough contingency plan that allowed us to operate since the date of the incident. At this point, the incident caused minimal interruptions to our operations, and we believe our primary information systems are being brought back online this week in all material respects. From a financial standpoint, we have cybersecurity insurance and do not expect a material impact to our operations, cash or liquidity, though our investigation is continuing.

Moving to operations. Overall, sales were up nicely, largely fueled by growth in the safe patient handling, infection control and orthopedic packaging medical submarkets. As anticipated, organic sales growth for the year was low single digits. This is largely due to abnormally high 2024 sales in robotic surgery as well as backlog in our safe patient handling business due to the labor issue at AJR.

Gross profit as a percentage of sales or gross margin decreased in 2025 to 28.3% (sic) [ 28.2% ], largely due to the $6.3 million in extra labor costs incurred at AJR, which are all reflected in cost of sales. Absent these additional labor costs, gross margins would have increased to 29.3%.

As Jeff mentioned, we improved efficiency levels in the fourth quarter and anticipate further ongoing improvement. Adjusted operating margin for the year was 17.1% of sales within our target range of 17% to 20% despite the extra labor costs. Our effective tax rate of 17.2% for the full year of 2025 was down from a year ago, reflecting a continued shift in pretax income to the Dominican Republic, where we effectively pay no income taxes.

2025 was a strong year for cash generation. We had approximately $92 million in cash from operations. And despite $12.9 million in capital expenditures and funding 3 acquisitions, we paid down approximately $53.9 million in debt and ended the year with a leverage ratio of approximately 1.1x.

With that, I now turn it back to the operator for questions.

[Operator Instructions] Our first question comes from Brett Fishbin with KeyBanc Capital Markets.

This is Will on for Brett. Good news around the contract extension. Could you just provide us any directional color on how we should think about volumes with your largest customer in '26 and '27? And maybe how we should think about the minimum volumes for '28 and '29. Then I have one more as a follow-up.

Sure. I mean, clearly, the contract extension is great news for us. It extended 2 additional years, which we knew was coming, but it makes the rest of the world settle down, and it was expanded to add additional program and the 2 programs in place increased materially. So our customers, all of them now, have come to us and said, please do not give any information that could allow the outside world to predict our business, and/or put us at any competitive disadvantage. So we are now unfortunately not able to give any commentary on how significantly it went up, but they agreed to the words, material, because it is a material increase of where we are now.

And the same applies, unfortunately, for giving guidance on the '26 and '27. You can kind of refer to the previous contract, and you know there's minimums that they have to hit. I think it has to be in the low 7s in the last couple of years. They have consistently been higher than those minimums. But under strict instructions from many of our customers, we're not going to be able to give specifics, unfortunately.

Okay. Yes. I think that makes sense. And then maybe just going over to AJR. Regarding the headwinds, like you indicated $1.2 million impact in 4Q. How are you thinking about this impact in 1Q? And maybe just any impact in the rest of '26?

Yes. So the team is making consistent progress. There's a couple of different objectives. One was to bring on new people because our team was way down. So we have staffed up to the level that we needed to be. Some are still temps, some are permanent. When they get to a certain level of skill, they switch over. And so 2 things happen then, the skill goes up and the cost goes down. So we are continuing to transition to temps, but we're not bringing in new people in general right now. So those 2 things are all forward progress we're going to look forward to.

And then we're running overtime now. So we're at their level. So we can keep up with our existing team and we're running over time to knock down any backlog that exists. And we did unfortunately have backlog carry over into this year, which is good news for the revenue of this year, but it's bad news that we haven't completely caught up with our customer.

So when that backlog is worked down, we will get rid of the overtime as well. So everything going forward should be progress. So we expect Q1 will have some impact. It will be less than the fourth quarter, and then it will diminish after that. So yes, there will be some carry on, but continued progress is expected in each consecutive quarter.

Our next question comes from Justin Ages with CJS Securities.

Can you give us a little more color on the puts and takes of the flat MedTech growth? I know you mentioned infection prevention, but just trying to take a look into 2026 and kind of size what's going to be the main drivers of growth there in MedTech.

Sure. We're expecting continued robust growth in the patient services market. So that is expanding on its own, and we're catching up from the prior year. So I think that will be a super strong year. We've also launched 3 new programs of late, one, in infection prevention, two, in robotic surgery, which are both positive influences going forward.

There's some other markets that are coming along that sort of represent growth in the future that are in the development stages now. Those are a little more wound care and/or diagnostics. I don't think those will hit 2026 revenue, but they hit the list of things we're excited about going forward. And so that's sort of the update on what we expect to be robust growth next year.

And Justin, let me elaborate. It's Ron. So if you're talking about flat MedTech growth specifically for the Q4, just a reminder that we had some revenue pulled into Q3. So sales in Q3 were higher, if you recall, than we had anticipated. So that's part of the reason why sales specifically for the fourth quarter were a bit softer.

That's helpful. And then second, on the cybersecurity incident, any -- I know it's just -- you mentioned systems are back in line, but is there any disruption in business that will impact growth rates? So operationally, it seems to be, things are back in order. But in terms of performing for customers, is there any impact there? Is that still under investigation?

I mean big picture, it's not good news obviously that somebody is able to get into our system. It was really good news how our team responded and how robust our backup systems were. So we were back in action literally day 1 making parts, but we didn't have the ability day 1 to label everything properly and ship everything. So there will be a delay in how things get shipped. I'll turn it over to Ron to give you some specifics. But the key is we're able to keep making everything we needed to make. There may be some delays in when some of these things actually ship.

Yes. The event happened mid-quarter, and we are back online in all of our ERP systems as we speak. So the team -- fortunately, we had the wherewithal years ago, our Senior Vice President of IT in conjunction with our operations leadership developed a pretty robust contingency plan to operate without systems for this exact reason. And we launched that contingency plan. And so albeit inefficiently, we were able to make parts and ship to the customers with manual invoicing.

So I don't think there's going to be a material impact on Q1 in its entirety. It will be soft within the months, the month of February within the quarter, but we'll make up for it in March.

Our next question comes from Max Michaelis with Lake Street Capital Markets.

A few here around the contract extension, just around the facility, I guess, so that sixth facility. Are you guys on the hook for that entire investment? Are you getting any help from your largest customer here? Or I should say, as well as what's sort of the time line of completion of that facility, too?

Yes. So with all of our major contracts, there's co-investment really without exception. Some of them, the customers are on the hook for literally all of the capital. So again, under confidentiality with the customer, we haven't been able to give out all those details. I can tell you our primary responsibility in this contract extension relates to leases and personnel. So capacity is ramping up. So capital will be purchased, and it will be installed, and we will be starting -- I think we take possession of the sixth building in April.

And so we will begin -- first of all, we have to get the thing fit for use, which is putting clean rooms and get it all set up. So it will start this year, and we'll be adding that capacity. And like I just mentioned, our primary responsibility is leases and personnel.

Perfect. Okay. And then you guys called out safe patient handling in the press release as well. Is there any way you can kind of size that opportunity for us? It seems like it's going to be a solid opportunity here. You expect more growth in 2026. So just kind of give -- can you give us an idea of what the market size is there? Or just any way you can help us?

Yes. So I think that's a large and growing market. And so we've partnered with the market leader. And so we're experiencing double-digit growth without making up for previous backlog additions. So I think that you can look forward to robust growth in that market for multiple years.

Our next question comes from Andrew Cooper with Raymond James.

Maybe first, just want to clarify some of the commentary around new programs. I think in the release, you mentioned we launched 3 new programs, and it sounded like referring to the La Romana facility. So just curious, I know you had talked about 2, and then you mentioned 1 new one in the extended contract. Are those the 3? Or is there an additional program that's sort of net new that we need to think about for that facility or that line of business?

Yes. So 2 of the programs were the multimillion dollar programs we had referred to in the past that we're launching at the end of the year that were both robotic surgery related. And then the third one was actually not robotic surgery. We had 3 different plants sort of collaborate and come together with their materials expertise and process expertise to really design an infection prevention device, start to finish that we will ship directly to the patients.

It will be packaged and ready to go from our facility. So that one has launched in La Romana in our new building #5. That is set up and going. It launches are slow, but we are making parts, but they'll go through a rigorous process of vetting those parts and they'll slowly ramp up. But yes, the third program is not robotic surgery.

Okay. That's helpful context. And then I know you're limited in what you're able to say in terms of the contract, but I think the release included noting that you added volume-based pricing matrices and some cost sharing provisions. I just want to clarify, are those net new? And is there anything to read into layering those in and how that maybe portends for sort of the long-term nature and maybe not needing to amend or adjust the contract as much going forward because you have some of these kind of features in place in the existing language?

Yes. So the contract -- the key to contract for us is when we make a long-term commitment to a customer, we want to make a long-term contract with a vendor at the same time. So part and parcel to this is if we make promises to the customer that relate to cost downs, very often, they're being financed by our vendor or together with our vendor. When we come up with cost-saving initiatives, they are typically shared with our customer.

So I think the customer wins and we win in this process. So I don't think there's any negative to look forward to both, other than the increased volume. But there is when they hit certain milestones, whatever those are, there is cost sharing opportunities that is borne between the 3 of us or enjoyed between the 3, I should say, the vendor, ourselves and the customer.

I didn't mean to imply a negative. Sorry if that came across differently, but that's helpful. And then lastly, maybe just the AJR business. I mean, I think you talked about about $8 million of backlog at the last update. Just curious, did that work down at all in the quarter? And if not, how should we think about the pacing of that starting to happen? And then just any updates on knowing you have this third program moving -- starting to move to the Dominican Republic, on kind of completion of and when we should expect kind of pacing of the shift to start flowing through the P&L and more?

So Ron, I'll let you tackle the backlog, and then I'll switch over and tackle the second question, which relates to program 3.

Yes. So our customer specifically asked us not to speak of backlog. The $8 million you referred to, Andrew, was the quarter, not the full amount. So I can tell you that the backlog going into '26 is higher than that, but I can't disclose the number. And we do expect to work it down gradually throughout '26.

Okay. With respect to program #3, these were all Phase 1 and the next and the next. So program #1 was completely transferred up and running and running at rate. Program 2 has now been transferred. It's up and running, but not running at rate as we go through the process. And program 3 is scheduled to transfer when program 2 is complete. We're taking possession of a new building, I believe, in April also, and we'll get that set up.

So that will be sort of the second half of the year assignment. The key is that we have full capabilities already in Illinois to do these programs. So these are redundant capabilities. And when they move over, our customer enjoys some cost saves, and we enjoy the opportunity to make additional profits when we get to our run rate levels.

This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Bailly for any closing remarks.

Thank you, operator. And thank you all for participating on the call. We are super excited about the future. The long-term contract hopefully dispels some of the concerns some people might have had. And we have really positioned ourselves with our top 3 or 4 customers for the next 4 or 5 years of really understanding what our growth trajectory is, and we have the vendors aligned right beside us.

I think we've done an excellent job in the transition plan for our new CEO. He is super fired up. He's been with us for 25-plus years. He was integral in helping develop the strategy. He's been integral in executing the strategy. We've had a development plan that has given him exposure to all different parts of the business, including to some of our investors of late. It has all gone super well. And so I think that's something for everybody to be excited about. I can tell you he is fired up. He's well qualified and a super smart guy. So we appreciate your interest. We're excited about the future, and I'll end it there.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Good day, and welcome to the UFP Technologies Third Quarter 2025 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded.

I would now like to turn the conference over to Ronald J. Lataille, Senior Vice President, Treasurer and Chief Financial Officer. Please go ahead.

Thank you, operator. Good morning, and thank you for joining us on our third quarter 2025 earnings conference call. With me on today's call is our CEO and Chairman, Jeff Bailly.

Today, we will make some forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, the accuracy of which is subject to risks and uncertainties. Wherever possible, we will try to identify those forward-looking statements by using words such as believe, expect, anticipate, pursue, forecast and similar expressions.

Our forward-looking statements are based on our estimates and assumptions as of today and should not be relied upon as representing our estimates or views on any subsequent date.

Please refer to the cautionary statement regarding forward-looking information and the risk factors in our most recent 10-K and subsequent 10-Qs, including disclosure of the factors that could cause results to differ materially from those expressed or implied.

During this call, we will discuss non-GAAP financial measures, which include organic sales growth, adjusted gross margin, adjusted operating income, adjusted SG&A, adjusted EPS and EBITDA and adjusted EBITDA. A reconciliation of GAAP to non-GAAP measures discussed in this call is contained in the associated press release and is available in the Investor Relations section of our website. I'll now turn the call over to Jeff.

Thank you, Ron, and thank you to everyone joining the call. UFP delivered solid Q3 results despite absorbing abnormally high costs related to the labor inefficiency challenge at our AJR Illinois facility. Overall sales grew 6.5% to $154.6 million. Our MedTech business grew 7.3% with impressive growth in Interventional and Surgical, Orthopedics and Wound Care, each of which grew greater than 30%, offset by a 23% decline in Patient Services and Support, which is our AJR, Stryker business.

Advanced Components or non-medical business declined 2.7% as we continue to focus the majority of our resources on our MedTech business. AJR, of 6 acquisitions we completed over the last 15 months, faced an issue when we went through the process of verifying the team's eligibility to legally work in the U.S. The e-verify process led to the turnover of greater than 50% of the direct labor workforce. Retraining a large percentage of our workforce reduced our output, resulting in a significant reduction in revenue and a third quarter $3 million reduction in gross profit and operating income and a $0.28 reduction in diluted EPS.

We expect much of the revenue from delayed orders will be recaptured in the coming months when our capacity ramps back up to required levels, and we can work down the backlog of open orders. We've made significant progress in hiring and training new associates. July was the low point of our inefficiency when we suffered a significant loss in Illinois. And have made steady progress since with a smaller loss in August and a return to solid profitability in September.

Although we expect the inefficiency to impact a couple more quarters, the greatest impact is now behind us. AJR's results in the Dominican Republic should also continue to improve as qualifications are completed and production of transfer programs ramps up. Our first program is in commercial production. The second is in the qualification process, and we anticipate a third program transferring in 2026, all of which was contemplated in our 5-year exclusive supply agreement with Stryker.

On the robotic surgery front, revenue was up 5.1% in Q3. We are completing the launch of 2 significant new programs. The combined revenue of those 2 programs should be greater than $10 million in 2026 and then continue to grow rapidly from there. We are also in discussions to increase and extend our $500 million contract with our largest customer. They've asked us to plan for significantly increasing volumes. Both companies plan to make multimillion dollar investments towards increasing capacity and efficiency at our La Romana facilities. We are simultaneously working on extending our exclusive supply agreement for a critical raw material in robotic drapes.

As a result, we remain very bullish about our long-term future robotic surgery. Our 2 recently completed acquisitions, UNIPEC and TPI are both performing well ahead of expectations and have been immediately accretive to our earnings. Organic growth for UFP was essentially flat in Q3 due to the reduction in AJR sales quarter-over-quarter. setting aside acquisitions completed in the prior 15 months, UFP's base business grew approximately 5%.

In conclusion, we have a lot of positive momentum and good news to look forward to. AJR's return to profitability and improving operating efficiency as new team members complete their training, positive impact of the transfer business in the Dominican Republic launching and then reaching commercial production, 2 new robotic surgery programs launching and beginning commercial production, an extension in process for our long-term contract with our largest customer with significantly increased volumes contemplated and planned multimillion dollar capital investment by our customer and the positive impact of our recent acquisitions, combined with our efforts to find strategic acquisitions that increase our value to customers.

I will now hand it over to Ron to provide additional details on our financial results.

Thank you, Jeff. I am also pleased with our third quarter results as we delivered solid numbers despite working through the large nonrecurring labor challenge at AJR.

Before I provide more color on these numbers, I'd like to start by providing a brief update on tariffs. As mentioned in our second quarter call, we do not expect to be directly subject to a material amount of tariffs, and that was true in our third quarter when we paid approximately $160,000 in tariffs to the government, of which all was or will be passed through to our customers.

On the supply side, our new estimate of the annual amount of tariffs to be passed through by our suppliers is approximately $6 million, down from the $9 million estimate in Q2. Like the direct tariffs, we anticipate passing through the raw material increases to our customers, some of which have already occurred.

Switching back to operating results. As Jeff mentioned, organic sales were essentially flat as the AJR business flipped from inorganic to organic for all of Q3. Due to the labor problem at AJR, more than $8 million in incremental orders were unable to be fulfilled during the quarter. Had we been able to meet the production demand, organic sales would have grown approximately 6%.

In light of these unfilled orders, backlog going into Q4 is approximately $16 million, much of which we expect to fulfill by early 2026. Gross profit as a percentage of sales or gross margin decreased to 27.7%, largely due to the $3 million in extra labor costs incurred at AJR, which are all reflected in cost of sales. Absent the $3 million in additional labor costs, gross margins would have increased to 29.6%.

As Jeff mentioned, we have turned the corner in terms of recovery. And in fact, last week, the amount shipped were 3x higher than the low point since the problem surfaced. Adjusted operating margin for the third quarter was 17% of sales, within our target range despite the $3 million of extra labor costs. Interest expense was down significantly as we continue to delever our balance sheet and our effective tax rate of 22.2% for the third quarter was down slightly from a year ago.

During the third quarter, we generated $35.9 million in cash from operations, paid down approximately $17.5 million in debt and ended the quarter with a leverage ratio well below 1.5x. Capital expenditures were $3.4 million.

With that, I now turn it back to the operator for questions.

[Operator Instructions] The first question comes from Justin Ages with CJS Securities.

Can you give us a bit more color on the growth in robotic surgery, that 5%? How much was from your largest customer? Any more details on that?

Yes. So if you do the math on our largest customer, their growth was actually higher than that. It was closer to 8%. And the reason is we had this sort of 1-year phenomenon where if you go back in time, we were producing pouches, the sort of critical part between the robot and the surgical instrument for the last couple of decades, some of which were sold directly to Intuitive Surgical, some of which were sold to our competitor.

When we moved to Dominican Republic, those sales were no longer to an outsider. They were part of the product that we sold to Intuitive ourselves. So there's -- this is 1 year where this impact is going to happen. So robotic surgery sales of about 5.1% was a blend of Intuitive Surgical being higher than that, offset by this onetime impact.

That's helpful. And then on the -- some of the other MedTech, the Interventional Orthopedic that grew, I think you said strong around 30%. Just looking any indication or any hints of the demand that you're seeing, if we can expect that to continue going forward?

Yes. I mean we were seeing very strong demand in all 3 of those markets. It was a blend of some of our acquisitions and some of our internal growth. But the only market really across the board that we saw any compression in related to patient services and support, which is literally our AJR/Stryker. So we see like a nice tailwind in most of our markets, offset by this sort of onetime item that we have to work our way through.

The next question comes from Brett Fishbin with KeyBanc.

I wanted to follow up on some of the commentary about the contract dialogue. I think you noted in the press release and then again in the prepared remarks that you're in discussions to extend and expand that contract with your largest customer and mentioned that volumes are expected to increase significantly. So I wanted to follow up and just see if there's any additional color you're able to provide on that.

And I was really wondering, does the word expand imply that the contract may include additional SKUs relative to what's been done in the past? And then can we assume that higher volume also means higher overall value for UFP.

So yes, we have been requested to revisit the contract. I think the goal is going to be a rolling 4-year contract. So there's a couple of years left, maybe a little bit more. And so they're looking to extend it out a couple of years. The key is, from our perspective, they need us to plan for substantially higher volumes.

In order to do that, we literally have to get a brand-new building. If you recall, we brought on building 5 this year in our robotic surgery campus. We're going to have to add a sixth building. We're going to have to add new capital, new personnel, et cetera. So we need a commitment from them. And conversely, they need a commitment from us so that they can be assured of continuity of supply.

In general, when we do a new contract, it does incorporate all the products, not just the Xi, it would roll in all the other ones at the same time. Simultaneous with working on that contract with Intuitive, we're going back and negotiating with our key supplier. So we'll look for our supplier to give similar commitments for volume that we do over the same 4-year period. And the volumes that are being contemplated are significantly increased over where we are now, particularly in the out years. We have the capacity already to do, I think, about 9 million drapes, but they're looking for us to plan to do substantially more than that in the out years.

All right. Super helpful. And then maybe I'll just follow up on -- in the quarter, I think inorganic revenue was again higher than we were expecting and looking at the 12-month run rate, I think it was a little bit above $9 million. So maybe just touch on how the acquired businesses performed versus your expectations and whether the upside relative to, call it, the trailing 12-month rate was more from the new ones, UNIPEC and TPI or from the final stub period from some of your deals from last year.

So to start, both of our 2 new ones are small, but they're performing fantastically well. They're turning out to be home runs, even though they're little, both strategically by bringing us new capabilities and financially. So I would say the impact from the new acquisitions is relatively small. And so the inorganic growth you're more seeing is from the previous ones rolling forward, but we are thrilled with both of our new small acquisitions.

And despite the fact that the small ones are not as impactful that we're able to -- I come up with much more pro shareholder valuations in those than we're seeing in the market for the much larger deals. So we're still happy with the small deals.

The next question comes from Max Michaelis with Lake Street Capital Markets.

I want to go to -- go back to the 2 programs that are expected to ramp in 2026. I think you mentioned a $10 million number in revenue contribution for next year. But sort of help me out, what do those 2 programs look like in terms of size, maybe once that's fully scaled, let's call it, in 2027 or 2028?

Yes. So our estimate of $10 million in my feeling is very conservative. I think one of those programs alone could be $10 million in 2026 and the other about half that size. We're always very conservative in year 1 because we don't know if there's going to be delays in launching.

But they're both substantial greater than $5 million programs at rate and both growing rapidly. So in the out years, one of them could be $20 million plus within a few years and the other one harder to say, but they're both rapidly growing programs that we're super excited about. So I would take the $10 million as conservative and then look for 2027 to be a wonderful uptick from there.

Awesome. And then just with the recent discussions and the extension of your contract with Intuitive, I know you talked about sort of an investment needed in the building 6. I mean, how much are you guys in terms of investment on the hook for? Is this all on their side, I guess?

It's being discussed and negotiated. They have already committed to a multimillion dollar investment that's related to improving efficiency. Some of their internal initiatives came up with some efficiencies that are helpful to us, and they share all these things with us. So they're in the process of a multimillion dollar investment right now.

Typically, they're shared capital. At a minimum, we would be on the hook for investing in the leases, et cetera. I think the inclination of late is more that it would be Intuitive's capital than ours, but it has not been decided. It could be 100% either one or it could be split down the middle. In the past, we've done both. But I would expect some multimillion dollar sharing of capital in the end.

The next question comes from Cooper Andrew with Raymond James.

This is Noah on for Andrew. Just wanted to get a sense for the AJR pacing. You called out $8 million of incremental orders this quarter, $16 million in backlog. I think you said earlier to a question, you haven't seen any demand impact. So how should we think about you working down that backlog over the next few quarters? And should we expect AJR being able to return to growth as you see those efficiencies? And so what should we expect from kind of that nonintuitive business that's kind of major. So just get a sense there.

Sure. So we are working hard to reduce that backlog. Unfortunately, there -- or fortunately, their business itself is growing. So the demand internally is growing and the backlog, as you say, is about $15 million or $16 million. Our goal is to work it down as fast as possible. I think that they'd like us to have it done by the end of the year. I think that's going to be a tall order. We're way more interested in output than efficiency right now. So we're throwing a lot of resources at getting their backlog down.

As we go into next year, we're still expecting the business to continue to grow. So all on its own, it will grow at a double-digit rate, plus we'll be working down the backlog. So we have quite a bit of tailwind going into next year. So our goal, like I said, is to get our customers' orders fulfilled as fast as possible with less focus on efficiency. Next year, we'll turn our attention to doing things much more efficiently.

Okay. Awesome. And then just one quick follow-up and kind of following up to that point on efficiency. We've already had that labor headwind sort of troughing in 3Q and getting better from here. So now that you're sort of working -- now that you're working through all of that, how should we expect gross margins to pace going forward? I know you're lapping like the headwinds next year, but just kind of curious how should we expect margins to trend as you pull out those efficiencies in light of your LRP ranges?

This is Ron. Noah. So yes, we would anticipate gross margins gradually improving. As Jeff mentioned in his script, the inefficiencies are not going to be 100% eliminated. They'll linger into Q4 and potentially even into Q1 of next year as we focus on output rather than efficiency. So I think they will gradually improve from where we were in Q3, but I don't think they'll be back to where sort of adjusted gross margins would have been had we had no inefficiency in Q3.

The next question comes from [indiscernible] with [ AFR ].

I just want to drill on the $8 million of orders that weren't filled in the quarter. I just -- I think you mentioned it, Ron, in your prepared remarks, but just so I'm clear, that closed July of '24, so it is considered organic this quarter year-over-year?

It is.

And so in a perfect world where you had delivered those, we should actually think about medical being more like $150 million, roughly 13%, 14% growth year-over-year?

Yes, I think that's right. To be clear, if we were able to deliver on the $8 million of backlog, organic growth would have been approximately 6%. Factoring in the inefficiency, the $3 million, if we were -- if we did not have that $3 million, gross margins would have been -- adjusted gross margins would have been approximately 29.7%. EPS would have been approximately $2.67 and adjusted EBITDA would have been approximately $33.7 million.

Got it. Got it. And thinking about that EBITDA, I get that there was $3 million of AJR costs, but I got to imagine there's costs associated with the ramp-up in the qualification programs that you guys were getting started in the quarter?

Yes, 100%. Every program launches with losses and then transitions to breakeven and then to profitability. So the programs launching in the DR are still in the losses phase and the programs launching in La Romana will be in the losses phase for the first quarter or 2.

I mean, how would you -- can you size that for us? Or how should we think about that? It's just -- I'm trying to -- obviously, you guys -- you punched above your weight in the quarter with a lot going on. And I'm trying to kind of dig at what would be a good -- how should we kind of view I don't know, lack of a better term, run rate EBITDA? And I get it, $30.7 million of EBITDA, add $3 million and then you have these onetime costs. How big are those roughly?

I mean for us, it's the cost of doing business because we're constantly launching programs, so we usually don't quantify them. It's -- per program, it's not millions of dollars, but it's hundreds of thousands of dollars per program. But again, we're used to this. We factor it into our planning. So we're constantly launching programs and constantly absorbing modest losses. But those several hundred thousand dollars of loses will turn into profits over the next couple of quarters. So it will be meaningful, but it's just the cost of doing business for us.

And I know you guys talked about obviously wanting to serve the customer, getting that product out the door, not worrying so much about efficiency. But is it fair to assume the incremental margin on that additional $8 million probably would have been something a little greater than 20% or in that 20% to 25% range?

We would probably think of it more as contribution because all the fixed costs are kind of there, the rent, the engineers and everything. So the contribution is considerably higher than that when you subtract direct costs.

Yes, [indiscernible], it's probably in the 30% to 35% range.

So I mean, we should be thinking about it in a perfect quarter where none of this stuff happened, you're actually kind of run rating more like a $36 million, $37 million of EBITDA.

I think that's right.

This concludes our question-and-answer session. I would like to turn the conference back over to Jeff Bailly for any closing remarks.

Yes. Thank you all for your participation and interest in UFP. As you can tell, we are super bullish about our future, particularly on the long-term front for robotic surgery. We will work our way through this onetime AJR issue. We have, for the first time in the history of our company, actually filed a claim after doing 20-something deals for a miss on a rep and warranty. So maybe or maybe not, we'll get reimbursed for our expenses. But one way or another, they're onetime in nature. We'll move through them. We're working through them quickly. So we appreciate your patience in the process, and we appreciate your interest in the company.

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Thank you, everyone.