Bel Fuse Inc. Class B Aktie

Good morning, everyone, Day 3 of Citi's Global TMT Conference here. I can't believe it's Day 3 already. Asiya Merchant here. I lead the tech hardware, tech supply chain coverage here at Citi. Very pleased to have Bel Fuse. Lynn Hutkin, she's the CFO of Bel Fuse here. This is an interactive conference. So I do have some questions here. I can turn it over towards the end. If you have some questions, just please do raise your hand so we can bring the mic to you. Before we get started, though, I wanted Lynn to have -- to present Bel Fuse, provide a few prepared commentary here. Lynn, over it back to you.

Great. Thank you, and thanks so much for having us here today. We appreciate it. So before we start, this is our safe harbor statement. So since it's our first year here, we thought it would be helpful to just give an overview of Bel for those who may not be familiar with our company. We've been in business for over 75 years. We started in 1949. We design and manufacture electronic components, systems, solutions based in West Orange, New Jersey, so just right over the river from here.

Our annual sales are just under $750 million on a TTM basis, and our EBITDA margin is just over 21%, which I'll get into in a future slide on the recent financial transformation that we've gone through.

From an overview perspective, we do manage the business in 2 segments today. This is something new that we started in March of this year. Prior to March, we were -- we managed the business by product group. And now we are looking at the business by end market. So in March, we introduced Industrial Technology & Data Solutions, which we refer to as ITDS. That is about 45% of our business today. And then Aerospace, Defense & Rugged Solutions, which we refer to as ADRS, that's about 55% of the business.

From a geographic perspective, about 2/3 of the business is North America based, about 1/4 in Europe and the balance in APAC. From a sales channel perspective, about 3/4 of the business is direct to our OEM customers with the remaining quarter going through our distribution partners.

So just to delve in a little bit on the segments and what we do, where we do it, where the products go. So for ITDS, the products here are largely power supplies, fuses, our integrated connector modules, transformers. So within this group, we're really servicing the networking applications. So anything that's going into data centers, we include our AI exposure in here as well, factory and automation systems. We have rail in here. So these are the main areas within ITDS.

And as you can see from the chart at the bottom here, there was a large buildup in inventory back in 2022. This happened across the whole industry, not specific to Bel. We then went through 2 years of a destocking cycle. So that's where you see the large drop off from '22 to '24, and we're starting to see that come back. So very much an industry factor there, but just wanted to outline that.

Now our gross margin, you'll see we've made significant improvements. So even though sales were lower, we've done a tremendous amount of work on our margins over the years, which I'll get to on the next slide here. On the ADRS side, we also supply power supplies here, networking systems, connectors, cable assemblies. And this is going into commercial aircraft. So Boeing is a customer of ours. This is where we have all of our defense exposure. So we do a lot of business with the U.S. and Israeli primes, so Lockheed, Raytheon and then the main primes in Israel as well.

And then we have space included here as well. So space is a small end market for us today, but is growing, and we think it will be meaningful for us as we move forward here.

The -- looking at the chart here, we did do a large acquisition in this segment at the very end of 2024. We acquired Enercon in November of '24. So that's the large increase in sales that you see there in '25.

So just looking back at the last 5 years, I think that this is an important part of our story, especially for those who aren't familiar with us who are thinking about where we've come from, where we're going next, why we're a good investment today. On the sales side, you can see there hasn't been a tremendous amount of growth. I mean, there has been some, but if you compare '21 to '24, we were pretty flat on the sales side. What we did do is there was a heavy focus on margin. So back in 2021, that's when Farouq Tuweiq joined our company. He came in as CFO with -- from the investment banking background, asking all of the right questions. We had never looked at SKU level profitability. We did not have a pay-for-performance program in place. So there were all of these things around the business that were just low-hanging fruit once you really started to look at it.

And so over the course of '21 to, call it, 2025, there were a lot of initiatives in just going through our SKU level profitability, pruning back any low-margin products, we sold some businesses that just didn't fit with Bel's story going forward. We did 6 facility consolidations during that time. So we increased efficiency around the world. There were a lot of CapEx investments made to increase automation and throughput. The whole executive team was actually turned over in the last 5 years. And we really instilled a pay-for-performance mindset across the organization. With the key message being not every sales dollar is a good sales dollar, which is an important distinction.

so if you look at the EBITDA side of the chart here, we've grown the business from being a mid-single-digit EBITDA business back in 2021 to being over 20% most recently. And during this journey, a lot of investors would say, well, this is great, but is this sustainable? How are you going to do in a year where sales are down? And that's why, in our minds, 2024 was a real test for us because sales did go down and our EBITDA margin continued to go up.

So we were able to prove out the sustainability of the actions that we took globally. So now that the margin part of our story is largely behind us. Now to be clear, we will always be mindful of our margins and maintaining those margins, but it's just not the heavy lift of the last 5 years. So our focus is now shifting more towards top line growth. So as I showed on the prior slide, top line growth was not something that we were very successful at doing over really the last couple of decades. And so today, we are looking at these 4 kind of tiers of revenue growth. One is the core business. We have great blue-chip customers, quality products. We've been in the business for over 75 years.

We've always done, I think, a good job with partnering with our customers, seeing what tomorrow's technology is, seeing how we can support them and then developing those components and systems for their applications of tomorrow. So that's just our core business, and that is doing really well right now. And then there are certain end markets that we're in that are growing at a higher clip than what it would normally be.

So I think if you look at the electronic industry in general, it's a mid-single-digit grower over a period of time, just average growth. I think as we're looking at the space today, aerospace, defense, space, AI, there are a lot of exciting end markets that we're in that are growing at the above-average growth rates, I would say. So that is kind of stacked on top. And then we have our internal sales initiatives. So similar to the margin story, where there were a lot of things that we just never focused on in the past, there are things on the sales side that we never focused on in the past. And we identified those items in the last, call it, 12 to 18 months. And sales takes a longer period of time to reflect.

So we are starting to see some of that come through on the bookings. So these are just additional kind of Bel-specific sales initiatives that we're working on that would layer on top. And then, of course, M&A will always be part of our story, and that will be there. So yes. Hopefully, that provides a brief background of who we are and where we are and where we're going.

Okay. Thanks a lot for that, Lynn. I think it's helpful, just given this is the first time you're presenting here at Citi for that background. So if I can just start, you already talked about a few key end markets that have clearly upsided expectations. You talked about defense, you talked about space, aerospace. So -- and you talked about data solutions. Just help us understand like the durability, what gives you confidence that as you're looking ahead 6 to 12 months out, 24 months out, that there is durability here. And it's not just given that we're hearing about tightness in the supply chain across many components, this is not just some sort of like a pull forward ahead of some sort of a demand cliff that's going to erupt here?

Right. I think it goes back to the end markets that we're in. So we are largely in aerospace, defense, data solutions space. So these are things that are going through a longer-term growth cycle right now. And what's nice with aerospace and defense is it's a very long-cycle design business. So we have products in defense applications that have been there for 20 years, right?

So as we get orders, it's for an extended period of time. So we have a tremendous amount of visibility on that part of the business. We specifically do not like playing in consumer or auto because those tend to be more volatile to your point. So we do feel that we have a lot of visibility in that at least for the next few years, we view defense as being strong with all of the government spending chatter, not that we've seen it come through yet, at least on the U.S. side. But -- and then commercial aerospace with new production build rates, I mean, those are published and those are increasing. So I think the end markets that we're in provide us some comfort that this is a longer term.

And then you just had growth that you posted 25% year-on-year in 2Q, you have gross margins that are almost 40% now. And then if you think about your outlook, you're still looking at margin expansion over here. There is continued strength, like you said, in defense, data solutions. So just maybe some puts and takes relative to that outlook. It seems like momentum is really strong. We heard from some of your peers on defense. Clearly, this is a technology conference where we've heard just constructive stuff on data solutions and data centers. Just what are some puts and takes to that outlook that you provided for third quarter and as you see that momentum building into fiscal '27?

Yes. When we look at our outlook for the next quarter, and we generally only guide 1 quarter out. That's just our level of visibility across the whole business. And I would say on the aerospace and defense side of the business, it's pretty solid because it's a longer-term design cycle, customers are placing orders well in advance. We have a lot of visibility there.

Now even within A&D, you can still have customer requests for pull-ins or pushouts, which we have to manage. So that's some of it. But I think most of the puts and takes are on the ITDS side of the business. And that is where we have things like fuses that are sold through the distribution channel, and they tend to have a lot of intra-quarter turns. So we don't have those bookings in our backlog when we're starting the quarter. We kind of see what that demand is during the quarter. So that's something that can pivot up or down unexpectedly.

And I would say also within ITDS is where we have the AI exposure, and we've talked about a customer in that space who is ramping up that depending on their ramp schedule, right? I mean, we communicate very closely with them. But depending on if it's slower than expected or quicker than expected, that could also have an impact.

Okay. All right. And then just within these end markets, not looking for guide here, but just strength that you see across these end markets like fairly evenly. I mean, I know you said commercial, defense and aerospace -- sorry, commercial aerospace and defense, a little bit longer cycle. So you feel good about the visibility. IT data solutions just -- and distribution, there tends to be a lot of turns. Just anything you can talk about on visibility there or just demand momentum as you look ahead?

Yes. I would say for demand momentum, I would say that the top is probably defense. We are seeing certain regions move faster than others. So I would say that Israel is quicker to move and quicker to provide funding for programs than the U.S. We've also seen in the news, there have been European countries who are engaging the Israeli primes to put in their own infrastructure, their defense infrastructure for their particular country.

So we're seeing a lot more of country-specific initiatives. And that will help the Enercon business. So our Israel business will benefit from that.

I think on the AI side, it's interesting. I mean we're kind of in a wait-and-see mode. We are working very closely with our customers there. They are still small. They -- we have been talking about a ramp coming. We'll provide more color on that when we see the orders. But we are taking actions today in terms of CapEx additions and making sure that we're able to meet that ramp capacity.

Okay. All right. So one of the questions that I get is, how does Bel Fuse differentiate themselves against your peers, right? Where is your moat? And maybe we can dig into each of these end markets because I'm sure it's very different, the moat that you have across each of these end markets, maybe depends on the products that you're supplying to these end markets. But you do have some very large players as well that you compete against, 2 of them that were here last -- yes, just yesterday, also talking about strength in military and defense. So if you can just -- and IT data solutions. So just if you can take it a level down and say, okay, where does Bel Fuse really differentiate yourself when you are competing in some of these end markets against some of these very, very large players with global footprints.

Right. And we get that question a lot from investors. I think the answer there is we are the right blend of being a big enough supplier for -- in defense, the primes, where we have longevity. We have quality products. We have top-notch engineers. We've been developing these products for decades. I mean we've been supplying the defense contractors for decades. And so we have global reach. We're near their engineers. So we kind of check all of the boxes for being the benefits of a large company. At the same time, we are obviously much smaller than some of our peers. And I think that brings a level of customer intimacy where we will -- we just don't have the layers within Bel that I think some of our larger competitors have.

So if we have a $1 million account for us, it's meaningful. We -- if that customer wants to have a call with Farouq, that's possible. We have just a very lean structure internally. So there's a lot of customer handholding. And I'm sure our competitors have a similar, but I think our smaller size, we're just more -- we're more nimble. We're agile. We just -- we don't have the same like levels for customers to go through for things to get escalated as needed.

Okay. All right. And then just on the defense side, just because that's been a topic that we've seen some of your other peers also talk about very -- and it obviously grew also like high 20s year-on-year for you guys as well. I think you talked about bookings, new program wins as well there. Just -- where are you seeing the greatest opportunity in defense? Is it very broad-based? Or is Bel Fuse like particularly concentrated in whether it's airborne, it's missiles, it's ground systems, it's naval applications. There's such a variety in that end market. Can you double-click a little bit into sort of where you are seeing the strength and -- or where you differentiate or where you think that you have sort of top leading positions?

So it's really across the board. So we are on over 1,000 different platforms within defense. So it's land, sea, launchers, missiles, anything that flies. We do communication and encryption applications. We have components that are worn on the soldiers. So it's really across the board. I would say that there's no one program that is more than 5% of our defense exposure. So it's really broad-based, which I think is good because whenever you have a program concentration, if something loses funding, then all of a sudden, there's exposure there. But -- so I would say it's very broad-based.

And then geographically, I would say right now, we're seeing obvious strength in Israel. There's strength in the U.S., although we expect that to increase as the years go on here. We have not seen yet on the U.S. side, a major funding kind of trickle down, right? I mean we need government funding to go to the primes to then come to us. So we have not yet seen that yet. And then the other thing that I'll note on the defense side is we are trying to further penetrate in Europe.

Yes. That was my next question. So European defense, I think you received certification for that, and you talked a lot about some wins that you've seen there, especially during Q2. What -- can you just help us size that European opportunity?

Like how should we think about that relative to what's going on in Israel, for example, for you guys? And how big can that be for Bel Fuse?

It's interesting. So we started the process of getting our Slovakia entity certified as a defense manufacturer about a year ago. And in tandem with that, we were working on the sales, right? So going to the European defense contractors and letting them know that we were going to be having manufacturing capability in Europe.

And I think it happened much quicker than anticipated, where we actually had project wins before that facility was even certified. So I think that is definitely a testament to the demand that's out there in Europe. So of the programs that we've received to date, it's definitely multimillion dollar programs. They tend to start small and then scale over time. So they'll be small to start, but we do think it's a larger opportunity for us. And I'll also say that we are heavily investing in our sales team in Europe to further penetrate that European defense market.

Okay. All right. Switching a little bit to Data Solutions, maybe if we can. You've talked about this ramp for a high-performance computing win. Just can you double-click on that? Like how much -- how much visibility you have here? I know you said it's ramping, you're waiting to see how it does. But just given your conversations with your customers -- with your customer that's ramping here, like how do you think about that visibility and the ramp that's going to be -- I guess, most of the momentum will be in calendar '27. -- calendar second half year?

Yes. So what we mentioned in the last earnings call was we did start to see a ramp in Q2. We expect similar levels in Q3 and then a further ramp in Q4. We have been speaking with the customer about their plans for '27 and '28.

And this is where I mentioned. So we don't yet have the orders to go along with what they're talking about. So -- but it could be a very meaningful ramp for us if that transpires. So right now, we are making sure that we have the capacity, making sure that we have the CapEx, but at the same time, we need to be mindful of making sure that those orders come in.

Okay. And then within the -- I mean, I'm sure they're selling it to are they in other data centers? Is it just they are then selling this high-performance computing to their customers in the data centers.

Okay. AI, I know it's a small part of your -- and you've talked about that as well. But there is opportunity, obviously, for you guys to sell your power products, your connectivity. Again, where this -- and you guys don't directly sell to hyperscalers. That's right, right? You sell to OEMs that then support that. Again, over here, how does Bel differentiate -- I mean, because these are like large customers, right?

So again, just like you talked about where defense, where you guys see sort of your differentiation, maybe just given the scale of some of these projects and the fact that they're then selling to other large customers, right, where does Bel differentiate themselves here?

So I think that we differentiate ourselves on the front end. So it goes back to that customer intimacy, the engineer-to-engineer work that goes into those new designs. So we will work with customers for years. I mean this particular customer who's going through a ramp right now, I mean, we've been working with them for 10 years. So we will put in the time and the effort and really work with their engineers to develop that next product.

And so -- and it's definitely a balance because we don't sell directly to the hyperscalers. And the reason for that is we're not the athlete for it. We are not as big as our competitors are. And we -- so we don't have the scale. We do have our margin profile that we're looking to maintain. And at some point, with the hyperscalers that high of volume, we're just not the athlete for it.

So we will work -- we tend to work with smaller customers or Tier 2 customers, and we will help them scale. And then at some point, we will get to the point where we need to find that balance between still supplying them with products and the engineering assistance, but making sure it makes sense for us from a margin perspective.

Okay. So if this project were to ramp quite meaningfully, like is this customer then second sourcing for this?

I'm sure they will. Most customers, that's the normal trajectory.

Just let me see if there's any questions in the audience?

2 quick related questions. One is -- and I don't know if you've given any sort of longer-term targets. You showed a very nice margin improvement. Do you have a target where you think you can get either gross or EBITDA margin and maybe revenue growth as well? And then related to that, I'd like to hear a little bit more about the internal sales goals. Like what exactly are you doing there?

Sure. So I would say on the first question, so we don't have long-term targets out there. I'll just put that out there to start. But what we have said, I think on the gross margin side is we are probably in the 90th percentile of the industry from a gross margin perspective. So we have made a tremendous amount of progress over the last 5 years.

We do get the question a lot of, well, if sales go up, wouldn't gross margin go up because of the leverage. Mathematically, yes. Now is that a goal of ours to have our gross margin higher? Not really.

So we are looking at the business in total. We're taking a portfolio approach. I think we're generally happy with where our gross margins are. Could they get higher with higher sales volumes? Sure. I mean that's just how the math would work. But we do have FX working against us. We do have higher material costs coming through. I feel like there's always a bit of a revolving door when it comes to margins. And that's why we did guide from Q2 to Q3 that our margins would be flat. So we were around 40% in Q2, and our Q3 guide is 39% to 41%.

Now on the EBITDA margin side, it's a little bit of a different story. We do think that there's still some room to go there as you look at us versus our peers. And a lot of what's below the gross margin line, so R&D and SG&A is relatively fixed.

So there is some variability in there with commissions and bonuses, which may fluctuate as sales go up. But there's a lot of fixed components in there. So we do expect as we see sales growth that there will be more of a drop-through on the EBITDA margin side. So we don't have any targets out there, but that's kind of just in general, where we're looking.

And then I would say on your other question on sales initiatives, it's -- I would say it's really broad-based. So as I was mentioning earlier on the gross margin story, when we looked at sales and why are we having trouble in growing sales, we realized we didn't even have the basic building blocks when it comes to growing sales. So we didn't have a CRM system in place. We didn't know what percentage of opportunities we were winning. We didn't know why we were losing. Is it price? Is it design? Is it our timing?

So all of those things are important, right, as you look to pivot and change how you're going after it. So we are -- we've been working on getting the new CRM system in place. And the new system takes some time and some adoption and a little bit of heartaches internally to get people using it, but we're making good progress there.

There are other things like in the distribution channel, we actually see where all of our product is being sold on to. So we'll sell products to DigiKey or Mouser. They then provide us with POS reports that show us where they're selling our products to. So the end customer. We know who they are, what they bought, how much they bought. We've never done anything with that data.

We've never reached out to them to say, "Hey, what are you building? Do you want to buy -- do you need a complementary product? Do you need something customized? So that's just another kind of basic example of just not having the right focus on certain things to help with that organic sales growth.

And then I would say our Tier 2 customer base, we were very good with Tier 1. We were good with the distribution channel outside of the thing I just mentioned. But having our sales team really going after those smaller customers, those Tier 2 customers, there just wasn't as much of a focus there, and there is today. So we've been really investing in our sales folks around the world and bringing new people on board.

Okay. All right. Last few here from my side, Lynn. Just you guys raised some equity here. You paid down debt. So you have your net debt of 0. And you have earmarked some of those proceeds, obviously, to buy out some remainder in your European -- sorry, Enercon interest there. So if you think about going forward, you did talk about M&A being part of your sort of overall long-term objective. So help investors just understand what's the algorithm here in terms of when you think about organic growth versus cash allocated towards investments to support that organic growth versus acquisitions and share buybacks or dividends as well?

Yes. So I would say that we have the 2 separate paths, right? Organic growth, which we will invest in through CapEx, through working capital investments as needed. So that is definitely a priority. And then separately is M&A. So we have 2 different sets of teams working on each of those.

I would say from a dollar perspective, M&A is probably where the larger dollars will ultimately go. Now of course, we're subject to the availability of targets. It has been a more robust environment this year, a more robust pipeline, but very competitive still. So we're very active in evaluating candidates. Yes, so I would say organic growth and M&A. Other than that, I mean, we have our regular way dividend that we expect to continue, and we do have a stock repurchase program that still has about $9 million left on it.

All right. Okay. Well, thanks a lot for coming to our tech conference and hope to see you.

Thank you so much for having us.

Good morning, and welcome to the Bel Fuse Second Quarter 2026 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Jean Marie Young the Three Part Advisors. Please go ahead.

Thank you, Dylan, and good morning, everyone. Before we begin, I'd like to remind everyone that during today's conference call, we will make statements relating to our business that will be considered forward-looking statements under federal securities laws, such as statements regarding our company's expected operating and financial performance for future periods, including guidance for future periods in 2026. These statements are based on the company's current expectations and reflect the company's views only as of today, which should not be considered representative of the company's views as of any subsequent date. The company disclaims any obligation to update any forward-looking statements or outlook.

Actual results for future periods may differ materially from those projected by these forward-looking statements due to a number of risks, uncertainties and other factors. These material risks are summarized in the press release that we issued after market close yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause actual results to differ materially from our expectations is discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and our quarterly reports and other documents that we have filed or may file with the SEC from time to time.

We may also discuss non-GAAP results during this call and reconciliation of our GAAP results to our non-GAAP results have been included in our press release. Our press release and our SEC filings are all available in the IR section of the website.

Joining me on the call today is Farouq Tuweiq, President and CEO; and Lynn Hutkin, CFO. With that, I'd like to turn the call over to Farouq. Farouq?

Thank you, Jean, and good morning, everyone. We appreciate you joining our call today. We are excited to have delivered another strong quarter in Q2, led by robustness across the majority of our end markets and in particular, within Data Solutions and defense sectors. Our distribution partners have also seen a significant uptick in demand. This trend started earlier in the year and has become more pronounced in Q2 with channel sales at its highest level since mid-2022.

Bell completed an equity raise in May, selling approximately 1.7 million shares into the market, generating net proceeds of approximately $440 million. The proceeds were utilized to fully pay off our debt with the balance of the cash earmarked to fund the closure of the Enercon transaction in Q1 2027 and to invest in other initiatives to support Bell's growth.

As announced last quarter, Bell is now organized under two end market-based segments: Aerospace, Defense and Rugged Solutions, or ADRS and Industrial Technology and Data Solutions or ITDS. Q2 was the first full quarter for us under the new structure, and the team has made nice progress in our segment strategic initiatives.

During the quarter, we achieved a notable milestone with Bell's facility in Slovakia, gaining the required certification as a defense manufacturer in Europe. We noted on last quarter's call a European defense project win for the Slovakia site, and we're excited to report that Q2 marked an additional eight project wins from the European defense customers for the site. We anticipate these translating to sales beginning in the latter part of 2027, which is the normal monetization cycle of defense wins.

From a people perspective, much of the year has been focused on building the team structure to support our growth. This initiative is across the board from operations and sales to IT, finance, legal and HR. In this area, we made notable progress in Q2 and anticipate having all of the key roles filled by the end of 2026. We have also been doubling down on building out the A&D sales team in Europe and have filled some key positions there as well. We are very excited about these additions.

Shifting to what's ahead. It was another strong quarter of bookings across the business, exceeding our level of sales for the sixth consecutive quarter. Based on the information available today, we are projecting that sales for Q3 to be in the range of $205 million to $225 million with gross margin in the range of 39% to 41%. Anticipated drivers of the sequential growth from Q2 is a continuation of the same trend, defense, Data Solutions and an increase in demand from components through our distribution partners.

As a point of note, the recent project wins, robust bookings and overall favorable market conditions will enable us to take a fresh look at our product portfolio. In this regard, we anticipate there will be some revenue rotation in the coming quarters, whereby higher growth, better margin business will emphasize ahead of our lower-margin business and products. We continuously evaluate our business and now have the luxury of focusing on better ROI business. Overall, we are in exciting times, and there continues to be great momentum across the business.

I'm proud and thankful of our global team for their collective efforts and pulling together, pushing forward and achieving another remarkable quarter for our shareholders. And with that, I'll turn the call over to Lynn for the financial review.

Thank you, Farouq. From a financial standpoint, we delivered a strong second quarter. We grew revenue, expanded margins and materially improved liquidity. These results increased our earnings quality and financial flexibility.

In Q2, total sales were $210.7 million, up 25% from the prior year quarter. Growth was broad-based, led by the defense and Data Solutions sectors, as Farouq mentioned. The increase in sales through our distribution channel was most prominent among our component products, including fuses, integrated connector modules and RF connectors.

Gross margin was 39.9%, up 120 basis points year-over-year. The increase primarily reflected operating leverage from higher volume and improved execution. These benefits were partially offset by higher material costs and unfavorable foreign exchange impact.

Adjusted EBITDA was $48.9 million compared with $35.2 million a year ago, an increase of approximately 39%. Adjusted EBITDA margin increased to 23.2% from 20.9%. This improvement reflects stronger conversion of revenue growth into operating profit.

From a segment perspective, ADRS revenue was $110.5 million, up $18.6 million or 20.6% from Q2 '25. Growth in ADRS was led by Defense, which totaled $66.5 million in Q2 '26, a 28.4% increase from Q2 '25. Sales into industrial applications were also strong during the quarter, largely through the distribution channel. These areas of growth were partially offset by a decline in commercial air versus last year.

ADRS gross margin was 41.1% compared with 41.4% last year. Higher sales volumes added leverage into the P&L, but those gains were more than offset by foreign exchange and material cost pressures during the quarter. Pricing increases implemented on new orders earlier in 2026 are expected to benefit Q3 and subsequent periods. We are also investing in capital projects and process improvements to increase throughput, efficiency and capacity.

Turning to ITDS. Revenue for this segment was $100.2 million, up $23.8 million or 31.1% year-over-year. Growth was led by sales into the Data Solutions end market, which was up $20.7 million or 55% from Q2 '25. Higher demand within Data Solutions includes the beginning of a ramp related to recent project wins in the high-performance computing space. The acquisition of dataMate in March 2026 contributed $4.4 million of sales in Q2 '26 and is included within Data Solutions.

While to a lesser extent, we also saw meaningful growth of sales into industrial and consumer applications, which rebounded nicely through our distribution channel in the second quarter. Strength in these end markets were partially offset by transportation, which declined modestly versus last year.

ITDS gross margin was 38.8%, up from 36.6% last year, an improvement of 220 basis points. The increase was primarily driven by favorable product mix and operating efficiencies, including higher volume and improved utilization. These benefits were partially offset by foreign exchange impacts. The weaker U.S. dollar relative to the renminbi increased costs at our China manufacturing locations during the current year period.

Turning to operating expenses. R&D was $9 million, up $0.9 million year-over-year. The increase was primarily due to higher personnel costs in the 2026 period. SG&A was $36.3 million, up $5.4 million from last year. The increase here was primarily due to higher compensation and benefits and an increase in professional fees, some of which were nonrecurring during the quarter. We expect SG&A to run in the range of approximately $34 million to $35 million in future quarters.

Turning to cash flow and liquidity. We ended the quarter with $306.1 million of cash and securities, up from $57.8 million at December 31. This largely resulted from the equity raise completed in May, which generated net proceeds of approximately $440 million. During the second quarter, as Farouq mentioned, we repaid our full debt balance of $197.5 million, resulting in no outstanding debt balance at June 30. This increase in cash materially improves liquidity and our ability to fund growth, manage volatility and pursue strategic opportunities.

From a working capital perspective, we have heavily invested in working capital to support growth throughout the first half of 2026. Accounts receivable increased $32 million based on higher sales volume in Q2 '26 versus Q4 '25. Inventories increased $32 million as additional raw materials were procured to accommodate the increase in orders received during the first half of 2026. And accounts payable increased $33 million, largely in line with the higher inventory levels.

Capital expenditures were $4.9 million during the first half of 2026. We do anticipate a slightly higher level of CapEx in the second half of 2026. We're prioritizing projects expected to improve throughput, drive growth and have a quick ROI. Going forward, we will focus on improving the cash generation cycle through better receivables management and payables planning. We do expect inventory turns to remain challenged in the near term as we build up our inventory levels to support our growth projections. Longer term, the objective is to convert a greater portion of earnings into consistent free cash flow as the business grows. And with that, I'll turn the call back over to Dylan to open the line for questions.

[Operator Instructions] Our first question comes from Bobby Brooks with Northland Capital Markets.

First, I was curious to hear more discussion on the Slovakia site gaining the A&D qualification because that seems like a very meaningful update for the efforts to grow Enercon product sales within the region. So could you expand on what this means for the long-term strategy? And I think it would also be helpful for folks to remind them of what the Slovakia site was before this.

Yes. Thanks for the question, Bobby, and good to connect with you here. So maybe start backwards from your question. Slovakia historically was our industrial power factory, so focus on things like rail and e-mobility, laser cutting equipment, so kind of very high applications on the power side of the business. And we've been in the process of modifying the facility so that it could also accommodate aerospace and defense type applications from the acquired Enercon business to serve as a storefront for the European market as that market seeks to have more localized content.

Obviously, it sounds a little bit easier than the reality of it. So the team has been hard at work here for well over a year, 1.5 years on gaining the appropriate certifications, government approvals changing out some flow of the facility, acquiring new equipment and selling equipment along with also training the team for these applications. So it's a pretty complicated effort.

And that was -- the idea is to meet our customers where they are at. And that strategy has started to take hold in terms of translating to wins, and we mentioned it on the first quarter call, and we have nice more wins here in the second quarter. And I would say both of these outcomes were in advance of what we initially thought, which we -- when we did this a couple of years ago at this point, we said we anticipate by end of 2026 to have some wins.

So that's obviously driven by the market and the reality of the world, but also driven by our investments that we've done at the headcount level, marketing level, attending conferences level and doubling down our efforts with the customers.

I would say, as we're investing in our go-to-market and sales on the A&D side across Europe, it's really for the whole A&D portfolio, right? Obviously, we have connectivity manufacturing sites in the U.K., serving the European Union. So we're also needing to push those sales. So when we think about A&D, it is across the portfolio. It's not just any one product line. So from our perspective, it's more of the same. Obviously, we flagged Slovakia, just given the interest, and it's something we've talked about. But from our perspective, it's kind of more normal investment in the business.

Very helpful color. And then -- so just curious, there's been a continuous focus over the last several quarters by you and the team to pull internal levers to help spur growth. And now the last two quarters, we've seen really excellent growth that's pretty much all organic, right, as the year-over-year comps have included the Enercon benefit. And what you guided for, for 3Q is a continuation of that.

So I was just curious to hear -- maybe give you an opportunity to step back a little bit, but just curious to hear which initiatives do you feel have been most successful and maybe which more recently enacted initiatives you're most excited about going forward as it relates to growth?

Yes. So I think that's a fair question. I think I would say that the wins in Q2 and Q1 are really more of the end of the journey in terms of a lot of the work that has been done by the team earlier this year and last year. So these wins, and as we've talked about, especially on the A&D side, it's a long chase cycle. So the fact that we're seeing the results in Q2, Q1, you'd have to look significantly more into the rearview mirror.

I would also say, as we think about growth across the portfolio, it's not just one area. We're seeing great wins in Data Solutions. We're seeing some great things on the industrial side, also the distribution side. So there is a swelling effect of some of the successes that the team has been doing.

The real question for us is not are we doing good and are we winning? Because I think the answer is yes. The focus of us is, are we fully living to our potential. And to where we are today, we're still not at our potential. And therefore, the investments in people, in systems and process, driving the commercial organization harder is still happening.

So for us, we talk about the strategic initiatives and put focus on it, but it's not like we have not been doing it for the last two or three years. It's just that we're starting to see some of the benefits of that. So we are still not where we need to be. which is, I think, a great opportunity, especially given all the recent wins that we have been doing. But we think we can and should be doing more.

So optimization is really what we're focused on versus, okay, we're doing a good job. We're all going to take a break now, right? So it's just that driving force to relentlessly lifted our potential is kind of what we're getting at. So -- and we're still in the process of that. We haven't fully arrived yet. I'm not sure you ever do, but we want to get a little bit closer to the potential.

Sure. I appreciate that. And maybe just any specific ones that come to mind that you feel that maybe these are initiatives you had enacted in like '24 or early in '25 that you feel has kind of really helped spur -- or is it just really an -- an accumulation of several different pieces, just all kind of flowing together and kind of benefiting at the same time or starting to flow through at the same time?

Yes. So if we were to put that discussion into two topics, people and process. On the people side of it, we have added headcount. We have elevated some internal people that are helping to drive the teams. We have also -- are continuing to add also headcount, like we said, so the people side of it, we also had people that were the right people, but potentially not in the right place. So I think on the people side, we've done a pretty fair amount of movement and reassignment and reestablishing KPIs and expectations of performance, which I think is important.

On the process side of it -- and the process side of it could be anywhere from the data side. So are we collecting data? Are we putting eyes on it? And now we're pushing the data piece of it. So we're still, I'd say, in process of that, but we're pretty dangerous today in terms of tracking and managing to that. So we're definitely excited about as we think about executive dashboards and CRMs and I'd say that stuff we're kind of moving along on pretty good.

The other side is the incentive scheme, and we will look to probably modify that as we continue to evolve, but just really rewarding performance and establishing and defining what performance means has been pretty important. And then another key element to, as I said, people and process is ensuring that our outside partners, especially in the reps that we use if folks recall, we had to redo a lot of our agreements with them to favor and pay more on new wins versus just legacy flow business. So I think that was a catalyst for change.

And I think when we look at people, process plus outside partners reestablishing our expectations and contracts, I think that has together collectively been the momentum. The other thing I would say is we are seeing that re-segmenting our business is also, I'd say, going to be another lever and catalyst for focus and helping driving the depth because we are really at the end of the day, an end market-driven business and kind of speaking the language and the drive that our customers are driving those relationships more seriously.

The other thing I would say on the process side, I forgot as we talked about restructuring piece of it, obviously, we restructured into the two segments, but also we created more focus around business development and key account management, and we're seeing also the great benefits of that. So we were missing some of these, let's call it, more basic structures. So I think that I'm not sure there's one thing I can point to, but we're very excited to see what our leaders are doing and the team is delivering on aided by process and outside reps.

Super helpful, Farouq. Really appreciate it. And definitely makes a lot of sense as a lot of different pieces go into making a winning team like you have. So I appreciate the time and congrats on the good quarter.

Our next question comes from Wamsi Mohan with Bank of America.

I wanted to ask a little bit about the very strong defense growth that you're delivering here. Do you see this sustaining through the rest of the year? And do you need to add capacity in defense? I know, Lynn, you mentioned higher CapEx. What's that primarily geared towards? And I have a follow-up as well.

We definitely think the outlook is looking pretty good, right? And let's kind of keep in mind that when we look at revenue, revenue is a little bit of a laggard indicator, right, because it indicates that you've already won a project and that you're starting to monetize. So from a forward-looking indicator, which the near forward is around bookings and the kind of medium term is around new wins. So when we look at forward indicators, bookings and new wins, we're definitely seeing the robustness and we are seeing the discussion modify on the defense side specifically.

Also, we're expanding more on the obviously, European piece by increasing our headcount. In terms of capacity, we -- capacity has not really been a big concern of ours, and we'd like to actually be more capacity challenged in the sense that we are obviously investing in CapEx. But the other thing keeping in mind is as we get Slovakia going a little bit, that will naturally give a little bit more flex on the capacity piece of it.

So capacity is not really a major concern of ours today. The focus is on the commercial front end of the house. We have the capacity and the ability to run the channel. That -- maybe more interesting thing we're focused on in addition to the wins is really the challenges within the supply chain, availability of materials is kind of the thing that we think about. So from a manufacturing perspective, not so much. But in terms of sales teams, we're adding more because we think we'll be more -- we're adding more engineers also on the A&D business, specifically in a place like Slovakia. So all in all, we like how this is looking, and we are investing in the right opportunities to get ahead of it as well.

Okay. And then just as a follow-up, when you look at the incremental margins in the quarter, those took a nice step up. It looks like in your guidance, too, there's very strong incremental margins, particularly at the operating margin level. How much of this is pricing versus mix versus other factors? And was there any pull forward as far as you can tell in the business in any areas that you'd call out if you saw any of it?

Yes. So when we look back at our call that we had in the first quarter -- for the first quarter, which we had in April, we had talked about the challenges around input material and cost really across the portfolio. Shipping costs were going up. FX was going against us. Raw material input was going against us. So the way I would think about the margin improvement is largely has been operational leverage in nature, which kind of helped drive this margin.

So what we did back in February and March time frame, we did put some price increases on new orders, which we said we'll start seeing the benefit of that in Q3 and Q4. So the good news is the way we look at Q2, while we did have headwinds, we know the model is working because despite everything kind of going against the source, we've seen the business deliver the operating leverage.

So we have a proof point, if you will, and hopefully, as we head into Q3, we'll start seeing the benefits of price recovery and operational leverage. We'll obviously not recover the full price in Q3 because, right, it was on new orders that kind of get shipped out over time. So the expectation is we start seeing the benefit of price, which I don't think we saw much of that in Q2, and we hopefully start seeing some of that in Q3.

Our next question comes from Christopher Glynn with Oppenheimer & Co.

So yes, just in terms of the gross margin, I think it's the second quarterly guide in a row where you ticked up from what had been the run rate of guidance for three or four quarters previously. And today, Farouq, you noted that you've got a nice opportunity to continue to press higher margin, higher growth products. Is -- are you suggesting that just some of the take rates and the overall growth are allowing you to de-emphasize more of the so-so mix end of your volume? And so you see a fresh kind of mix lever that has availed as the economy and some of your end markets have strengthened?

Yes. I think we called that out, Chris, is I think the normal expectation is when you start having an abundance of wins or new opportunities is you're thinking about where do we allocate really two things, hours and money. And as we have done a nice job on the wins, and we expect more out of the commercial organization, more wins, I think we can start thinking about, well, where do we want to allocate more of our time and effort where we can get a better ROI on the hours and dollars spent.

And I think we have done a good job here where we are afforded that luxury. And obviously, if we get better ROI type SKU, right, it does all sorts of things. One, it frees up the team to go pursue other things, maybe de-emphasize some, let's call it, maybe noise. So it's nothing too special. I think when you look at the industry, our competitors do this on a regular basis. For us, it's a little bit of a new luxury.

And we're calling it out because we are a company that's in an evolutionary stage. We've been on this evolution here for the last few years, and we expect to continue to evolve. So from my perspective, this is a testament to the team allowing us to do some of these rotations. So we just called it out really in the spirit of flagging behavior and messaging where historically, we have not done as much of that.

Okay. Great. And a little bit on the Data Solutions side. I think Lynn said up 55%, maybe $20.7 million in sales or did she say plus that amount? I'm not sure. but also key customers hitting scaling inflection has been kind of a topic year-to-date for the Data Solutions business. I understand some of your customers in the AI space might have some optionality and take rate opportunities. Are you seeing some of that start to play through?

Yes. I'll let kind of Lynn comment on that. But overall, your assessment is correct. We are seeing inflection points. We are seeing growth. And I think we've played it pretty wisely to where we want to allocate resources on that. And we are seeing those efforts really maybe two, three, four years ago efforts paying off today. Lynn, you want to comment on that?

Yes. So thanks, Chris. On the -- just to clarify the numbers there on Data Solutions, so it was about $58 million in Q2 '26, up from $38 million in Q2 last year. So it was a $20.7 million or 55% increase year-over-year, just to clarify those numbers.

Great. And last one from me. So I think you mentioned eight new European defense design wins. And last quarter, you mentioned a couple. Just curious about the spectrum of size of those applications. I know Enercon specialized in small lots. What's the breadth? Is this a couple of customers? Or is it a wide range of customers and just kind of small lots versus potentially larger lots? Just curious, a little more complexion.

Yes. Kind of a combination of that, right? By default, Europe, not too dissimilar to the American side. There tends to be concentration of OEMs, right? But we tend to think about it is around the platforms that you are on. And ideally, you want platform diversity, whether it be things that fly or things that are on the ground or things on the water.

And for us, we want to measure and see diversity of programs because generally, it's different engineering teams and sometimes Europe is different countries where these things get done in. So when we look at the diversity, we like the diversity. So it's not a -- yes, there are some kind of -- if you look at it from a customer perspective, OEMs, which is normal for us, right, on the A&D side. But we're seeing a diversity platform. In terms of scale, we think these are multimillion dollar collectively here opportunities over -- and we think about A&D over the life cycle of the program. So these could potentially turn to some very nice big wins for us.

So yes -- they're large, but I wouldn't say there's one dominant one, which we kind of like that diversity play a little bit as well because also funding cycles tend to go to maybe different technologies or different applications. So you want to make sure you have enough diversity. So if something gets funded, you're on it.

And I'll give you, obviously, an example on that. We have a pretty heavy presence in the U.S. side on the missiles side of it, which is a topic that's all in vogue, and we're pretty diversified on those, whether it be the launches or the missiles side of applications. So now we will be benefiting from that growth. Why? Because we kind of had a few diverse opportunities over our history.

So diversity is kind of what we're focused on/new wins. That's kind of really the only control, but we can't control funding cycles or anything like that. So we want to make sure that we have diverse new wins. And we can say we've accomplished that at least in this small sample size that we're talking about.

Our next question comes from James Ricchiuti with Needham & Co.

I was wondering if you could provide any color on the bookings in ITDS and ADRS, where you're seeing the strength? Obviously, you called out Data Solutions and Defense, but just if you can give us a little bit more color on the bookings activity you're seeing.

Yes. So Jim, thanks for the question. I think on the bookings, as we mentioned, we have been seeing positive book-to-bills for six consecutive quarters now. That has been broad-based. So it's really been across both segments, most of our product lines, most of our end markets. I would say it is largely in Defense and Data Solutions and also through our distribution channels. So this is something that had been soft for the last couple of years, and we're seeing that rebound nicely over the last couple of quarters and Q2 was particularly strong.

So things that go through distribution, as I mentioned on the call, it's things like fuses and our ICMs and RF connectors. So it's components that kind of go into a wide variety of applications. So it's -- I would say there is concentration in Defense and Data Solutions, but it's not contained to those. It's much more broad-based.

Alluded to the replenishment that's going to be required on the defense side, particularly in the missiles area. Are you seeing that yet? Or is that something you're anticipating that potentially comes later in the year, early 2026?

Yes. So obviously, public discourse and discussion leads the money. So the discussions obviously are happening for any casual observer of the news, as I'm sure everybody can follow here. We are seeing positive momentum on that front. But I would say there's a gap still between the required funding that people want to get to replenish and what we're seeing. So it still hasn't trickled all the way down.

So in short, we are seeing benefits of that. We are seeing some orders of that. The chatter in the channel around expectations and build rates is great, but still waiting on all sorts of kind of government funding to come through. So the nice news is we are seeing increased orders, but still, I think the funding needs to be more to achieve, let's call it, maybe normalization of stockpiles, which obviously, as you, I'm sure, read in the news, it's not going to happen in the next year or two. So it will be an ongoing effort for the near future.

Are you seeing more activity in the space market? I'm wondering, yes, obviously, that's also been in the news. Can you quantify perhaps what kind of revenues you're seeing or the growth in this part of the business? I know it's an area that you have been putting more resources.

Yes. So space for this quarter was $3 million. So it's up slightly from where it was last year. So it continues to be small for us, but an area that we think that there's a lot of potential in, especially as we look out over the next couple of years.

And I think, Jim, that's another example of, right, we are on a -- I think we have over 250 customers. We're on a lot of platforms and designs. The bottleneck is the ability to launch things into space. So until that bottleneck gets fixed before maybe we see some bigger numbers. But we are well positioned given the wins and where we are and who we're speaking to and the number of customers, but they got to figure out how they get into space given the bottleneck there. So that's kind of a good example of we need to focus on wins. We don't control when the revenue happens exactly, but design wins is really the leading indicator for us.

Our next question is from Luke Junk with Baird.

Farouq, I want to start in Europe, the eight project wins in Slovakia. I think you said that was better than expected, especially relative to the timing of those awards. Can you just say what it means about the pipeline that you're seeing in some of the commercial development activity that is driving that from an internal standpoint as well?

Yes. So when we acquired Enercon back in Q4 2024, and we talked about this was going to be a more commercial synergy play and Europe being a very important piece of that commercial play. And we said at the time, because we know we had to do some work, but we have the Slovakia facility, adding some headcount, restructuring the business. and given the pace that the European is going to move that, we said we'd expect to see some of the benefits of the commercial synergies end of 2026.

And the fact that we can point to some wins in Q1 and in Q2 of 2026, by definition, ahead of schedule, partially attributed to the dynamics changing between, obviously, the change in administration in 2024, the realities of the ground of changes and the tone and political discourse has changed. So that has allowed for acceleration of on-continent, let's say, production and leaning into their independence.

So I think that's moved up a little bit more. I think we are seeing a lot more opportunities. And part of the restructuring, we said we've added some headcount. The selling of defense products is a very intimate long-cycle design sale process. So we've added some headcount, which we're seeing some nice more short-term goals, which we hopefully will translate to new wins. We are still looking to add a few more headcounts in Europe, but we're not fully ramped up there on the team side yet. So as we bring on new people and the new people get their legs underneath them across different countries in Europe, we continue to expect more robustness in our growth.

And then at some point, right, it just becomes a normal part of the business for us. But Europe is kind of the biggest opportunity in both -- on --the connectivity business and on the power business because we have an end market sales agnostic sales team in Europe that are selling all of our A&D products.

Lynn, you mentioned in your remarks that the higher demand in Data Solutions included the beginning of a program ramp in high-performance compute. Can you just expand on that in terms of materiality? And looking into the back half of the year, is this one of the things that we're seeing an uptick in the revenue guidance walking into 3Q?

Yes. So yes, it is feeding into that. We are seeing, as I said, as you noted, there Luke, programmatic wins. Obviously, these are some of the things that we've won quite a while back, but now we're starting to see -- right, because as our customers gain customers and as our customers deploy their products, it kind of reverberates back to us, which is great.

So when we look at the bookings, which lead this indicator -- and obviously, the chatter with our discussions and the intimacy as they're getting customers, our expectation is further ramp as we close out the year and as we head into next year. So the markers, the indicators, whether it be bookings on books, bookings are promised to come or general, you guys have capacity and you're ramping up, let's figure out planning discussions, all of that is indicating an upward -- healthy upward trend.

Got it. And then maybe bigger picture for just curious to get your updated filter lens for M&A now, some dry powder on the balance sheet and a little bit of noise in the market just in general.

Yes. I think one of the things that we tend to think about is we have -- we are a long-cycle design business. So while we appreciate the public markets are having, let's say, a lot of changes and shifts that are going on, we are focused on investing in the business for the medium and long term where we think there is good growth, good technology needs, good alignment with our customers. So we'll continue to invest in the business, whether it be technologies or capacity additions or new end markets. So we're -- nothing really changed from our perspective.

What we are seeing in the market is, I'd say, a fair amount of let's maybe call it, aggressiveness or irrationality around payments, and we've seen some of our peers do acquisitions that we just think are not for us. So we'll focus on us. So we will be disciplined. We appreciate our investors' trust in our recent equity offering. And obviously, those are with us for a while, to be honest with you. So we will be disciplined. We're not looking to go all the way crazy.

So we will be disciplined in our approach despite the market doing some maybe irrational things. And so the pipeline from our perspective is there's a lot of opportunities. And at that, I think it becomes a question of how hard do we want to compete and how crazy we want to get. So that's going to be a balance for us. But ultimately, foundationally, we're going to be balanced and mature in our approach of doing things, but not overly conservative.

Our next question comes from Greg Palm with Craig-Hallum Capital Group.

This is Jackson Schrader on for Greg Palm. A quick follow-up to that M&A piece, just kind of a basic one for me, that extra 20% left for Enercon coming next year. Is that as simple as just the 20% coming off of that $400 million? Or should we expect some kind of like upward or downward adjustment for that?

Yes. So it's -- and this is for those that want all the exciting details, we have put this back in our public disclosures back in 2024. It's a purchase of the remaining 20% equity interest in the business. And we will be taking measurements of EBITDA and paying a multiple off of that and then figuring out down to equity value, that's how we're going to get to the 20%.

We put a, let's call it, a cap on the upside to the tune of 135% of what it was back when we actually did the acquisition. So there is a cap, but it's not 20% of the $400 million. It's going to be 20% of the actual EBITDA of the business. And we do accrue for all that.

I'll let Lynn hit on that here.

Yes. And just -- so each quarter in case you're tracking it. So on the balance sheet, we do have a redeemable noncontrolling interest line there. As of the end of June, it was $102.6 million. So that's representative of what it would have looked like as of that date.

Obviously, as Enercon continues to do well, that number increases as their TTM EBITDA increases. But to Farouq's point -- we will get to the point where there's a cap there. But that's the current value of it as of June.

And then just to remind you, there also is another earn-out payment. If you recall, there was a $5 million earnout that they had achieved based on '25 results that was paid out in early '26. There's a similar one based on '26 results that would be paid in early '27. So those are kind of the two components as far as cash needs related to that.

Perfect. And then just on the organic versus inorganic side. Can you kind of size your excitement and what you're seeing with organic growth, some of the elevated CapEx that you have on some sort of short-term high ROI projects? How much of that focus kind of going forward is really in the organic versus inorganic?

I would say it's -- we appreciate that some folks will co-mingle those for us, those are distinctly separate. Our organic play and the team and the sales initiatives, all the things that we've been talking about is the organic. So our team and our day jobs is focusing on the organic piece of it and driving that. So as we think about CapEx or hiring people or investment in technology, from our perspective, it's organic. Inorganic, we have a separate team that obviously does partner with our leadership and our senior leaders to identify, pursue and go after.

But we're not de-emphasizing one over the other. So we kind of look at them as two separate tracks and the objective is for each of those tracks to run as hard as they can. So we're not looking at co-mingling, but our discussions here are generally around the organic piece of the business. We don't put any kind of long-term kind of sizing or targets on that, but we expect continued robustness from here.

Our next question is from Tomo Sano with JPMorgan.

With the data facility transitions and ERP conversions completed, could you talk about like what the steady state benefits should we expect? And when should they show up in the numbers, please?

Sorry, you broke up there, Tomo. So the question is around the data and then the app. So obviously, as we restructured our business and created key accounts group and business development within ITDS specifically because dataMate sits within ITDS, we're seeing the benefits of that, right? So whether it be on the BD side and the team that did come over to us with dataMate has been great. And they've been really doing their day jobs in addition to a facility move in addition to therapy conversion, we just keep seem to be throwing more at them and they're fully embracing the journey.

And we're seeing some of the benefits of that with robustness on the backlog and opportunities. We have fed them into the Bell machine. I'd say we're -- I can't say that we're fully up and going, obviously, given the nature of our business, but we're starting to see the benefits of that. We invested a little bit more on the BD side for their products, and we've already identified a few opportunities. So we'll see that coming.

Keeping in mind that from a revenue percentage perspective, when we acquired dataMate, it was around $18 million. So if you were to think about that, from -- obviously, $18 million is a great number, but it's in itself is not going to be a massive mover for the ITDS or Bel Fuse business.

Our next question comes from Theodore O'Neill with Litchfield Hills Research.

Congratulations on the good quarter. I've just got one question here. Obviously, with Enercon, you're in a much better place to capitalize on the A&D spend in the EU. But I'm wondering, do you worry that it will cannibalize spend in the U.S. levels?

I think the -- if this was normal times where there was not a ramp or increase due to global events, maybe instead of buying American, they kind of start building, we could see that. But the reality of the matter is we're seeing big spend, whether it be NATO catching up, whether it be strengthening and -- driving resilience into the infrastructure in Europe as we think about Ukraine and the issues going on there. But also remembering that the U.S. has also gained a lot of new customers in terms of sales, whether it be the Saudi, some of the other guys.

So even if there's a little bit of a drawdown into the Europeans, which we hope to benefit from that, I think we're seeing also increased sales of U.S. equipment and also consumption. So we don't think that's the case, and we definitely haven't seen it. Sure, maybe some things are shifting around. But ultimately, we want to make sure that we're capturing on both sides. So net-net, we do think that all things going on today in A&D is a net benefit to us, unfortunately, given the world that we're in today.

Yes. The other thing I would say to that point is we're seeing more investments in new technologies, right? And we're seeing emergence of new players. So we feel like we have a pretty good job at tackling the change in the end markets here, whether it be geographic, technological or manufacturers. I feel like we're doing a pretty good job tackling it from all fronts here.

Our next question is from Asiya Merchant with Citigroup.

And I apologize if this was asked earlier because I was on another call as well. But between the two segments, could you maybe peel a little bit about demand dynamics, how we should think about what's baked into the guidance here, both on the top line as well as how we think about gross margins because it did take a nice step up for the ITDS segment. I think, Farouq, you talked a little bit about price recovery here in the second half. So if you could just help us between the two segments, how we think about the gross margin ramp as well.

Maybe kind of looking at both segments separately, the main driver on ADRS was defense spend and production. And on the ITDS side, it was -- I'd say maybe the leader there was Data Solutions, but also from a percentage perspective, but we're seeing great things in terms of call it our industrial -- industrial technology business, which would include a large amount of other industrial type applications and rail and so on. But also, it cuts across both segments is the increase in distribution. So we're seeing it on all fronts from an end market perspective. And also same thing as we look at the bookings that came out in Q2 is kind of broad-based, which is kind of a good thing versus concentration.

The other thing I would say on the gross margin piece because we put in let's call it, a holistic price increase in February and March. And we said we're not really going to see the benefit of that until Q3 into Q4. I would say the step-up in gross margin that happened in Q2 was operational leverage and thanks to a lot of internal work done by the team. So I would not characterize that as pricing.

As we head into Q3, it will be a combination of operational leverage and some pricing. And because of -- as we can all appreciate, the pricing cost dynamic is still -- was a little bit still challenged in Q2, not as maybe big of a percentage, but Q2 had some pricing pressures as well heading into the next quarter in terms of bookings. So we'll see a little bit of both, but I'd probably argue that the most part of our gross margin step-up is going to be operational leverage in nature.

And the other thing that I'll add is on the FX side, that was a large pressure point for us in Q2, especially with the Chinese renminbi and the Israeli shekel. And looking at those trends, they have both stabilized and starting to recover a tiny bit in the current weeks here. So we're just -- we're not expecting further downward pressure from Q2 to Q3 on FX. If anything, it looks like it may improve a little bit. So -- and that does have a big impact on our margins. So if those two currencies do move more favorably, that will also assist the margin expansion.

Our last question comes from Hendi Susanto with Gabelli Funds. On great results.

I'll squeeze my two questions into one. Farouq, would you be able to share the magnitude of the price increase? That's one. And then second, you talked about revenue rotation into favorable higher-margin products. Can you share more colors in terms of timing and which product lines or product groups or whether it's broad-based?

Yes. I appreciate the question here Hendi. I think our pricing -- remember, we have a lot of SKUs for a company our size and customers. So it was really a surgical effort around what input costs went up where, coupled with the ability for the market to tolerate it, right? We have to kind of make some serious decisions also along the lines of, well, what is it that we're working on and expect to coming up here. So when we kind of look at all of that, I would say it was pretty broad-based and a pretty wide range. So that's one, but I'm not going to put a specific percentage on that. I don't think that will do us well.

And then the -- in terms of rotation, it's really within ITDS, I would say, and maybe more specifically, as we think about Data Solutions. We are seeing some nice wins and outcomes that maybe we want to kind of shift the portfolio and allocate resources. Again, I wouldn't say there's anything special about that or unique. I think that's a very normal business going. My guess is we'll start rotating some of that and having these discussions and impacts as we head into, I don't know, Q4 into 2027. We'll be measured, obviously, in our approach.

But I think we have more than enough growth here to handle the business, right? So partially as we to continue to grow and continue to pay our bills and get the operational leverage. So it's a little bit of a balance, but we're not looking to commit to a dollar amount on that because I think it will be a little too arbitrary.

We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Farouq Tuweiq for closing comments.

So thank you, everyone, for joining our call today. We definitely enjoy-- these questions here. We think we have an exciting story, and we continue to deliver despite some of the choppiness out in the market. So we're excited to be halfway at the year here and continue to look to hopefully a good close for the year. So thank you again for everyone for their vote of confidence. Looking forward to our next call, and everybody, enjoy the rest of your summer.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Good morning, everyone. I am Dan Bernstein, Chairman of the Board of Bel Fuse Inc., and I'd like to welcome you to Bel Fuse Inc. 2026 Annual Meeting of Shareholders, being held via remote communication.

I shall act as Chairman of the meeting and request Lynn Hutkin to act as Secretary of the meeting. In addition to Lynn Hutkin, joining me today are our directors, Eric Nowling, Mark Segall, Dave Valletta and Farouq Tuweiq, our Chief Executive Officer.

In addition, representatives from Grant Thornton LLP and Deloitte & Touche LLP are presented and are available to answer any order related questions from shareholders. Later in the call, we have an opportunity to answer questions that you have submitted. Only validating Class A shareholders will be able to ask questions in designated field on our web portal. We will attempt to answer as many questions as time allows, but only questions that are relevant to the meeting will be addressed.

Holders of Class B common stock that have questions may submit them to us at [email protected], and we do our best to retain either during or after the meeting. I will now ask Lynn to present proof of the calling of this meeting and review certain procedure matters. Lynn?

Mr. Chairman, this is Lynn Hutkin. I present a copy of the notice of annual meeting and proxy statement dated April 10, 2026, which states the time, place and purpose of this meeting and the means of remote communication to be used.

This document has been posted on the company's virtual annual meeting webcast site and is also available at www.belfuse.com. I further submit the complete list certified by Continental Stock Transfer & Trust Company, the transfer agent for the company of the holders of Class A common stock as of the close of business on the record date fixed by the Board of Directors for shareholders entitled to notice of and to vote at the company's annual meeting.

This shows that as of the close of business on the record date, there were 2,115,263 shares of Class A common stock of the company outstanding, all of which are eligible to vote. I further submit the affidavit of distribution of the representative of Continental Stock Transfer & Trust Company, showing that it caused to be mailed to each of the shareholders of record a notice of Internet availability of proxy materials and to be made available to such shareholders in accordance with SEC rules.

A copy of the notice of meeting, proxy materials and Bel's annual report to shareholders, which contains the consolidated financial statements of Bel Fuse Inc. and its subsidiaries for the year ended December 31, 2025.

The notice of meeting and proxy materials were filed with the Securities and Exchange Commission on April 10 2026. Please note that the company's bylaws provide that any business brought before an annual meeting by a stockholder, which is not specified in the notice of meeting must be submitted in writing in advance of the company and that the notice meets certain requirements.

The company did not receive any such notice, and as such, voting will be confined to the 5 proposals outlined in the proxy statement. Please note that any non-historical statements that the company will make today will constitute forward-looking statements under the Private Securities Litigation React of 1995.

Actual results could differ materially from these statements as a result of a number of risks and uncertainties, including the risks that the company has cited in its most recent 10-K and 10-Q filings with the Securities and Exchange Commission, and that Bel Fuse typically cites in its press releases.

Also, I would like to remind everyone that this meeting is not a public forum for purposes of the SEC's Regulation FD. As a result, while the company would be happy to provide you with general background information about the company, we will not be able to provide you with material nonpublic information at this meeting.

Ms. Lynn is directed to incorporate a copy of the notice of the annual meeting and proxy statement dated April 10, 2026, together with the affidavit of distribution as part of the minutes of this meeting.

Continental Stock Transfer & Trust Company has been appointed inspector of the election and has qualified by taking describing to an oath safely to execute the duties of inspector at this meeting.

I direct the oath be filed with the minutes of this meeting and that the inspector take a poll of the shares representing at this meeting in person on this webcast or by proxy.

Mr. Chairman, this is Stacy Akley from Continental Stock Transfer & Trust Company. They are present in person on this webcast or by proxy at this meeting substantially more than 1/2 of all of the shares of Class A common stock outstanding entitled to vote at this meeting.

By reason of the fact the holders of the record of a majority of the outstanding Class A common stock of the company entitled to vote at this meeting are present in person on this webcast or by proxy, a quorum is presented for all purposes.

I declare this meeting lawfully and properly convened and now competent to proceed to the transaction of the business for which it has been called and as stated in the notice therefore.

The first order of business for shareholders action at this meeting is to elect two directors for 3-year terms or until their successors are elected or qualified. Mr. Segall will present the nomination of the Board of Directors.

This is Mark Segall. I nominate Dr. Rita Smith and Jacqueline Brito, each for a 3-year term to expire at the 2029 Annual Meeting.

This is Eric Nowling. I second the motion.

There being no other nominations other than provision in our bylaws, I declare the nominations for directors closed. The chair recognized, Mr. Valetta.

Mr. Chairman, I move the ratification of the designation of Deloitte & Touche LLP to audit Bel's books and accounts for 2026.

This is Mark Segall. I second the motion.

The Chair recognizes Mr. Nowling.

Mr. Chairman, as set forth in the proxy statement as proposal 3, the say-on-pay vote, I move a vote for the approval of the following advisory resolution. Resolved that the compensation paid to the company's named executive officers as disclosed in the company's 2026 proxy statement pursuant to Item 402 of Regulation S-K, including the compensation tables and narrative discussion is hereby approved.

This is Dave Valetta. I second the motion.

The Chair recognizes Mr. Segall.

Mr. Chairman, as set forth in the supplementary proxy materials as proposal for I move a vote for the approval of the Bel Fuse Inc. 2026 Equity Compensation Plan.

This is Eric Nowling. I second the motion.

As you know, a shareholder proposal was included in our proxy statement. Is there anyone here from GAMCO who would like to move the proposal?

Yes, Mr. Chairman.

You have heard the nominations and proposals -- go ahead.

Yes, Mr. Chairman. My name is George Maldonado, Director of Proxy Voting Services, a representative of GAMCO Asset Management, Inc., beneficial owner of approximately 3% of Bel Fuse Class A common stock.

I'm here on behalf of our clients to formally present GAMCO's shareholder proposal. The proposal reads as follows: Resolved that the shareholders of Bel Fuse Inc. request that the Board of Directors take all necessary steps, including proposing any amendments to the company's bylaws and/or Certificate of Corporation as needed and subject to any required shareholder approvals, to permit holders of the Class A common stock to convert their shares into the Class B common stock at their option on a share-for-share basis.

The Board may implement reasonable safeguards, such as caps, timing windows or pro rata mechanics to ensure compliance with existing charter provisions and to avoid any unintended consequences to the company's capital structure. The case is straightforward, GAMCO is a long-term shareholder of Bel Fuse, and while we applaud the board for successful steps to surface shareholder value, the Class A shares trade at approximately $20 per share discount to Class B that is a persistent inefficiency in the company's capital structure.

Optional conversion would unlock immediate value, let investors choose between voting power and enhance dividends, it's voluntary, not mandatory, reserves Class A voting rights and gives the Board full flexibility to design appropriate safeguards. On behalf of GAMCO we urge all shareholders to vote for this proposal.

Thank you, Mr. Chairman and fellow Bel Fuse shareholders for the time.

Thank you. You've heard the nominations in the proposal. The polls are now open. If there are any registered holders of Class A common stock or persons who held legal proxies from such registered holders who desire to vote who haven't already done so, who wish to change the vote that can be done through the remote annual meeting webcast site at this time.

While we allow time for any final voting to take place in the web portal, I would like to ask Lynn to read any questions that have come through the web portal. Lynn?

Mr. Chairman, I'm not showing that any questions have come in through the IR e-mail. I'll turn it over to Farouq to check the webcast portal.

Thanks, Lynn. Hello, Mr. Chairman. There are no questions that have come through the portal at this time.

Let's give it another 10 seconds. All right, Lynn, any other questions you see? Farouq?

No further -- no questions at this time the far, Mr. Chairman.

No questions on the IR e-mail. Mr. Chairman.

There being no questions for the shareholders, I will pause a momentarily and then close the polls. The polls are now closed. Lynn?

Mr. Chairman, the Inspector of Election has presented a preliminary vote -- preliminary report of the voting. That report reflects that holders of a substantial majority of the shares of Class A common stock voted at this meeting have voted in favor of the Board's nominees to serve as directors. In favor of the ratification of Deloitte & Touche LLP to audit Bel's books for 2026 in favor of the advisory resolution approving the compensation of Bell's named executive officers in favor of the Bel Fuse Inc. 2026 Equity Compensation Plan and against the shareholder proposal.

Thank you for your participation in our meeting. The final voting results will be published by the company in an 8-K to be filed by the company in the next few days. I'll instruct Ms. Hutkin to file the shareholders' list, proxies and ballots among the records of the company.

At this time, I will entertain the motion to adjourn.

This is Dave Valletta. I second the motion.

Thank you for joining our meeting today, and the meeting is adjourned.

Good morning, and welcome to the Bel Fuse First Quarter 2026 Earnings Call. [Operator Instructions] Please note, this conference is being recorded. I would now like to turn the call over to Jean Marie Young with Three Part Advisors. Please go ahead.

Thank you, and good morning, everyone. Before we begin, I'd like to remind everyone that during today's conference call we will make statements relating to our business that will be considered forward-looking statements under federal securities laws, such as statements regarding the company's expected operating and financial performance for future periods, including guidance for future periods in 2026. These statements are based on the company's current expectations and reflect the company's views only as of today and should not be considered representative of the company's views as of any subsequent date. The company disclaims any obligations to update any forward-looking statements or outlook.

Actual results for future periods may differ materially from those projected by those forward-looking statements due to a number of risks, uncertainties or other factors. These material risks are summarized in the press release that we issued after market close yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause actual results to differ materially from our expectations is discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and our quarterly reports and other documents that we have filed or may file with the SEC from time to time.

We may also discuss non-GAAP results during this call, and reconciliations of our GAAP results to non-GAAP results have been included in our press release. Our press release and our SEC filings are available in the IR section of our website. Joining me on the call today is Farouq Tuweiq, President and CEO; and Lynn Hutkin, CFO. With that, I'd like to turn the call over to Farouq. Farouq?

Thank you, Jean, and good morning, everyone. We appreciate you joining our call today.

We delivered a strong start to fiscal 2026. First quarter performance reflected broad-based momentum across the business and continued execution, both operationally and commercially. We also delivered solid profitability, supported by disciplined operational performance and favorable mix.

Before we get into the quarter in more detail, I want to highlight an important step we took during Q1 to better position Bel for continued growth. We completed a business unit realignment designed to align our teams around how our customers buy and how we win, enabling greater customer intimacy, faster decision-making and a more coordinated approach to delivering our full portfolio of solutions across connectivity, power and magnetics. This structure strengthens our ability to bring more of Bel to each customer, expanding share of wallet through integrated selling, improved program execution and tighter alignment between engineering, operations and the commercial teams. Accordingly, Bel now operates 2 focused business units.

First one, Aerospace Defense & Rugged Solutions, or ADRS, which combines our legacy connectivity business with Enercon, focused on mission-critical applications across commercial aerospace, defense, space and rugged industrial environments, and Industrial Technology and Solutions, or ITDS, which integrates our pre-Enercon power and magnetics businesses, focused on data solutions, transportation and industrial markets where performance, reliability and scale matter. This structure sharpens accountability, accelerates decision-making and increases the speed at which we translate engineering into customer wins but also enables product-agnostic access to Bel's full portfolio, so customers engage with us as a solutions partner aligned to their end market requirements.

In that context, I am pleased to share that we closed the acquisition of dataMate from Methode Electronics in March for $16 million. dataMate adds approximately $18 million in annual sales with margins in line with Bel and is expected to be immediately accretive. It will operate within our Industrial Technology & Data Solutions business unit. Strategically, this expands our ethernet and broadband portfolio in a highly complementary way and positions us to grow in data centers, industrial automation, smart buildings and broadband deployment. It also strengthens our U.S.-based manufacturing and engineering footprint. We're excited to welcome the dataMate team. They bring new customers, differentiated technology and strong talent, and we look forward to what we'll accomplish together.

Turning to business performance. Within ADRS, results were driven by robust demand in defense and commercial aerospace with continued strength across key platforms and programs, supported by strong demand and stable OEM build rates. We also saw ongoing progress in space as production schedules and program content continue to expand. Robust bookings during the first quarter within ADRS were driven by both sustained program demand and continued traction with our channel partners, resulting in a strong foundation heading into the back half of the year.

We're also beginning to see the fruits of our organic growth initiatives over the past year. In Slovakia, for example, we secured 2 new defense design wins that are progressing through final certification steps and remain on track to complete in the second quarter. The win was initiated by Enercon with ramping up the Slovakia entity to produce an Enercon design, highlighting our global ability to deliver to our customers locally. In addition, we achieved our first bundled Cinch and Enercon win on a new design in Israel, which is a great early proof point of that -- of what this broader integrated portfolio can do when our teams collaborate across the organization.

Within ITDS, we continue to see healthy demand signals across networking and data infrastructure with momentum improving in data center connectivity and high-performance compute applications. Customer activity remains elevated as the industry invests in AI-oriented architectures, driving opportunities for power conversion and protection as well as high-speed interconnect solutions that support next-generation switching and server platforms. We are expanding our design win funnel and investing in engineering and operational capabilities to support these growth vectors, including manufacturing resilience and multisite capacity to serve global data center customers.

As we think about the broader environment, we remain mindful of trade policy and tariff dynamics as well as demand variability by end market. We continue to work closely with customers to manage these conditions, including pricing and supply chain actions where appropriate. We are seeing some general upward pressure in certain material and logistics inputs, and we remain prepared to use the levers within our control, procurement actions, pricing discipline and operational execution to support the overall direction we've laid out.

With that overview, I'll turn it over to Lynn to walk through the financial results in more detail. Lynn?

Thank you, Farouq. From a financial standpoint, we had a solid quarter with continued sales growth, margin expansion at the gross profit line and healthy cash generation. Before walking through the results, I want to cover a couple of points of clarification related to our new segment structure. First, the realignment that Farouq mentioned became effective March 31, 2026. And as a result, our Q1 reporting and all prior periods presented have been recast to reflect the new structure. Further, we filed recast segment information by quarter for 2024 and 2025 in an 8-K filed on April 6 for reference.

Second, beginning in Q1 2026, our end market sales figures will capture all sales into a given end market, including both direct-to-customer shipments and sales through the distribution channel. In the past, distribution channel sales were called out separately in total rather than allocated to individual end markets. We will provide prior period comparable figures where appropriate to help investors evaluate performance on a consistent basis.

With those points in mind, let me turn to the quarter. In the first quarter, total sales were $178.5 million, up 17.2% from the prior year period. Gross profit margin was 39%, up 40 basis points from Q1 '25. The gross margin performance improved leverage of our fixed costs on the higher sales volume, partially offset by higher material costs and impacts from foreign currency fluctuation. Below the gross profit line, GAAP operating income was $23.7 million compared to $25 million last year, while adjusted EBITDA was $34.5 million versus $30.9 million in the prior year period.

Now turning to results by reportable segment. In the Aerospace Defense & Rugged Solutions, or ADRS segment, sales for Q1 '26 were $99.8 million, up 20.1% versus Q1 '25. Growth was led by a $9.4 million increase in defense market sales, up 19% from Q1 '25 and a $3.9 million increase in commercial aerospace sales, up 22% from Q1 '25. ADRS gross profit margin was 41.5%, an improvement of 140 basis points from Q1 '25. This margin expansion was largely driven by improved leverage of fixed costs on the higher sales volume and a favorable shift in product mix. These benefits were partially offset by unfavorable foreign exchange movements, primarily related to the weakening of the U.S. dollar against the Israeli shekel and the Mexican peso.

Within the Industrial Technology & Data Solutions segment, or ITDS, sales amounted to $78.7 million, up 13.8% from Q1 '25. Growth was primarily resulted from AI-driven strength in data solutions, coupled with the continued year-over-year recovery of sales into our enterprise networking customers. This growth was partially offset by lower transportation sales versus Q1 '25, particularly within the rail and e-mobility markets. ITDS gross profit margin was 36.6% compared to 37.3% in Q1 '25. The margin decline was primarily driven by higher material costs, particularly related to gold, copper and PCBs and unfavorable foreign exchange movements, particularly with the Chinese renminbi.

Turning to operating expenses and cash flow. R&D expense increased to $8.5 million from $7.2 million last year, reflecting continued investment in technologies aligned with our targeted end markets. Of this increase in cost, we estimate approximately $400,000 related to foreign currency movements as we have a large engineering population in China and Israel. We anticipate R&D will run in the range of approximately $8 million on a quarterly basis going forward.

SG&A increased to $36.7 million, up from $29.5 million in Q1 '25. Of the $7.2 million increase, we are estimating approximately $3 million was onetime in nature, including acquisition-related costs related to dataMate, segment leadership transition costs and a prior year benefit which was nonrecurring in the 2026 quarter. The remaining $4 million of the increase reflects targeted commercial and infrastructure investments to support growth in addition to an increase in commissions on higher sales and unfavorable foreign exchange impacts. On a go-forward basis, we expect SG&A expense to run at approximately $33 million to $35 million per quarter.

We ended the quarter with $59.4 million of cash and securities. Net cash provided by operating activities was $13.8 million, up from $8.1 million during the first quarter of 2025. Capital expenditures were $2.6 million, generally in line with the prior period. During the quarter, we closed the dataMate acquisition, investing $15.2 million. To help fund that transaction while maintaining balance sheet flexibility, we had $7 million of net borrowings from the credit facility during the first quarter of 2026.

To close on the financials, we delivered a very strong quarter, driven by solid execution and healthy demand across the business. Looking ahead, we see continued strength and momentum for the balance of the year and remain confident in our ability to perform. We are also operating in an environment of higher input costs, and we're actively managing that pressure by focusing on the levers we can control, pricing discipline, procurement actions and operational efficiencies.

At the same time, we're enhancing our focus on the cash conversion cycle, improving inventory turns, receivables and payables discipline as a key enabler to generate cash, strengthen flexibility and accelerate Bel's growth strategy. With a strong quarter behind us and clear priorities in front of us, we're executing with urgency and discipline. With that, I'll turn the call back over to Farouq.

Thanks, Lynn. As we look forward ahead, our focus remains on executing our commercial and operational priorities while navigating the external environment, including ongoing tariff and trade-related uncertainties and demand variability across our various end markets.

Looking ahead, we have a strong outlook for the second quarter. We are guiding sales in the range of $195 million to $215 million with gross margin in the range of 38% to 40%. This outlook is supported by robust bookings across the business in recent quarters and is driven by higher demand from our defense, commercial aerospace and data solutions customers.

Before we open the line for questions, I want to recognize Pete Bittner on his retirement after 35 years with Bel. Under Pete's leadership, we strengthened our connectivity platform and delivered meaningful profitability improvement while deepening customer relations. We are grateful for Pete's contributions and wish him and his family all the best.

With that, I'll turn the call back over to Kerri to open up the line for questions.

[Operator Instructions] And our first question will come from Luke Junk with Baird.

Farouq, maybe hoping you could just provide some comments on book-to-bill trends. You mentioned robust bookings were one of the things that is supportive of the guidance. And within that, if there'd be any end market highlights you want to call out as well?

So on book-to-bill trends, I would characterize them as robust in the first quarter here. And that was really seen across the full business, both in both segments and across most of our subsegments. I think the only exception would be in transportation. But when it comes to aerospace, defense, data solutions, a very robust book-to-bill in Q1.

Got it. Second, you mentioned that the ITDS growth was primarily AI-driven with strength in data solutions. Just hoping you could provide a little more color on what you're seeing. And I don't know if you're going to be speaking out the AI dollars specifically going forward. And Farouq, you mentioned serving global data center customers as well. I was hoping we can maybe double-click on that trend too.

Yes. I think we obviously have seen our customers benefit from all things, data center build-out, obviously, AI and data generation and everything that we're reading out in the world is additive to that effort. And we're seeing that across our portfolio. Specifically on the AI customers that we service, we're definitely seeing a very healthy pickup in their bookings and customers and orders, and therefore that downstreams to us. So I think we would say that we characterize it as a very, very healthy environment. The bookings continue to be more robust. The outlook continues to strengthen and all the good things. And I'll defer to Lynn here on more specifics around that.

Yes. And Luke, so I know in the past we had called out AI-specific sales. As we're entering 2026 here, things are getting a little more blurred, and we had alluded to this last year where we had AI-specific customers, but also selling into our regular way enterprise networking customers where their demand was increasing due to AI demand as well. So I think going forward, we will be talking more generally about data solutions. But we did see it across both of those platforms, I would say, the AI-specific customers and into our more general enterprise networking customers where we saw strength in Q1 that, that was AI-driven.

Understood. Last question for me. Just curious to get your perspective on posture right now at U.S. and Israeli defense trends. It seems like there's a fairly obvious replenishment opportunity. Just how much of that is baked into the 2Q guidance sequentially. And as you look into the back half of the year, just qualitatively, the potential for some additional upside or just clarity on that opportunity.

Yes. And we talked about, obviously, the geopolitical events for us from an A&D business is helpful and additive. And we've said this in the past where we tend to be levered and a fair amount of exposure to all things on the missile side of the business. So whether it be things that are deploying or the launchers themselves, that's all additive to us.

So as you had alluded to here, with the replenishment and the talk about national stockpiles and all that kind of discussion points, that is all additive to us. We agree that we think there has been a replenishment cycle going on starting out back in kind of the Ukraine days, it never felt like we caught up. And now we saw a lot of more usage of the stockpile. So we agree this will probably be a medium-term vector of growth and replenishment.

Obviously, we are also seeing more overall investments going into new business and new platforms as the whole industrial A&D complex is being challenged to step up across the technological spectrum. So that all is additive to us. And we see in our business, whether the funneling and the opportunities are becoming a little bit more, a little bit bigger. So we do see more shots on goal. So whether it be the replenishment on existing platforms or new, we think that that's all additive. And also, as a reminder, we're not just seeing that, obviously, in the U.S. side of the business, but we're also seeing that in our European Israel business as well.

And our next question comes from Bobby Brooks with Northland Capital Markets.

It was great to hear about the first Cinch Enercon package win. Could you just discuss more how that win came about? And maybe what you felt was the piece that pushed the customer to give you that order?

Yes. I mean, I think, listen, it's -- I'm not sure -- I don't believe in one magical solutions in the sense that we didn't change one thing and it all worked out, right? We sell highly engineered complicated systems, whether it be on the components or on the system side of things. So we -- I would say, people are very busy, right? As we can imagine, A&D is -- our organization is very stretched in.

And on top of that, we started partnering to make sure we deliver holistic solutions. So we were alluding to a couple of opportunities here to maybe just kind of expand the point. We had talked when we acquired Enercon potentially using our Slovakia facility to become our A&D footprint into Europe. And obviously, that takes a while to get certifications and sharing the drawings and ramping up the skill set. We had to invest in some CapEx. So we did do that.

In conjunction with that, we were able to move some of the products. We had a European customer that wanted to have manufacturing done on the continent. That's where Slovakia came in. So all that effort, we were able to get the customer out to Slovakia. They saw the facility, they saw a signal capacity. Obviously, they know the products from the Enercon and engineering. So it was a very good team effort, both from engineering and operations and Enercon supporting Slovakia to get that facility up and going. And the customer saw it and was thoroughly impressed and we got a couple of POs thereafter.

Now with the first one here, obviously, is the win, this becomes a very great one. On the other opportunity I was talking about basically -- can you hear me, Bobby?

Just curious, is that like, first, is that a specific drone company or...

Bobby, your line is open.

-- making drones second...

I think he's taking a phone call.

I'm not sure what's going on, so no worries. You can all appreciate how this goes. But I'll continue to answer your question. The other opportunity was taking an Enercon box, a power unit, and we put a Cinch component on it on the connector and cabling piece of it. So we're able to do the connectivity there. Now we end up solving obviously a few problems because we had both the power supply and the cable solution. So I think we got very good compliments from the customer. I think more importantly, it showed the team the art of the possible. And more importantly than these 2 wins, to be honest, is we are definitely seeing a more robust collaboration across the organization of ADRS. So when we hear the discussion that they're going through and the opportunities, I think people are significantly much more aware of the whole portfolio and going after it.

I would also take a step further and say that we're seeing some of the A&D customers looking for more hardened industrial solutions. And now with our non-Enercon products, it's able to fill that gap. So we're able to fulfill the customer needs from a few different angles, I would say. But the discussion bottom line was significantly ahead of where it was, I would say, in the recent memory. I don't know if you're back, Bobby, but hopefully that answers your question.

Our next question comes from Christopher Glynn with Oppenheimer.

I'm going to ask a question and try to stick around. Just if there's background noise, just tell me to mute it, please. So just continuing with the defense because it's such a large proportion of your business in such a dynamic area and then you're generating your own dynamism within that. I'd say with these initial kind of greenfield design wins in the defense sector in Europe, is that kind of consistent with the time line you would have anticipated from an integration pathway or maybe pulling ahead a little bit? Just kind of curious of the actuals versus your expectations.

Yes. I'd say maybe a little bit ahead/on time. If you recall back to kind of Q4 2024, when we did do the Enercon acquisition, we said I don't think we're going to see anything probably until at least '26, probably towards the end of '26. So if that is the correct metric, we said back then, here we are roughly in Q1, we're seeing some of the early wins.

I would say what took a little bit longer than anticipated was getting all the certifications and facility approvals. Obviously A&D is a heavily, heavily, heavily regulated market. You can't just be moving things around globally and in e-mails and so on. So as a result of that, the approval process from the local authorities in Slovakia was longer than we anticipated, partially because they're seeing a lot more investment in the overall country.

But putting that aside, we're sitting here, let's call it, April, we had some nice wins. We had customers come through this. So like I said, I would say we're probably slightly ahead of schedule on schedule, somewhere in the middle of that.

Okay. Makes sense. And just given the obvious dynamism in defense procurement and everything and hot regions, these kind of design wins to revenue, are they pretty quick?

I would say a lot of good things about defense, but quick might not be the characterization of the world. I would generally say, right, because also when you win a program, you got to prove it out, they got to do all their testing and then it kind of scales over time. But the key is when there's a lot of investment and, let's say, spotlight and all things defense, you got to make sure you're getting into these things early. So as they scale, you're there.

I would say if we were to paint a very potentially let's say, range, if it's an existing product, I'd say you generally get an initial order, but I would probably say before you start seeing kind of volumes 12 to 18 months. And if it's a brand-new kind of product or technology that's being developed by the customer, then it could be a little bit longer.

But the key is being getting the award side of it, right? Because then you're going to there -- it might go through a couple of iterations along the way. But if it's an existing product or slightly existing, maybe it's a modified, I'd probably say 12 to 18 months before you start seeing some real dollars. That's just the nature of defense design cycles.

Right, right. So the replenishment orders are more kind of the quicker lead time drivers that you're seeing right now?

Correct. And I will also caveat is my earlier commentary on defense, not necessarily the fastest movers, I would say that is probably still true. I would say we are seeing areas where things are moving faster, right? So there it seems to be some buckling of maybe the historical norms. I'd also say there's regional nuances, right? So I think maybe we're seeing some different speeds in Europe versus the U.S., maybe Israel will be the fastest. So I think it's changing a little bit, but I would say, largely speaking, it is a slower moving industry.

Okay. And yes, just a quick check on how we think about the back half. Second quarter is obviously a pretty striking step change upward in the run rates. And I think you had some nice latency to some market trends that's showing through. So I'm not particularly thinking that the second quarter guide has some surge demand kind of factored in. Maybe there's a little onetime, but you talked about almost $30 million sequentially and is just a sliver of that. So is that really just a fundamental step in the -- how the run rates are developing with your end market exposure?

Yes. As Lynn said, we are fortunate to play in a lot of great end markets. So much more than not are in moving in growth mode. And as we closed out the quarter and headed into April, we're just seeing that continued robustness across the portfolio.

I would also say that distribution is one of the things we're talking about. It started off very good in April. So as we look at backlog, customer chatter, outlook and the kind of nature of the world, we think we'd expect a very healthy second half. Obviously, keeping in mind, we do hit with some seasonality in Q3 and Q4, right? So Q3, we hit kind of the European slowdown a little bit throughout the summer months and some Labor Day and 4th of July type events. And then we head into Q4, we start getting into some of the holidays, whether it be Golden Week or some of the ones in Israel and overall holidays. But putting that aside, we expect a very healthy second half and continued strength.

And our next question will come from Greg Palm with Craig-Hallum.

This is Jackson Schroeder on for Greg Palm. I want to start out with -- you guys talked on gross margin a little bit and the cost there, but curious how you're feeling about the levers you're pulling on that. I don't know if there's any kind of timing-related things on that, how we might see that play throughout the year, especially as it relates to new bundled design win in Israel and some of the organic initiatives that you have. So curious if you're doing anything within those new contracts or investments to kind of offset that going forward?

Yes. So I think as we look across the full year of 2026, we're a little bit of a disconnect. As just mathematically, as sales grow, we will have better leverage on our fixed costs within COGS, leading to margin expansion. That's with all other things staying consistent. What we're seeing this year is a rise in input costs, primarily related to material costs. We do have some minimum wage increases around the world.

And we are in an unusually unfavorable, I would say, FX environment where all 3 of the currencies that impact Bel are all moving in the wrong direction for us. So that's the Mexican peso, the Israeli shekel and the Chinese renminbi. So we do have things moving against us as sales are increasing. We are taking actions that are within our control, whether it's through pricing discipline or procurement initiatives or operational efficiencies, but those things take time to put in place. So what we're seeing is probably Q1, Q2, where there's more of a disconnect where we're paying those higher input costs, and we have not yet seeing the benefits of the initiatives that we're doing to offset those, so.

And then I'd also say, as we -- obviously we have done some pricing actions to offset these input costs. One of the things we got to be mindful about is touching the backlog. To some extent, to Lynn's point, we got to work through the backlog. So anything new, we've put price increases through. So we'll start seeing the benefit of that as -- maybe we might see some of that in Q2, but I think about it as Q3, Q4, where we'll start offsetting some of that.

So I think that's a testament to the business here. We got a higher margin given the operational leverage and things we can control. And then the pricing elements that we did put through, we'll start seeing the benefits of those into Q3, Q4.

Got it. Super helpful. And then I also wanted to talk on the new business structure here, strategic realignment. Curious how you're processing that as it goes through the P&L as you look at inorganic -- sorry, organic growth specifically as we lap Enercon, looking at like the geographic breakdown where we can kind of size where we should be seeing growth here by segment, by geography, if you could do that.

Yes. I'd say we haven't given forward guidance on the growth piece of it. We, at the end of the day, are in a very unusual environment. So we haven't given any kind of long-term guidance on that. I think the overall message, we expect -- we've always said we're an end market-driven business, and we obviously want to be a little bit ahead of that. So as we think of the end markets, we think there's robustness in there.

I would also say that when we look at our A&D business, it's been growing for a bunch of quarters sequentially, right, from a growth rate perspective, and we expect some of that to continue. But by definition, right, maybe some things, the hot percentages start to go up. But overall, we expect robustness and continued top line growth. So I'll leave it at that.

On the ITDS side, the data solutions, data centers, AI, kind of all the infrastructure around data generation and transmission and some of the broadband and kind of the other things we've talked about just now, we also expect robustness there. Obviously we have a little bit more nuanced game and strategy in that market where we can make sure we can drive margins and get good return on our business. I would say our industrial technology part of it, which would include some of our transportation and e-mobility type applications and other industrial, I would say that one is a little -- kind of a little bit later to the game, but we're seeing some nice things in that part of the ITDS business. So all in all, we expect the growth piece of it, but I'll leave it at that.

And moving next to Hendi Susanto with Gabelli Funds.

Congrats on strong results. Farouq, I would like to understand more about your data center footprint and post the acquisition of dataMate. Like I think my first question is, is dataMate a growing business? What kind of sales trend?

And then second one is when you talk about data center, AI data center, anything new, any new areas that you want to address, any new product portfolio that you want to develop?

Yes. So maybe the first question on dataMate, yes, we bought it with the expectation of growth. I would say we are a better home for it in terms of the end markets that they play in, the customers they serve and the kind of language that we do use. I would say, in certain of the products, which is their core products, they were the, let's call it, the dominant great reputation in our industry. So we're very excited for that team to join us. And when we look at the development product portfolio and things that they're working on, we're very impressed by. So yes, our expectation is that it grows or else I'm not sure we do the acquisition.

And I think also what's the nice thing about dataMate, it gives us a footprint into manufacturing in the U.S. Obviously the team there, kudos to the dataMate team, it was a carve-out. So we had to relocate facilities, and those things are always bring a certain level of complexity, but we are in the new facility. We're up and going. The team did a great job. It was much more seamless than I probably had anticipated. So thank you to the team there. So that's the expectation of dataMate.

I would say dataMate, there are some customers that they bring that we just haven't had inroads with historically that we hope to kind of land and expand the broader Bel portfolio. We have a much broader sales organization and reach globally that we think we can effectuate their growth. And I'd say more importantly, I think people are very excited internally to have access to that portfolio set and also just great engineering.

The other thing I would say to your other question on the data centers, AI, I mean, look, we have a lot of SKUs that we're always seemingly winning new things. But at the end of the day, the drivers remain the same, which is AI build-out, AI deployment, data center build-out, data center deployment, routers and switches, right? That's kind of where we play. I would say that effectuates our legacy power and magnetics businesses from both sides. So I would say it's pretty broad-based.

And as we've talked about, when we say AI, we think of that as a floor versus ceiling because sometimes we lose visibility to where our products are going. But when we look at the floor, which is the clear AI, we're seeing robustness in that growth. And so that's, let's call it the clear AI, if you will.

And just to add on to that, so within Data Solutions, we've talked in the past how our AI exposure is largely within our power products. So if we isolate Data Solutions just within power products, that increased by $4.8 million or about 27% from Q1 last year to Q1 this year. And much of that was driven by AI.

Yes. And a then Farouq, a number of companies have talked about the possibility of price increases in the second half. You mentioned pricing action. What are the puts and takes in terms of expectation on price increase in general in your industries in the second half?

Yes. I mean, let's be honest, I don't think everybody welcomes us or anybody in the industry with open arms around price increases. But I think there's a general understanding and appreciation for the fact that things are going up. I would also say from an industry-wise, you are correct. It's become normal. I shouldn't say normal, but people have done it, and it's part of the world that we live in. So from our perspective, we need to do the right thing by our investors and make sure that we are passing on cost. Obviously, we try to mitigate where we can. But if not, then we will need to pass that on. And I think you hit on it correctly as we took pricing actions in Q1, but that's on the new business, right?

So obviously, we have backlog, so we don't want to necessarily -- barring it being egregious or something really kind of crazy, generally, you want to update your price sheets and pricing for all the new stuff. So that's why we earlier said we'll start seeing the benefits of that, some of it in Q2, but we think about it more by Q3, Q4.

Got it. And then, Farouq, any insight into market recovery in industrials, especially on customers' and distributors' inventories?

Yes. So we're seeing -- I'd say distribution is a pretty broad -- obviously we touch a lot of end markets and a lot of customers, right? But I would say we've seen pockets of definitely robust strength, and we've seen pockets of still recovery side of things. So as a result of that, when we stitch it all together, we'd say it started getting a little bit more stronger as we can -- headed out of the quarter into April. So I would say we are seeing the strength in distribution, the recovery part of it, which I think is additive to our efforts and to earlier commentary as well.

We'll go next to Theodore O'Neill with Litchfield Hills Research.

Congratulations on the quarter. Two questions for you. The first one, last quarter you talked about weakness in the rail and e-mobility, and I'm wondering if anything has changed there?

And my second question is about the strength in Q1. In the last 20 years, you companies reported a sequential growth in Q1 over Q4 only 3 other times. So what was driving the strength here in this sequential increase?

So I'll cover the initial question first. So on e-mobility and rail, it's, I would say it's relatively more of the same from Q4. I think on the e-mobility side, Q4 was probably the bottom that we saw. There was a slight uptick from Q4 to Q1, but nothing meaningful. Both of those areas, I would call them still depressed in Q1, similar to Q4.

And then what was the other -- I'm sorry, the other part of the question?

The broader industrial.

The sequential increase in Q1 over Q4.

That's really rare.

In general, right. So as our end market mix is changing, so you're correct that historically Q4 to Q1 we always saw a -- or generally saw a decline. And that was largely due to the Chinese New Year holiday and production interruption that we would see in the January, February time frame with our large dependence on the China workforce. As more of our business is becoming aerospace and defense-centric, we are less reliant on China. So it's just having less of an impact. So we're becoming less seasonal as our end market mix shifts more towards A&D.

And we'll take a follow-up question from Bobby Brooks with Northland Capital Markets.

I was just curious on diving a little bit more into the guide. Obviously really nice sequential growth. And even if you back out the benefit from dataMate, we're still looking at like really nice double-digit year-over-year growth. So could you just expand a little bit on the factors that underpin that outlook? And do you have a visibility with the strong bookings already year-to-date, that type of sequential growth can keep occurring in the back half?

Yes. So I'll just answer kind of generally before I turn it over back to Lynn, Bobby. Yes, our backlog continues to build and grow from year-end, strength to strength, Q1 was very healthy. Obviously delivery could be kind of spread out. From our perspective, yes, we're seeing that. We're also seeing the robustness of the funnel opportunity and new opportunities and also just general, let's say, industry chatter with whether it be our customers or distribution partners.

But yes, we put a guide here based on some very good orders that need to be shipped and scheduled to ship in Q2. Obviously, not all of our backlog is for Q2. So we have backlog into Q3 and Q4. Obviously it starts to scale down post Q2, a quarter out roughly. So but when we look at again the forecast, the guidance, the discussions, what we have in the backlog, right, that's how we think about it. That's why we said, yes, we do expect robustness.

Now to the specific level, I think it will be largely kind of very healthy, putting aside some of the seasonality that comes in Q3 and Q4. So we expect to have a very good year. I think I'll kind of leave it at that. Lynn, I don't know if you want anything to add.

Yes. So Bobby, on the question about the Q2 guide, I think if you're comparing Q2 last year to what we're guiding for Q2 this year, the strength is really seen across both segments. Within ITDS, I would point to the Data Solutions portion, which is largely AI-driven. And then within ADRS, it's really commercial air, space, defense. We just have several of our end markets that are running very strong right now. So those are the key drivers, and it is supported by the orders received.

Awesome. That's super helpful color. And then just one last one for me is you guys have done a really good job kind of finding strong acquisition targets. Obviously just the dataMate looks like more of that. Just was curious to get your -- get a feel on capital allocation and your appetite for more M&A moving forward? Or maybe is it a pause just to let the dataMate get the integration, or? Just curious to hear that.

Yes. No pause here. We are always out and active on the M&A front. Obviously, if you were to kind of set aside a little bit the dataMate acquisition, the cash flow even for -- usually Q1 is our biggest cash, let's say, usage of the year, given its bonus and we pay our big IT and insurance and all other kind of good stuff. But putting that aside, I think it was a very good cash flow, and we obviously were able to pay for dataMate.

As we look out to the balance of the year, we expect healthy cash flow generation. We have a good amount of opportunity on the access to capital side of things. So when we look at that married up with internal bandwidth and ability to execute upon an acquisition, we like both of the sides. So we are open for M&A. We're actively looking at M&A. It feels like we always have some kind of discussion going on around M&A. So we are not hitting the pause by any stretch of the imagination. I think what we would need to be mindful of, maybe how messy it is and how much integration and the M&A needs to stand on its own merits. So from our perspective, we're wide open for M&A.

And again, congrats on the great quarter.

And this now concludes our question-and-answer session. I would like to turn the floor back over to Farouq Tuweiq for closing comments.

Yes. Thanks, Kerri, and thank you, everyone, for joining us today. A very important thank you to all of our team globally that delivered this outstanding Q1 and what we think will be a very healthy balance of the year starting out with Q2. So thanks, everybody, and looking forward to speaking again in July.

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines, and have a wonderful day.

Good morning, and welcome to the Bel Fuse Fourth Quarter 2025 Earnings Call.

[Operator Instructions] As a reminder, this call is being recorded. I would now like to turn the call over to Jean Marie Young with Three-part advisers. Please go ahead, Jean.

Thank you, and good morning, everyone. Before we begin, I'd like to remind everybody that during today's conference call, we will make statements relating to our business that will be considered forward-looking statements under federal securities laws, such as statements regarding the company's expected operating and financial performance for future periods, including guidance for future periods in 2026. These statements are based on the company's current expectations and reflects the company's views only as of today and should not be considered representative of the company's views as of any subsequent date.

The company disclaims any obligation to update any forward-looking statements or outlook. Actual results for future periods may differ materially from those projected by these forward-looking statements due to a number of risks, uncertainties and other factors. These material risks are summarized in the press release that we issued after market close yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause actual results to differ materially from our expectations as discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and our quarterly reports and other documents that we have filed or may file with the SEC from time to time. We may also discuss non-GAAP results during this call, and reconciliations of our GAAP results to non-GAAP results have been included in our press release. Our press release and our SEC filings are all available at the IR section of our website.

Joining me today on the call is Farouq Tuweiq, President and CEO; and Lynn Hutkin, CFO.

With that, I'd like to turn the call over to Farouq. Farouq?

Thank you, Jean, and good morning, everyone. We appreciate you joining our call today.

I want to begin by expressing a big thank you to our global team for making customer service and meeting demand their top priorities and for delivering innovative technologies as a key partner to our customers. As a result, 2025 was a milestone year for Bell, with record revenue and EBITDA. We delivered net sales of $675.5 million for the full year, a 26.3% increase over 2024 and achieved a record GAP and non-GAAP EPS. We Fourth quarter sales reached $175.9 million, up 17.4% year-over-year. Our gross margins expanded to 39.1% for the year, reflecting strong execution and operational discipline.

Aerospace and defense, including space, continued to be strong drivers for us in 2025. For the full year, A&D accounted for 38% of our consolidated sales with 28% from defense and 10% from commercial aerospace. Recovery in the networking end market and growth in AI applications also contributed to higher sales in 2025. Order volumes remained strong across multiple end markets throughout the year, resulting in the full year book-to-bill ratio of 1.1. We have seen continued improvement and strength heading into Q1. This sustained momentum in incoming orders highlights a healthy demand environment across our end markets and positions us well as we move into 2026.

Our team delivered these record results despite headwinds from material pricing, particularly gold, copper and PCBs and unfavorable FX movements in the peso, renminbi and shekel. We're actively monitoring these factors and have and will continue to take pricing actions to mitigate incremental cost, ensuring continued margin strength. Operationally, we successfully completed the closure of our China facility in Q4, transitioning operations to a third-party supplier without interruption to the business.

This move is part of our ongoing efforts to optimize our global footprint and drive cost efficiencies. We also made significant progress in strengthening our balance sheet, paying down our debt by $90 million during 2025. We -- this has created additional capacity and flexibility for future investments and potential acquisitions as we continue to pursue growth opportunities.

Looking ahead to 2026, we anticipate continued growth in aerospace, defense, space and AI, the same revenue drivers that have benefited Bell over the past few quarters. Additionally, we have seen positive shift in sales across the networking, consumer premise wiring markets as well as through our distribution channel. The rebound in these areas are expected to continue into 2026. We also foresee increased raw material input costs and a weaker USD, which will require us to proactively manage pricing and pass costs along where appropriate.

Our pipeline for M&A activity remains active, and we are excited about several opportunities currently in various stages of evaluation. We anticipate a better backdrop in terms of M&A opportunities as the market noise settles down a bit in 2026. As announced a few weeks ago, we're excited to welcome Tom Smelker to our executive team. Tom joins us from Mercury Systems, bringing valuable experience and a fresh perspective in aerospace and defense. His leadership will help us better align our organization with changing customer needs and industry trends.

As we continue to evolve, we are reviewing our segment structures to ensure we're well positioned for future growth. With aerospace and defense now representing a significant portion of our business, we see opportunities to further tailor our leadership and strategy to the unique demands of these markets.

Before turning the call over to Lynn here, I would like to take a moment to recognize Pete Bittner, President of our Connectivity Solutions business, who will be retiring in April after 23 years with Bell. Pete has been instrumental in shaping and growing this segment and leaving it in the great conditions as he pursues his next chapter, and we thank him for his many meaningful contributions. We wish you great luck, and you'll be missed, but will surely enjoy his time with his wife and family.

I'd also like to take a moment to recognize Dan Bernstein, who transitioned out of the CEO role in May 2025. This last year has been 1 of significant transition for Bell, and I want to sincerely thank Dan for making it a seamless one. Our business transformation, which began years ago under Dan's leadership, laid a strong foundation for the company's continued success. His vision and commitment to Bell's growth have positioned us well for the future, and we're grateful for the guidance and dedication. On behalf of the entire organization, thank you, Dan, for your outstanding contributions and for setting Bel up for success.

With that, I'll turn the call over to Lynn to run through the financial highlights from the quarter and provide color on the outlook for Q1 2026. Lynn?

Thank you, Farouqu. From a financial standpoint, we had another strong quarter and year with continued margin expansion and solid sales growth across all segments. Fourth quarter 2025 sales were $175.9 million, up 17.4% from the same quarter last year. Full year 2025 sales totaled $675.5 million. a 26.3% increase over 2024. On an organic basis, sales grew by $41.5 million or 7.8% over 2024. All 3 product segments delivered organic growth for the quarter, demonstrating the strength of our diversified portfolio. Profitability improved alongside sales with gross margin rising to 39.4% and Q4 25, up from 37.5% in Q4 '24. I -- for the full year 2025, gross margin was 39.1% compared to 37.8% in 2024. This margin expansion was driven by improved absorption of fixed costs in our factories due to higher sales volumes and by strong execution within each segment, maintaining discipline around SKU level profitability. These results highlight our ability to drive value through operational efficiency and strategic focus.

Now turning to our product groups. Power Solutions and Protection delivered another exceptional quarter with sales reaching $92.5 million in Q4 '25, an increase of 18.5% compared to the fourth quarter of last year. The sales growth in the Power Solutions segment was driven by several key end markets, including a $1.5 million increase in sales of our front-end power products, serving the network networking end market and Q4 '25 compared to Q4 last year. Fourth quarter sales into AI-specific customers reached $4 million in Q4 25 up from the $3.3 million in Q4 '24. Fuse product sales were up by $1.4 million in Q4 '25, a 31% increase from Q4 '24.

Sales into consumer applications increased by $1.8 million in the current quarter, up 32% from Q4 '24. And just to note, in our Power segment, this is also where we had the acquisition last year. So there was some organic growth on the defense side as well. These areas of growth were partially offset by a decrease in sales of our rail products by $4 million and e-mobility sales were down $1.1 million as compared to Q4 '24. The gross margin for the Power segment was 44.5% for the fourth quarter of 2025, representing a 390 basis point improvement from Q4 '24.

This improvement was primarily driven by higher power sales into the aerospace and defense end markets, a favorable shift in product mix and better absorption of fixed costs at our factories. Our Connectivity Solutions group achieved sales growth of 15.1% during the fourth quarter of 2025 as it reached $60.5 million compared to Q4 '24. This improvement was due to the continued strong performance in commercial aerospace applications, where sales totaled $18.2 million, an increase of $3.8 million or 26% year-over-year. Sales into space applications amounted to $2.6 million in Q4 '25, up 53% from Q4 '24.

Connectivity sales through the distribution channel were up $3.8 million or 20% versus Q4 '24, primarily due to shipments into the defense end market through the distribution channel. Profitability within the Connectivity segment continued to improve with gross margin for the group rising to 37.2% in Q4 '25 from 36.6% in Q4 '24. This margin expansion reflects the benefits of operational efficiencies achieved through improved revenue, a more favorable product mix and facility consolidations completed last year. These positive factors were partially offset by minimum wage increases in Mexico.

Lastly, our Magnetic Solutions group sales delivered a solid quarter with sales reaching $22.9 million in Q4 '25, a 19.1% increase compared to Q4 '24. This performance was primarily driven by higher shipments to a major networking customer. Gross margin for the group was 27.3% in Q4 '25 and down from 29.1% in Q4 '24. This margin differential was due to minimum wage increases in China, an increase in material costs, primarily in gold and PCBs and unfavorable foreign exchange impacts related to the renminbi.

Research and development expenses totaled $8 million in Q4 '25 in representing an increase of $1.1 million compared to Q4 '24. This increase was primarily attributable to the inclusion of Entercom's R&D costs, which amounted to an incremental increase of $1 million during Q4 '25. We anticipate that R&D expenses in future quarters will generally remain consistent with the Q4 '25 level as we continue to invest in new technologies and solutions to support our customers and drive long-term growth.

Selling, general and administrative expenses for the fourth quarter of 2025 and were $32.6 million, down $2.2 million from the $34.8 million in Q4 '24. -- primarily driven by lower acquisition-related legal and professional fees in 2025 compared to 2024. Turning to our balance sheet and cash flow. We closed the year with $57.8 million in cash, down $10.5 million from last year, primarily driven by our proactive efforts to strengthen our balance sheet, including paying down $90 million in long-term debt, resulting in $197.5 million of total debt outstanding at December 31, 2025.

Additionally, we made $3.5 million in dividend payments and we invested $12 million in capital expenditures to support growth and efficiency initiatives. These outflows were partially offset by $7.8 million in proceeds from property sales, and $1 million from the sale of held to mature securities earlier in the year. During the full year 2025, we generated cash flows from operations of $80.6 million. Taking into account our swap agreements, the weighted average interest rate on our debt balance at December 31, 2025, was 4.4%.

Looking ahead to the first quarter of 2026, we continue to see strength across all 3 segments. Historically, our first quarter tends to be our lowest sales quarter of the year, given the impacts of the Lunar New Year holiday in China. In light of this historical trend and based on the information available as of today, we expect Q1 26 sales to be in the range of $165 million to $180 million. Gross margin is expected to be in the range of 37% to 39% and given anticipated headwinds related to higher material costs and the unfavorable FX environment we are in.

Overall, our consistent performance strategic investments and operational excellence have positioned Bel for continued success. We remain committed to driving shareholder value, innovating for our customers and capitalizing on growth opportunities across our markets.

I'd now like to turn the call back to the operator to open the call for questions.

[Operator Instructions] The first question is from Bobby Brooks from Northland Capital Markets.

So I wanted to touch on kind of sales initiatives moving forward. So you guys brought in the new head of sales about a year ago, right? And I'd just be curious to hear where he sees the most interesting opportunities for growth. Obviously, for Roop, when you initially joined as CFO a handful of years ago, you had a massive shift in the margin profile of the company, which A lot of that was sort of low. A lot of that was sort of like low-hanging fruit that you targeted. So I'm just curious to hear if that sort of same scenario. If Ooma has seen that sort of same scenario and again, like what he sees as the largest opportunities to go after.

Yes. Thanks, Bobby, and good to speak with you here. I think that's a pretty nuanced question. As a reminder, we are largely in a medium- to long-term design cycle businesses, right? So as we think about influence, and we think about A&D, I'd probably suggest the largest part of E&D for 2026 is going to be simply receiving orders from the customers as they get funding and deployment. So if we were to think about sitting early on in the year here about new wins and when they get funding, you're at least a year out probably 1 to 2 years before you monetize them. And some of our shorter design cycle businesses on the other end, I would say something like fuses you could probably see a win a couple of quarters out, and that translate into some sales of some of our consumer business.

So we are a long-cycle design business. There's no quick claims here. We sell technology. We want to get in with the customer. We want to do the hard stuff. -- and therefore, that does take a while. If we look at the past few quarters on some of the benefits I have in there, that has been a reflection of the work that the team has done at a global level. within the various businesses, right? So I would suggest that the wins and the performance that was probably not much due to sales efforts that happened in Q4, right? This is stuff that probably happened early on in 2026. So we are seeing the benefits of the global team folks in doubling down. When we look across the business, we have new wins across probably all of our end markets, maybe a little bit less so in places like e-mobility or maybe some of our, I'd say, rail is kind of a little bit of a slow year.

But I would say more often than not, we always have new wins. And when we think about the funneling process, right, we want to make sure we're going after a robust set of opportunities that are good opportunities and try to convert them to sales. And that process, we started a while back. Now that's not to suggest that we don't have work to do. On the last call, we talked about CRM implementation in Q4. We did 3 -- a little over 3 dozen worth of contracts with our reps in the U.S. to really lean into new opportunities.

So we're trying to move the whole system forward from compensation structures to software and data to a shift and it's been happening, right? It's evolutionary. So we've seen the wins. Where is it going to come from? I mean we think probably there's a lot of money going into A&D data centers, AI, a lot of obvious interest going in there. But quite frankly, our consumer business did very good last year. So I think what we like about us is we touch a lot of end markets, and we like the way they're looking today heading in 2026, a little bit more maybe than early '25 or '24.

So a long answer to your I just want to caution, we're not a quick turn business, and we're trying to sell more design-in type work or modified solutions versus just purely off-the-shelf stuff.

Absolutely. Really appreciate that detail color for. And then -- maybe just turn into the 1Q guide, very, very impressive, but just wanted to maybe unpack that a little bit more and maybe hoping to get a little bit more granular on the expectations for growth across the 3 segments?

Sure, Bobby. So as we look to the first quarter, and I guess I'll compare it to this recent Q4 that just ended here. We're seeing a lot of the same areas of strength across all 3 segments. So not seeing much in the way of significant shifts or changes from Q4 to Q1. I think the only variable in there is the Lunar New Year holiday, which impacts primarily magnetics and then to a lesser extent, power. So those are the areas where we may see a little bit of softness from Q4 to Q1. But Other than that factor, everything is pretty similar to the Q4 drivers.

Got it. I appreciate the color there. Congrats on the great quarter.

The next question is from Christopher Glynn from Oppenheimer & Company.

I just want to build on Bobby's question about developing the commercial funnel. So you mentioned focus on designing and modified by modified burs off-shelf is how you're developing the funnel that makes sense. We've heard that. Curious if you're noting any traction in win rates for us historical as you mature this -- these strategies.

I think we're doing a better job at defining what a win is and how we want it to be at certain levels of margin. The other thing I think we are moving more towards 2026, and we talked about last call, is we want to really try to bring the whole Bel portfolio to our customers. I think historically, we've been really more focused around selling specific products like fuse or a connector power supply. And we do need to do a better job at doing a little bit more systems type sales to our customers. Now this is a little bit of a longer journey. .

But the idea there is we want to get more alignment to the customer, solve more of their problems and challenges and really be a little bit more of a solutions address the difficult things for our customers. So it's not just simply about more shots on goal, which we are seeing. We're seeing better shots on goal, but we still want to continue to evolve to higher content on goal. So Yes, we're seeing better also the markets a little bit better place, right, so which creates more opportunity for us. I think the team also remember, we spoke on the last call, where we started creating new internal groups and structures to align to that.

So for example, we created a key accounts group, right, which we have not had that most of the time it was kind of sitting inside the BUs, now we want to have a more Bel focused key account groups that bring all of our products to the customers because we do have a lot of SKUs. Same thing on the business development efforts. We're [indiscernible] the teams around end markets as we think about products and directions. So I would also argue customer service is an extremely important part of this as we create an easier user experience for our customers. And we just have a lot of different e-mail addresses to customers in different forms and everything and the like or different pricing list to our distribution partners.

So I think calling these things out to not underemphasize that there is a robustness in what we're doing that needs for you a pervasive in our holistic approach to the market. So the short answer is yes, there, Chris, but it's also more than just trying to get more shots on goal.

Great. That was great color, for. And then on the AI customer base, you mentioned that as one of the continued drivers of growth next year. You've often described it as being in early stage. I think with single source to well funded more start-ups for us the headline, big 3 or 4. Just curious if any of those customers are potentially positioning for adoption curve to their technology where you can cotail, not necessarily first half of '26, but more conceptually.

Yes. I think the answer is yes in short. The body language from our customers, I'd say, across the networking side. But specific to your question around AI, yes, and that is obviously reflected based on the bookings that came in towards the end of the year last year, the discussions that are ongoing with our customers and obviously, the ultimate outlook that we put out there in the quarter.

So the answer is yes, we're seeing the positive momentum scaling and continuing to move forward. And also, let's not forget, there's a networking set of customers that bundle our product into their solutions that ultimately make it to folks like hyperscalers, right? So when we think about networking, it is obviously AI, and that is not an insignificant number for us, which is nice to see the team's efforts pay off there, but also networking side is just as important because we do touch AI in a couple of different ways, right?

Yes. Understood. And then just defense, just wanted to clarify. I get a lot of questions about the mix. I think you're pretty broad-based rotor, fixed wing, munitions, comms, radars, maybe even just curious if all those categories, if that is accurate, where the weightings are.

Yes, in short.

Okay. Okay. Great. Understood. I understand it...

Yes, I would say we want to be careful with kind of talking about at our side here, right? But all the kind of mean -- we're on all the major programs and some not major programs. So it's a very diversified portfolio anywhere to the things that you called out, munitions, things that fly, right? And we're doing more ground obviously, space is a little bit tangible to that as well. But we cover encryption communication, right? So all the things that you talked about, we probably touch it.

Great. And last one, just a housekeeping -- any thoughts on share class consolidation. I think 1 of your holders had generated a headline.

Yes. I would say I think from the gist of it, the -- our shareholder structure is a little bit more nuanced from the perspective of the economic differential between the 2 shares, right, versus just a vote, no vote. So that's one. I would say, as an appropriate due course, we'll have a company response and views on that at the appropriate time. I don't want to speak on the behalf of the board, but at the appropriate time, we'll address that. And also we -- I think the -- what we're trying to do here, Chris, and we've really been at this for the last handful of years here, is we want to our fiduciary dairies to serve the best interest of all of our shareholders, As and the Bs. And as we build a company that's set up for the future, with good performance and investing in our employees and our customers, ultimately, that's kind of what moves the needle. So I just wonder, we're very aware of the fiduciary duty, but I think the Board at the appropriate time, will have a response. That's a little more formal to this.

The next question is from Theodore O'Neill from Litchfield Hills Research.

Congratulations on the good quarter. .

Thank you, Theo.

So are you guys seeing any impact from the spike in prices on memory? .

I was going to say, our customers, I would say, largely are the ones that feel it. We not directly are impacted by that. Obviously, we have our other let's say, spike in prices that we're dealing with, like gold and copper we spoke about. But on the memory specifically, it's more, I'd say our customers are influenced by that.

Okay. And on the gold, copper and print circuit board side and the weaker dollar, do you have the ability to hedge some of those? Or do you pass the pricing on? How do you adjust for that?

Yes, that's a good point. Today, we hedge our FX exposure from a raw material perspective, we're in the business of providing solutions to our customers and technology. So we want to focus on what we're good at. We're not running a prop desk care trying to hedge everything, right? So I think our approach has been we want to try to do our best to mitigate and offset price increases, but to the ability -- and work with our customers to the extent that we can't. We, unfortunately, have to pass that along, and I think that's not unique to us and really kind of in line with the supply chain behavior. But ultimately, we want to be great partners to the extent we can offset it. Sometimes we will find alternative sources. We want to be a solutions provider really to our partners. But in cases we can't, we need to do the unfortunate decision of passing it along.

Okay. And finally, on the Aerospace side, do you have any exposure to the drone market.

I would say we generally do, yes, I think the drill market is going through some interesting things, right, where there is, let's call it, more consumer that tends to get retrofitted as we're seeing out in the world in, like Ukraine. That's not really our market. We're more in the military kind of U.S. primes and some of the European and Israeli OEMs, the stuff they manufacture. So we're not in the, let's say, drones that you and I are maybe buying or in the more sophisticated drone game. .

The next question is from Greg Palm from Craig-Hallum Capital Group.

This is Dany Egerton for Greg today. Maybe just hitting again on A&D and maybe unpacking how you saw that develop in the quarter maybe between Enercon and Corbel and maybe what you saw in some cross-sell business. And then obviously, we know kind of about the increased spend. But as you look into 2026 here, what gets you excited about the growth in this business? And what kind of visibility do you have here?

Yes. So Danny, I'll take the first part of that question. So the growth that we saw when we talk about defense, it's both in our legacy singe business and through Enercon -- we definitely saw growth in the Enercon business. As we look at the business, I think it's important to also keep in mind what we sell through our distribution channel. So there are direct sales and then there are sales through distribution, which we don't really break out into those end markets today. But we did see, as we mentioned in the commentary, we did see a nice increase in distribution that related to growth in defense for that fine business. So I would say that it was pretty split between the 2. So both Sinch and Enercon had robust growth in defense in Q4.

One thing we would just add [indiscernible] 6, right? We're seeing the build rates on the plan side continue to increase and head in the right direction. Also a lot of the programs around munitions and given kind of what's going on in the world, these are well-funded programs. So we think there'll be a prioritization to make sure those get to fruition and the finish line. So as we look at the amalgamation of that, we feel pretty good as to where we stand compared to what's funded out there. .

Okay. No, that's very helpful. Then maybe if I can just touch on gross margin here, which was pretty strong in the quarter, especially in power. I know you mentioned some of those headwinds with FX and input costs, but any way to quantify those? And then as we kind of have that push-pull between input costs and passing on price in any way to think about potential margin expansion in '26?

Yes. I think as we look at the fourth quarter, I think we thought that we may have had some additional FX headwinds in Q4. But we have had hedging programs in place, as Bruce mentioned. So we're still seeing the benefits of those prior hedging programs come through the current period. So as we look we do foresee some margin pressure there on FX. I mean if you look at the peso rent and chuckle, they're all moving in an unfavorable direction. And we do hedge probably half of that, but that's going to start rolling off -- so we definitely see pressures there. And then even on the material side, that's something that -- it takes time to ultimately come through our numbers, right, as we're buying raw materials today, that's something that will flow through our financials at a later date. So we do think that we will see margin pressures in '26. And this is why we're really being mindful of pricing actions that we may need to take with customers.

And 1 thing to just kind of flag in the pricing, right? It's a little bit of -- it's not as simple as we wake up and raise our prices, right? There's a little bit of cadence to that. So some of the contemplations are do you reprice the backlog, do you come up with an updated pricing list for distribution, which takes, I think, something like 30 days before it's effective. So there's a little bit of a time issue. The other thing I would say, and we've talked about this in the past, while our margins are great, and we'll always continue to try and push margin expansion, we have pivoted from a margin gain to a growth game. So we need to make sure that we are winning our fair share of business and opportunities out there that we can get in on. And to enable that, there is some potential investment that we've been doing a little bit around the go-to-market, the systems piece of it and the people piece of it.

So I just want to make sure -- and I know the margin gets a lot of discussions on the Bell earnings. And obviously, we're very proud of our margins. But we are hitting some headwinds that we've got to make sure that we have in the middle of this kind of growth that's coming that we're positioned appropriately for not picking up too much.

The next question is from Luke Junk from Baird.

Just wanted to double click on what we've been talking about in terms of what you've been doing to realign the sales force really thinking more about how do you attack markets or key customers, but something that you said in the script, kind of caught my attention in -- with oncoming in to head the connectivity business, that there might be some like opportunities even further down in the organization. Am I hearing that right in terms of aligning operations, maybe even from a, let's say, manufacturing footprint to better attack some of these discrete opportunities?

Thanks for the question there. Look, I would say a couple of things to maybe answer it from the back way of your question here. So on the operational side, we I can't remember 7, 8 facilities. We've done a lot. So what's going to dictate facility moves is the current state of the business and the customer demand, right? We pride ourselves and were our customers. So obviously, for a while, there was a lot of discussion around China and India than that froze. If that kind of starts up for some people at a startup, we were going to move to some of our products to India.

So I would say, given the geopolitical world that we live in and the realignment of localization of supply chains, we are in these, let's say, active discussions, right? But in terms of Bel as a stand-alone basis in putting a political supply chains, our facilities are pretty good. So we have to react to the fundamentals of the market. I think our biggest opportunity here is around the go-to-market and sales piece of it. I think maybe just to highlight on moving a facility for us is a big task, and it's not simply is just moving equipment, building some buffer supply, moving equipment from place A to place B., you need to set up a lot of kind of the legal structures. And if you're talking about A&D, there's a lot of regulatory hurdles to jump through. As we're setting up, for example, our Slovakia factory to be more A&D facing to the European markets we're living through the complexity and spider web of getting all the clearances and certifications on defense weaponry control.

In addition to that, customers usually always have to want to come up to your facility and do audits and usually there's feedback and that takes a whole issue. So it's not easy. We don't take these decisions on moving facilities lightly. So we need our customer market changing dynamics to force our hand on a facility move. Go-to-market our products today that we have that can be bundled together that can be brought to bear as we talked about, the key accounts group earlier, that is our biggest opportunity at hand.

And then operations, there's always things to be done, sure. But I think we've done so many of them that we need to live in growth land. And if we're not going to move a facility unless it's going to help us grow, right?

Yes. That's super helpful. Near term, just curious from a guidance standpoint, New Year, obviously, having a seasonal impact as we've normally seen the business, but it's pretty late this year. I think it's almost as late as it can be just from a calendar standpoint. Would you normally have maybe a little better feel for that seasonal impact in the fiscal year? Is there any conservatism just because of your timing and the guidance?

I think as you know, Luke, in public land, right, everybody is always trying to figure out the optimal way to guide the Street. Our perspective from guidance is we want to land in a range and we build it to around the midpoint, right? So we're not trying to -- we don't build it to the high end point of our range and hope to guide we go over a range. We build it to the midpoint. -- right, to allow for some room for shifting from quarter-to-quarter. Obviously, we're in A&D, that tends to be kind of sometimes funny business. If we allow for some overordering fuses, yes, given how late we are in the quarter, talking about Q4 right here, we are roughly in the back of February, yes, we have better visibility.

But to put your comment on question specifically about Chinese New Year, it's 2 weeks off, right? Everybody can trust down. It's not just us. It's all the CNs, it's all our customers in the Far East, right? So as a result of that, everybody goes pencils down for 2 weeks. And when they come back, it doesn't just turn on a dime. Usually, there's a week of, let's say, tough start time getting back into the groove, getting things going. So you're probably talking is somewhere between 2 to 3 weeks loss on a 3-month period, all right? That's not insignificant.

So I wouldn't say conservatism. I would say we wanted to do what we say we're going to do and we're in our best guess. So we're not trying to be conservative on that.

Fair enough. And then I just want to zoom out for my last question. The Power side of networking. Obviously, you've got some exposure there. I mean, the higher levels of power that power these more capable chips really becoming quite apparent in that world right now. And I'm just wondering to what extent you're seeing any pull-through from a design cycle point of view for high-voltage components from either your Tier 1 customers or your direct customers in that world? And especially if there's any IP that might be leverageable either, I think, rail or mobility, both have some high-voltage IP that might be interesting.

Yes, I would just say -- I think there's a couple of things to unpack there, right? Specifically the AI networking world, it's always going to go to more high power, higher density, less energy right, more efficiency. So that's a constant theme over ever. Now we are seeing, I would say, some new designs coming in relatively maybe in a short period of time, maybe back of the day, it was a 3- to 4-year device cycle, things are coming in a little bit sooner. So we are, for example, selling some products -- but we're already working on the next gen stuff.

So that has happened a little bit quicker. I will also say, generally, right, we do have exceptions, but we're not really an IP business, right? We R&D to fix or address a problem. And then what we want to do is we want to -- we do a pretty good job at this inside of each of our business units is how do we leverage what we've developed for somebody to either standardize it or select modifications and then we extend the recap products, whether we do distribution or other similar customers.

The other thing we are seeing, which is actually interesting in some of our actual e-mobility products, given the nature of those products, we are starting to see some military folks looking at, let's say, high-end products and services but not quite military grades. So kind of I guess, we're calling semi military being used. So we are seeing that extension of the R&D effort that has gone to e-mobility into other markets. Now we haven't won anything yet, but we're feeling good about potential wins coming if that makes. So that's how we extend our R&D dollars. We're not looking to reinvent the world every time.

The next question is from Jacob Parsons from Needham & Company.

I'm just asking a question on behalf of Jim Ricchiuti. So we've been kind of hearing a better tone in the commercial aerospace market. Really, particularly with the leading domestic players in the marketplace. So how are you guys thinking about this area of the business in 2026 and potential for better growth within the Connectivity Solutions area.

So as it relates to commercial air specifically, right? I mean for better or for worse, we are -- from an OEM perspective are attached to the hit to our largest North American customer. And the way that we're going to make more money and to be clear, we service that customer both our Connectivity and our Power A&D business. So the way we're going to grow revenue is a direct correlation to increase build rates right? And we've lived the ugly side of that when there was kind of the all the union negotiation. If you recall, I think it was Q4 last year, there was a shutdown at kind of threw our business a little out of whack or back in the days of the grounding of the MAX.

So we are going to see how that correlates to the build right. So what we always point close to is, I think they're very public about build rates and what's going to get approved and not approved. So take a view on that, and that should have a direct correlation back to us. On the Connectivity business, so not the Power business, there is an element to it, right? So as we think about MRO cycle, I can think about are people on the planes flying being consumed and miles are being put on these planes. And up to every so often, those mine to be kind of retrofitted or MRO, right? So we think flights and when we look at the earnings of the -- some of the flight operators out there, people are flying and planes are moving. So we feel both good on the OEM and MRO side.

Yes. That's all super, super helpful. And if I can just kind of get 1 more in. So I'm curious, how's the book-to-bill ratio varied much by market vertical and which areas of the business have you guys seen the biggest changes relative to last quarter?

Yes. So I think on the book-to-bill side, Farouq had mentioned we were at 1.1% for the full year. I think our book-to-bill has strengthened as the year progressed. In Q4, our book-to-bill was 1.3. And I would say that strength was seen across all 3 product segments. So there's not 1 segment that is really high, while someone else is below 1. All 3 are very strong in Q4.

The next question is from Hendi Susanto from Gabelli Funds.

I have several questions. Park, can you help unpack more details on your AI opportunities in terms of end products or devices to help us build better ideas. Some products that come to mind are like power modules, network switches, traditional compute, AI surfaces and optical networking. Perhaps you can help us build better ideas of your devices?

Yes. I would say, Hendi, we want to be a little bit careful here, but our products are going to are more around the power side of the business, and the Bel Power is kind of where it's at. I would say from a direct where we know things are going for AI. Obviously, our magnetics business is also beneficiary from the networking guys and then they're kind of the RJ-45s kind of what we call magnetic solutions, which is really more maybe a potential interconnect product. So that's how we go at it largely. Our connectivity business doesn't do too much into those end markets given that we're really more low volume, medium volume harsh environment applications in that product that coupled with it being more copper based. So that's how we kind of go at the AI piece of it.

Generally, we do some stuff with the hyperscalers, but that's not really our focus market. So if you remember, we got in trouble there back in 2020. So we want to make sure we pick slots where technology and service matters versus just a copy product with a race to the bottom on pricing.

Yes. And if I may quickly check if there are products that may carry some opportunity for physical AI or humanoid robots?

I think the humanoid market is still getting settled. Today, it's definitely not a big dollar amount. It's very much R&D-centric. I think there's a question around from a humanoids perspective, is that ultimately a consumer product like auto, or is that going to be a technology play? I still think we're far out from mass production. But today, it has not been a discussion level for us. That's a dominant one.

Okay. And then what are your latest view and outlook on pockets of market recovery and inventory rebuild activities among customers?

I don't think we -- right. I think the inventory rebuild is kind of stacking up the shelf really on the customers. I think given that everybody, I'd say, went through a pretty difficult lesson back in '23 and '24 and overlaid with the tariff geopolitical world we're in, I'd say people are generally ordering more to demand versus building up the shelf. And quite frankly, I think that's probably a good thing in the sense, right? If you want to be able to shelf then you've got to deal with the hangover.

So today, we feel largely and I'm sure there's exceptions. Obviously, we touch a lot of markets. But largely, we feel to shift to demand versus ship to put on a shelf and build a buffer stock because obviously, with tariffs, if things move, the things that you put on the shelf all of a sudden really changed pretty quickly. So I think there's a little bit of nervousness around that from our customer perspective.

Yes. And then, Lynn, I have a question on seasonality of sales in aerospace and defense. Is there a -- like if I look at Enercon cells, I'm trying to figure out what seasonality we need to model? And then plus considering that you are -- you may also like winning like more design. So what kind of seasonality can we expect in 2026 in aerospace and defense?

I'd say generally, aerospace and defense is not a seasonal business where we play, right? North America, Israel, Europe, right? I would say it's really more around sometimes they move for a core to the other when things get funding, right? That's kind of where the choppiest comes from. But it's not really a seasonal to seasonal play, I would say, if there was a seasonality I mean not to the Enercom business, obviously, our connector business. But there is some less working days generally in Q4 just with the holidays and Thanksgiving but -- and some of the Jewish holidays in October. But other than that, I would not say it's a seasonal business.

Okay. And then I have a question on capital allocation and debt payment, especially following the $90 million of debt payment in 2025. What is your playbook for capital allocation and debt payment?

Yes, Go ahead, Lynn. .

So I think as we look at capital allocation, Priority #1 is reinvesting in the business through CapEx. We have regular weight dividends that we continue to pay. Barring anything on the M&A front, debt paydown is where it would be. And I think from a dollar perspective, the last couple of quarters, it's -- they've been robust debt paydowns to the tune of, call it, between $20 million and $30 million a quarter. and we would look to continue doing that going forward. Now keep in mind, Q1 tends to be a cash -- heavy cash utilization quarter just with our annual bonus payment, insurance payments, things like that. So I expect Q1 would be on the lower side. But as we look to Q2, 3, 4, that would be around the level of debt paydown, assuming there isn't anything on the M&A front.

The next question is from Bobby Brooks from Northland Capital Markets.

So just wanted to circle back and ask specifically kind of on Enercon and cross-selling opportunities there. Obviously, obviously, you mentioned this spend more specifically with aerospace and defense, these are long-cycle programs, right? So these aren't happening in 1 quarter and seeing the outcome the next. But just curious to hear if maybe that's still on the back burner just because demand was so robust in 2025 and the segments kind of just had a deal with the demand that they were seeing. So just kind of curious to hear more on that.

Yes. No back burners here. Yes, we understand we've got to prioritize. But also remember, we have to live in new wins, land, right, because we can't influence when orders come from our customers, right? When the program gets funding, can they sell it, right? What does the military budgets look like? And then you get an order. The thing that we can influence is going after new programs and aligning ourselves to new wins and new design cycles, right? So as we go after these, we are doing a better job at collaborating I think we're doing a better job at ensuring that both the connectivity and the power side of the house understand what they're going after, weekly calls and putting in some incentives along the way, we can do a little bit better job, but that process is in place. .

And what's interesting is we're definitely seeing some of this, let's say, go to market. So there was some -- a couple of interesting quotes in Israel, where I was lining to earn from our e-mobility products that there was a need locally in Israel that our team flagged, but they didn't need quite the, let's say, high levelness of the military stuff but they need really complex products, which are e-mobility and Slovakia teams do a great job at. So we're trying to quote those into Israel. So I classify that as kind of a real-time opportunity that we're chasing. And we've seen a few of those as well.

Another example of this is there was a cabling need at our let's say, U.S. Enercom business, which our competivity Group can assist with. So they're working on kind of getting all that qualified and approved normally, in this case, Entercom had to go outside and deal with others, but we're able to capture more of this. And so the opportunities are real but in the spirit of greeting is, we'd always love to do more. But I think as we're getting more bids out there now at a joint level, we're seeing some nice traction. Hopefully, we continue to do that and kick that to gear a little bit more.

There are no further questions at this time. I would like to turn the floor back over to Farouq Tuweiq for closing comments. .

Thank you for that. Again, I could not be more proud of the team for the great year. Again, also thank you for all of you guys joining the call today, taking interest in what we think is a very, very exciting time for Bel. So thank you, and look forward to speaking to you in a couple of months from now. .

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Ladies and gentlemen, good morning, and welcome to the Bel Fuse Inc. Third Quarter 2025 Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the call over to Jean Marie Young with Three Part Advisors. Please go ahead.

Thank you, and good morning, everyone.

Before we begin, I'd like to remind everyone that during today's conference call, we will make statements relating to our business that will be considered forward-looking statements under federal securities laws, such as statements regarding the company's expected operating and financial performance for future periods, including guidance for future periods in 2025. These statements are based on the company's current expectations and reflect the company's views only as of today and should not be considered representative of the company's views as of any subsequent date. The company disclaims any obligation to update any forward-looking statements or outlook.

Actual results for future periods may differ materially from those projected by these forward-looking statements due to a number of risks, uncertainties and other factors. These material risks are summarized in the press release that we issued after market close yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause actual results to differ materially from our expectations is discussed in our filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2024, and our quarterly reports and other documents that we have filed or may file with the SEC from time to time.

We may also discuss non-GAAP results during this call, and reconciliations of our GAAP results to non-GAAP results have been included in our press release. Our press release and our SEC filings are all available at the IR section of our website.

Joining me today on the call is Farouq Tuweiq, President and CEO; and Lynn Hutkin, CFO.

With that, I'd like to turn the call over to Farouq.

Thank you, Jean. And we appreciate everyone joining our call this morning. Thank you.

During the third quarter, we continued to see robustness across most of our end markets, particularly within the commercial aerospace, defense and networking sectors, with continued steady rebound within our distribution channel and consumer lines. Our profitability this quarter surpassed our expectations, thanks to the continued dedication and discipline of our global team. This strong performance reflects our global team's dedication from pursuing strategic business opportunities and investing in key customers to effective procurement cost management, operational efficiencies and improved fixed cost absorption resulting from increased sales volumes.

As part of our ongoing commitment to operational excellence, we are continuously reviewing our global footprint with an eye towards scaling Bel for long-term performance. In October, we made the strategic decision to transition operations from an additional facility in China to a subcontractor during the fourth quarter of 2025. This move follows a thorough evaluation of internal manufacturing costs versus outsourcing and outsourcing in this instance, proved to be the better alternative. We expect the transition to largely be completed by December 2025, with a fair amount of annualized cost savings to be occurring as we head into next year.

We're also progressing with the restructuring initiative at our Glen Rock, Pennsylvania facility. Following the sale of the building in the second quarter of 2025, we are now transitioning the remaining manufacturing operations to other Bel sites, with full completion expected by early 2026. The Glen Rock initiative is projected to incur minimal incremental restructuring costs in Q4 2025. And throughout this process, we have already realized significant annualized savings as we had previously discussed.

To put this in perspective for some of our newer investors, our restructuring efforts over the past 4 years have resulted in 7 facility consolidations in addition to the sale of our Czech business in 2023. These actions have resulted in an over 600,000-plus net square footage reduction on our manufacturing lines while leaning into automation and investing for the future of our factories. And I recall that, again, just to put a pin on it in terms of where we are heading, which is the more important part.

As we approach the end of 2025 and look ahead to 2026, our focus is and has been firmly on our go-to-market strategy and driving growth, both organically and inorganically. Throughout the past few months, we have been meeting with Bel's key leadership across the world to identify the areas, methods and resources needed to better achieve top line growth. While we're in the early stages of strategic planning, I want to emphasize the exciting collaboration and energy within Bel's extended leadership team as we chart our next chapter.

One of the common themes emerging is shifting our historical focus from products to end markets and customers to ensure we are delivering the totality of Bel to them. This mindset shift will take a while to cement, but is a logical step for a company such as Bel given the impressive breadth of our product portfolio. This is an exciting effort, and one that is key for a long-cycle design business such as Bel.

In addition to driving growth, we're investing in the foundational structures that support our business, especially around IT systems and data infrastructure. To give you an example of some of the current initiatives, we are in the process of updating and implementing the CRM platforms, travel management software, developing various dashboards tools for key financial and operational metrics and KPIs. These enhancements will enable our leaders to make faster data-driven decisions, strengthen accountability and improve overall performance. Standardizing our processes and terminology will also allow us to scale efficiently and seamlessly integrate future acquisitions.

In summary, there is a tremendous amount of activity and excitement underway at Bel, all aligned to our common goal of growth and continued maturity.

With that, I'll turn the call over to Lynn to run through the financial highlights from the quarter and some color on the Q4 outlook. Lynn?

Thank you, Farouq.

From a financial perspective, we delivered another strong quarter, marked by continued margin expansion and robust sales growth across all segments. Third quarter 2025 sales totaled $179 million, representing a 44.8% increase compared to the same quarter last year. In addition to the $34.4 million of incremental revenue in the current quarter related to the Enercon acquisition, each of our 3 product segments achieved double-digit organic growth over last year's third quarter.

Profitability improved alongside sales, with gross margin rising to 39.7% in Q3 '25, up from 36.1% in Q3 '24. This margin expansion was driven by improved absorption of our fixed costs in our factories with the higher sales volumes and by strong execution within each of our segments and maintaining discipline around the SKU level profitability.

Turning to some details at the product group level. Power Solutions and Protection delivered another exceptional quarter, with sales reaching $94.4 million, representing a 94% increase compared to the third quarter of last year. Excluding A&D, organic sales grew by $11.3 million or 23.2%, reflecting strong demand for our power products in key markets. Sales of power products for networking applications increased by $11.4 million. Growth within the networking market reflects both rebound in demand following a long period of inventory destocking and new incremental demand driven by AI.

As we've noted in the past, it is difficult to isolate exactly how much of this growth is AI-driven. But to provide a comparable metric to prior quarters, our third quarter sales into AI-specific customers were $3.2 million in Q3 '25, up from $1.8 million in Q3 '24. Other areas of strength within the Power segment were seen in sales of our fuse products, which were up $1.8 million or 41% from Q3 '24, and an increase of sales into consumer applications of $2.3 million or 39% from Q3 '24.

As an important note, fuse products and consumer-facing products have very short lead times and are generally the first areas where we see the pickup in intra-quarter turns, which is a positive indicator for the overall business. As an offsetting factor, eMobility sales were $2.2 million in Q3 '25 versus the $3.4 million in Q3 '24, and sales into the rail market were $8 million in Q3 '25 versus $9 million in Q3 '24. Gross margin for the segment came in at 41.8% for the quarter, up 240 basis points from Q3 '24, largely driven by the higher sales volumes and better absorption of fixed costs at our factories.

Turning to our Connectivity Solutions Group. Sales for the third quarter of 2025 reached $61.9 million, up 11% compared to Q3 '24. This growth was primarily driven by strong performance in commercial aerospace applications, where sales totaled $18.8 million, an increase of $6.3 million or 50.5% year-over-year. Connectivity product sales into defense applications also continued to be robust in the third quarter, with sales rising $3.6 million, a 31.2% increase from the prior year quarter.

Contained within our defense number here are sales into space applications, which amounted to $2.5 million in Q3 '25, up 25% from Q3 '24. While connectivity sales through the distribution channel were down $1.9 million or 9.7% versus Q3 '24, it's important to note that this reflects the shift of an end customer out of the distribution channel and we are now servicing directly.

Profitability within the connectivity segment continued to improve, with gross margin for the group rising to 40.3% in Q3 '25 from 36.6% in Q3 '24. This margin expansion reflects the benefits of operational efficiencies achieved through facility consolidations completed last year and a more favorable product mix. These positive factors were partially offset by minimum wage increases in Mexico and foreign exchange pressures related to the peso.

Lastly, our Magnetic Solutions group delivered a strong quarter, with sales reaching $22.7 million, an 18% increase compared to Q3 '24. This performance was consistent with the expectations we shared on our last earnings call and was primarily driven by higher shipments to a major networking customer.

Gross margin for the group improved to 29% in Q3 '25, up from 27.3% in Q3 '24. This margin expansion was supported by higher sales base and the benefits of facility consolidations in China, which helped reduce fixed overhead costs. These gains were partially offset by minimum wage increases in China and unfavorable foreign exchange impacts related to the renminbi.

At September 30, 2025, R&D expenses totaled $7.5 million in Q3 '25, representing an increase of $2.1 million compared to Q3 '24. This increase was primarily attributable to the inclusion of Enercon's R&D costs, which amounted to $2 million during Q3 '25.

Looking ahead, we anticipate that R&D expenses in future quarters will generally remain consistent with the Q3 '25 level as we continue to invest in new technologies and solutions to support our customers and drive long-term growth. Our selling, general and administrative expenses for the third quarter of 2025 were $32.8 million or 18.3% of sales, up from $26.7 million in Q3 '24.

Importantly, SG&A as a percentage of sales declined from 21.6% last year, reflecting continued progress in managing our cost structure as our business grows. The increase in total SG&A dollars was primarily driven by the inclusion of Enercon's SG&A expenses, which contributed $6.6 million to the quarter and our U.S. medical claims continued to be high in the third quarter. As noted in prior quarters, our legacy level of SG&A expense was maintained during our period of reduced sales, such that we believe we are already spending the right amount on fixed SG&A infrastructure needed to support future growth.

Turning to our balance sheet and cash flow. We closed the quarter with $57.7 million in cash and securities, down $10.5 million from year-end. This decrease was primarily driven by our proactive efforts to strengthen the balance sheet, including paying down $62.5 million in long-term debt, resulting in $225 million of total debt outstanding at September 30, 2025.

Additionally, we made $2.5 million in dividend payments and invested $8.6 million in capital expenditures to support growth and efficiency initiatives. These outflows were partially offset by $7.8 million in proceeds from property sales and $1 million from the sale of held-to-maturity securities earlier in the year.

Looking ahead to the fourth quarter of 2025, we continue to see strength across all 3 segments. Historically, we have seen seasonality in the fourth quarter with fewer production days due to the holidays being celebrated around the world. In light of this historical trend and based on the information available as of today, we expect Q4 '25 sales to be in the range of $165 million to $180 million. We noted in the second and third quarters that the trend of intra-quarter sales has resumed, and this range assumes that trend continues into the fourth quarter.

And with that, I'll now like to turn the call back to the operator to open it up for questions.

[Operator Instructions] The first question comes from the line of Bobby Brooks from Northland Capital Markets.

Just wanted to circle back on those last -- the last piece that Lynn, you were touching on for the fourth quarter guide. Obviously, something that caught my eye was, yes, bucking kind of the historical trend of 4Q being lower than 3Q. And you mentioned that trends of intra-quarter sales have resumed and that the range assumes that continues in the fourth quarter. I was just wondering if we could just discuss what other factors might be at play, driving that outlook a little bit more detail because I feel like that's a really kind of exciting development for you guys.

Yes. Bobby, I'll let kind of Lynn jump in here with more details. But I just want to kind of call out a comment that caught my ear here, which is this kind of step down over Q4. I think you said bucking the seasonality trend. I think if you look at -- we see a potential of that, if you just look at the range that we put out there, $165 million to $180 million versus, let's say, the $179 million that was delivered, so possibly. But when we look at the range, I think it's broader than that in the sense that we do expect some seasonality, right? I mean, at the end of the day, we're going to have fundamentally less working days as we head into the holiday season and year-end and as we look kind of around the world and also just various holidays, whether it be kind of Golden Week and/or some of the holidays, for example, in Israel. So, I just want to be mindful that we just do have less working days. So, could it happen? Sure. I think the good news is we're expecting it to be a good quarter, but maybe we beat Q3, but I just want to be mindful of that.

And I'll turn it over to Lynn here.

Yes. So just to add to what Farouq said, I think that we are seeing continued strength in areas like commercial air, defense, AI, space. We are continuing to see the rebound coming through in networking and distribution. So, all of these trends are continuing from Q3 into Q4. So it's definitely end market strength continuing. But to Farouq's point, just mathematically, there are fewer production days in the quarter. So there's Golden Week in China, which was the first week of October, and then there's Thanksgiving and all of the winter holidays throughout the world in December. So it's really -- those are the pieces. So, I mean, if you stripped out the holidays, the messaging would likely be different. But if you look back at our trend historically, having a dip from Q3 to Q4 is pretty natural for us. So...

Yes. I really appreciate that color. And I guess more so, it's just -- I definitely can appreciate that, yes. A lot of the ranges would be 4Q being coming in lower than 3Q. But I guess what just caught my eye was the guidance that you gave matched what the guidance was for 3Q. And usually, your guidance is for even the high end of the range being lower than what 3Q was. But I can appreciate those puts and takes you just laid out.

The other piece is just like on those legacy customers and kind of the order trends. Is it fair to assume that -- it seems like it's fair to assume that those are still trending positively. But maybe could you give some more context as to like how to think about where they could go? Like obviously, we're coming off like trough levels in '24. But do you think they can -- do you feel like they are like continuing to improve? Or are they just at an improved level now stabilizing? Just curious to hear more on that.

I think if we look -- if we zoom out and we look at kind of, let's say, the last 5 years, 2020-2025, I think the industry would generally agree with the statement that has been anything but normal. In terms of the extreme extended lead times that happened in the earlier part of the time frame, I just laid out to an extended dip, if you will, where the industry was kind of down for a longer time than normal. And then you overlay a lot of geopolitical and economical uncertainties, let's say, right? So, I think the reason I point that out, I'd say, is it's still a little bit, I would say, not normal. And I think what we're seeing is a little bit of a maybe hesitation, if you will, on the parts of the customers and kind of robustly coming back. So the good news is that the attitudes have changed a little bit, I think, from a historical perspective. But what we are seeing in our business and we look at backlog and discussions, there's definitely a positive outlook, right?

I think maybe if you look back at -- again, we have a lot of customers in a lot of places, so just general terms here. But generally, we'd see people maybe coming back a little bit stronger. And I think if you look at the industry-wide, and I was at a conference last week, there's a little bit of timidness. So, people are maybe not investing as much in a buffer stock and really more kind of just ordering as needed. But what we really look at is the end demand, right, our customers' demand. We're in a B2B business.

So, what does their demand cycles look like? Where are their products going? And are they growing? And the answer is yes, as is reflected with our number and with our guide. So, we like the outlook, but I think it's hard to generalize that everybody is feeling all yippie about the world. So nonetheless, we like our positioning. We like our -- where we are with our customers. And I think we'll have pretty good outcomes here.

And just to add, our book-to-bill was positive again this quarter. So, that's the third consecutive quarter of a positive book-to-bill ratio. And I mean, we haven't seen that trend since back in 2022. So, I think just generally, we're seeing more activity, which is positive.

Got it. And then just last one for me is, I was really impressed, Lynn, when you were going through each kind of segment of power, and it really seems like power was driven -- these robust results in power were driven across many different segments. And it was nice to hear you break out what Enercon was as well. And just curious on Enercon, is the integration of them into you guys kind of wrapped up now? Or is there still a bit more to go? And then just curious on -- obviously, you guys are working on long lead time projects, but any early reads on kind of cross-selling opportunities maybe starting to bubble up here?

Yes. So, I would say, I think we want to be just mindful of the word integration because the plan was never kind of a, let's say, classical approach to integration. right? So from our -- when we think about integration, it's really around alignment from a go-to-market and tackling opportunities and co-selling and making sure that we are kind of creating opportunities together. And obviously, in Europe, it's a little bit of a different playbook as we talked about in the past, right, just in terms of trying to manufacture a little bit more there and be more present in our customers' backyards. But putting all that aside, I think we're definitely moving in the right direction.

There's definitely obviously more work to be done, but we are seeing some nice, let's say, early sparks of where one side of the house is bringing an opportunity to the other side of the house. So I think our, let's call it, lead sharing, co-tackling is better, but we do have more room to go, keeping in mind that while we also want to do that, it is a very busy market, right? So step one, we got to do our day jobs and get out and push, and we're seeing the benefits of that strategy, but also want to make sure that we're more aligned. So, I would say we like what we're doing. We can do a little bit more, and we plan on doing a little bit more.

We take the next question from the line of Theodore O'Neill from Litchfield Hills Research.

Congratulations on the good quarter. Lynn, you mentioned in your prepared remarks, you saw a shift -- you had a shift of a customer out of distribution to service directly. And I have 3 questions related to that. How often does that happen? What determines the shift? And how does the distributor feel about it?

So, I would say -- first of all, thank you for the question there, Theo. I'd say we've kind of talked about in the past, distribution is a very dynamic channel and they're great and key partners for us and within our industry. And it's really hard to paint this in a broad stroke, but I'll try my best. Some customers, while we may design and work with them directly, ultimately, they want the distributor to aggregate all their purchases, right? So, we may start the relationship direct and it goes into the distribution channel to give them some kind of fixed fee. And the inverse of that also happens where a customer comes to us through distribution and then we develop something together, and it can be distributed and worked through the distributor or sometimes it does come out. So it happens both ways.

And I would also say the -- some of the guiding principles on that include minimum order quantity. So if it's something smaller, we wanted to go through distribution. So sometimes we push people into the distribution channel to really maximize our cost to service these customers' model. So, I would say it's definitely a dynamic channel. And I would say when we look at distribution, it's a great discovery channel for new customers. So, I wouldn't say we're doing anything unusual in our industry because at the same time, we're not looking to burn the relationships, right? So this is pretty standard, I would say.

The other thing is not all distributors are the same. There are some folks that really focus on kind of low quantities and as things scale, they don't want you in the channel, so you take it out directly. Other folks more if it's big and opening up doors. So, I'd say the answer is it depends, but I wouldn't say anything unnatural or odd happened here.

Okay. And what's the M&A opportunity looking like for you right now?

Yes. I mean, I think we've been very clear. We like our balance sheet. We continue to pay down our balance sheet. We like where the direction of just paying down more heading into Q4 and into next year is going. So, we feel like we are in a very good position to do an M&A deal. I think really the question as we kind of think about is how big and what is it. And when I say how big, it's both in terms of just size and scale, complexity and also purchase price, right?

So today, I would say it's still not a healthy M&A environment, but I think we are seeing a step-up in terms of opportunities versus Q1, Q2 this year. So, we are seeing more shots on goal. I would not classify it as normal yet, but we definitely have some opportunities ahead of us that we're kind of working through. I would also say is it feels like if you look at our course of a quarter, we always have something live. The question is, do you want to strike and do you like the business fundamentals? So, that kind of -- hopefully that answers your question, Theo.

We take the next question from the line of Jim Ricchiuti from Needham & Company.

I apologize if you gave some of this detail in the presentation. I joined a little late, but I did hear something regarding the ongoing transition with some of your manufacturing footprint, I think. Did you say you're divesting a facility in China if I understood you correctly? Are you partnering with a contract manufacturer on these products? And if I missed it, did you provide any detail on which product areas are affected? And to what extent this is going to have an impact on margins? Or is it fairly small?

So Jim, it's within our Magnetics segment. And we are -- we basically went through an analysis of whether it was more cost efficient for us to be manufacturing internally versus outsourcing that manufacturing. And in this case, we chose that outsourcing was the better alternative. As far as impact on gross margin, that would be about $1 million a year.

Yes, give or take. Obviously, we're in the process of moving that, but it will be positive. And more importantly, I'd say than that, Jim, is allow us to focus on the things that we excel at, right? So hopefully, it unlocks more bandwidth than beamwidth for us to pursue things that have a better ROI for us.

Got it. And the strength you're seeing in networking, I was wondering if you could maybe drill down into that a little bit. Is that being driven by just the increased AI investment that we're all hearing about? Or is it simply the distribution channel having just burned off the excess inventory that was out there or maybe it's a combination of both.

Yes. So in networking, and if we talk about -- are you asking about a particular segment or just in general, Jim?

I'm talking about networking because you did highlight that as one of the areas.

Yes. So, that was right. So if we're talking about the Power segment, we mentioned it's really a combination of both of those factors that you just said. So, there is some rebound happening coming off of the couple of years of destocking that we went through. But then we're also seeing new incremental demand related to AI. So it's a mix of those 2 that's driving the growth in networking.

And Lynn, you mentioned, I thought book-to-bill was above 1. Is that right? And did you -- can you characterize the bookings by the 3 main product areas, whether there was much variability among the 3?

So, each of the segments were above 1. We saw positive book-to-bill across all 3 segments.

We take the next question from the line of Greg Palm from Craig-Hallum.

This is Danny Eggerichs on for Greg today. Congrats on the solid results here. I think just first off, maybe kind of a broader question on demand you're seeing from your -- each of your respective geographies, anything to call out in terms of outperformance, underperformance? And then maybe specifically on China. I know last quarter, we saw kind of the pause and then the resumption of order patterns. So, maybe just kind of what you're seeing current day and whether those have kind of just returned to business as usual.

Yes. I'd say, Dan, that's a good question. I think, giving our end markets -- so understanding, right, kind of taking a step back and saying we're -- the numbers move around a little bit. But by far, 2/3 plus of our business is kind of exposed to U.S.-based customers, right? And when we look at those, we also see that A&D is our largest end market today, which kind of lends itself both to the U.S., Israel and Europe. So when we look at geographies with the lens of the end markets, I'd say the kind of U.S.-based customers and Israeli-based customers are probably leading the way. And then also combining the networking side, also, those are the vast majority of the people we spend time with.

Asia is our smallest exposure and then Europe/Israel is in the middle, right? So from a mathematical perspective, we're going to really kind of move the needle as we see our, let's say, U.S. and Israel business moves predominantly. In terms of demand environment, I'd say the U.S. seems a little bit more healthier, broadly speaking. When we look at Europe, I think it's a little bit of a mixed bag. So, our rail business is a fair amount in Europe, for example, right, we talked about. So, that was a little bit down.

EV and eMobility, which sits in our Power group tends to be more European exposure. Obviously, there's other things going in the sector. But Europe, I'd say, is a mixed bag. It really depends on what it is you're talking about in terms of end market exposure. Asia is kind of an interesting place for us. It is a small place, but we have throughout this year, invested in the senior leadership within our sales organization in Asia. And I think we're seeing some nice opportunities coming out of that.

So, we like what we're seeing, but Asia generally is a smaller play for us. And also keep in mind that for us and the end markets we play in, right, we're not really a heavy consumer market business. We're not auto. And obviously, we're not a race to the bottom on pricing. So, Asia for us is a selective strategic play where we pick our spot. So, we can do more in Asia. We are planning on doing more in Asia. But I'd say that, that's going to just round robin there on geographies.

Yes. Got it. That's all really helpful. Maybe if I can hit on the Power segment and specifically kind of the gross margin there, I think it's kind of the same thing we saw last quarter where even this quarter, you see even a bigger sequential step-up in revenue, but that gross margin kind of stays flat or maybe even slightly steps down. I know last quarter was kind of the legacy business outgrowing Enercon and kind of being a negative mix factor there. So, I guess how should we think about that as Power continues its growth trajectory? And when should we think about kind of that gross margin hooking up with the revenue growth and seeing some expansion there?

Yes. So, I think on the gross margin side for Power, I mean, there's a few different factors going on. Obviously, the Enercon acquisition is additive to our legacy Power margins. I think the one thing to keep in mind, both in Q3 and going forward here is there are 2 currencies within the Power segment where there could be margin pressure. So, we have the Israeli shekel related to the Enercon business and then also the renminbi related to the China facility that we have within Power. And we don't have a natural hedge in place. We do have some hedging programs, but they're not hedging in all exposure. So, that's something that we just need to be mindful of because that can move margins a little bit.

And then also keeping in mind some of our other margin businesses like eMobility and rail are down and those tend to be higher margin. I think the bigger -- I think discussion is today, we're at a point where I would say we're at great levels of gross margin. And if we're trying to think about growth, right, what is the opportunity there to expand to new customers, new offerings and new products versus having an extremely strict line on gross margin, right?

So that's kind of something we're thinking about kind of how do we smartly think about that to ultimately drive EPS all the way down. Because as we've said in the past, to a large degree, there is some -- our SG&A and R&D are relatively range bound. So, how do we really get some operational leverage from that cost structure to continue to drive the top line. So, these are kind of things that we're all kind of thinking about. But I would say today, we're definitely up there in terms of performance on margins.

Okay. Yes. And maybe that kind of plays into my last question here, which is kind of the Q4 guide and the gross margin range. Just looking back year-to-date, the gross margin has kind of been at like a 39%. And obviously, revenue levels in Q4 that suggests higher than -- quite a bit higher than what we saw in the first half at the midpoint here. So, I'm sure it's a lot of those factors that you just talked about, but any other things within that gross margin assumptions, maybe mix or maybe there's a little bit of conservatism built in there? Any thoughts there?

So, I think it's a couple of factors. One is our Magnetics group has been depressed over the last couple of years, right? So as that rebounds, it is our lowest gross margin segment. So if you're looking at our gross margin in total on a consolidated basis, that would have some downward pressure on it as Magnetics grows into a larger piece of the overall pie. So, that's one piece to keep in mind.

I think the -- if we're looking at Q3 sales to Q4, seasonally, we're down a bit in Q4 versus Q3. So if that happens, you have less leverage within your fixed cost absorption, so that could have some potential gross margin pressure. And then as I mentioned, on the FX side, with the peso, the renminbi and the shekel, those do directly impact our margins. So, those are some of the factors that come into play when we are putting out our guide for margin for the fourth quarter.

We take the next question from the line of Christopher Glynn from Oppenheimer & Company.

Congrats on the nice results. Just curious in terms of the development of the commercial multiple that you've described in some detail, where are you seeing the kind of leading end of progress, early adopters, so to speak, in terms of design cycles, new business opportunities generating? It seems like AI, maybe defense. You noted a little progress in Asia. Maybe there's some other cross-sections to bring into the discussion as well.

Thanks for that, Chris. I think your question is just more commercial across the business and where they're coming from, the new wins?

Yes. Yes, exactly. And maybe a little color on new business opportunities, what's the growth there year-over-year?

Yes. So in general terms, right, as an engineering-led organization and we've talked about this, we're a medium to long-term kind of design cycle business. So really, the actions and the results that we're seeing today in Q3, you can almost got to look back at least 1 to 2, 3 years to see what was done then and kind of seeing where these wins have come, right? So I would -- obviously, as Lynn said, we do have some intra-quarter turns that do happen. But generally, I would say what happened in Q3 here is probably not a whole lot in large in terms of new business that things that happened in Q2, maybe some Q1 stuff, okay?

So, this puts a big pressure on us to make sure that today, in Q3 or Q4 here, we're working for Q2, Q3, Q4 next year and beyond. So the question is, okay, well, how are we as a team tackling go-to-market and what is our sales initiatives and what is our data side of things to help lead those kind of tip of the spear activities. When we look at the activity around new developments and new wins that we saw, for example, in Q3, it's definitely exciting for us, to be honest with you. We're seeing some nice new wins, some bigger wins than maybe we historically have, some new customers that we, historically, were not maybe competitive or didn't kind of co-tackle it appropriately.

Obviously, with the customers we've had for a very long time, we, I would say, probably constantly win new programs, right? When we look at, obviously, defense, which is our biggest kind of market nowadays, it's not like there's a whole lot of primes in the U.S., right? So really, there, we look at, are we getting more shots on goal? Are we getting new opportunity design wins? And I think the answer is yes. When I speak to the teams across Bel Fuse, I think there's a pretty fair aggressiveness in terms of hunting for the new. We are defining what new is. We want certain margin profiles of business and learning how to win.

Again, we've always done this throughout our 76-year history, but I think we're putting more fire around it in recent times. And this was kind of my earlier commentary here, Chris, where when today, our business is really kind of -- we think about things to some extent from a product perspective, but we have a lot of products that go to the same customers. So how can we align ourselves more robustly to deliver solutions to our customers to ensure that we're not missing a cable or a connector or a fuse sale because we're selling a power system.

So when we look at our product portfolio, I think we can do more with it. And this is back to also my earlier commentary around we got to invest in the systems and structures that we can make sure we're going after highest ROI opportunities and really measuring performance. It was a little bit of a new muscle for us, but I think the early signs and the wins we're seeing today, we kind of got to look back probably before 2025, to be honest with you.

Okay. Great. And then just curious on Enercon, if they're caught up on shipments. I think they had a little delivery snags last quarter. And did the quarter include some catch-up? Or is that just the sequential scaling that the business is generating?

Yes, both. It continues to kind of go from strength to strength. There was a little bit of catch-up, but also just kind of depends on where the catch-up we're talking about is. The biggest issue end of June, as you may recall, just flights stopped coming in, specifically from India and out of Israel. So, that's kind of the catch up, but it wasn't a very long pause, right? And obviously, there was local consumption that happened inside of Israel. So, there was some catch-up, but also, yes, growth, whether it be sequentially or year-over-year.

We take the next question from the line of Luke Junk from Baird.

Farouq, I want to circle back to gross margins and maybe more of a philosophical but bigger picture, certainly. If we look at the gross margin trend this year, it's been above the high end of guidance 3 straight quarters, 39% plus in general. And just love to get your thoughts on kind of your feel for volume leverage in the business on a go-forward basis, especially as you continue to layer on those new design wins just relative to your understanding of the improved cost structure and kind of what that can mean incrementally as you do add volume?

No, I appreciate that question, Luke. It's a question we've been thinking a lot about in general is where should you be, right? And I think by all accounts, putting aside our mix between Magnetics and the other segments, yes, we're seeing an uplift in margin as sales grow and we are getting operational leverage. The question is now that we are really trying to shift our mindset away from just operations and cost efficiency, which always just become regular way table stakes, how do you drive growth? So as we launch new products and go after new customers, invest in new relationships and new technologies, we need to be honest with ourselves and say, okay, what is the pricing strategy on things.

So for example, right, let's say there's a very nice piece of business that was, I don't know, $1 million, $2 million that was a little bit below corporate averages. But over time, we can scale it up and also get new opportunities. Would we take that business? I think we really need to consider that if it's a strategic relationship. I think the gross margin strategy, let's say, has not been one that was available to us through our history. So now we got to look at it as an asset and as a tool.

Now keeping in mind, we work very hard to get our gross margins here, right? We don't want to arbitrarily kind of get it further into that 37%, 39%. So, I think there's a little bit of self-discovery, to be honest with you, as to where we should be. I think when we look at gross margins today, we want to make sure we're not picking out too much and just really missing the boat on EPS growth, given that we talked about the range boundness of our SG&A and R&D. So that's, I think, the sense of maybe a little bit of conservatism there.

I think the -- I appreciate in public markets that everybody is looking to manage a certain level of expectations. But our intention, and we've talked about this internally, is we want to land in range, right? We don't really want to blow the range on the top or on the bottom. So, I think our -- and we give the optics here in the last 2 quarters to your point, I think we could see some conservatism. That's fair. The question is, okay, as we go throughout next year, where do we want to be? The good news is we have a lot of -- we have a buffet of options to play while delivering good returns, good gross margins to our investors, and that's kind of the front and center. So it's a little bit of a self-discovery journey we're going through to be honest.

That's all very helpful. Second question on -- just curious if we could double-click on networking and AI specifically in terms of the design win activity and just tilting the organization to growth overall. I guess I'd be especially interested in Power and just how you think going forward? I mean, we're seeing this rebound, obviously, in demand from an inventory standpoint and whatnot and those direct AI sales. But as you think about building the pipeline, just the opportunity set within Power specifically?

Yes, no. I mean, today, with an improved cost structures and the investment that has gone into the factories from an automation perspective, the improvements R&D teams that have done in terms of moving quicker to launch products, our sales team being more mindful of what we're going after. I think today, we're in a better position to go after opportunities and be a little bit maybe more serious about it than we have been able to in the past, okay? So as a result of that, as we think about networking, there's obviously a -- and as Lynn talked about earlier, we know where our AI products are going, but that's a floor, right? And we know that we sell to some other networking folks that are servicing directly AI. So, we know that our products that we're selling to networking guys are probably also being impacted by AI. How do you measure it is a different complexity to it, right? Because our products are high-end products that can go to AI or other applications. But I think it's hard to say that all things going on in AI data center world is not positively impacting us.

The other thing I would say is with the improved operational structure and more focus on the markets is we have, I'd say, started to open up doors with some customers that maybe in the past, we were not cost competitive or we're not focused on, maybe a little bit too much in our comfort zone. So, we're seeing some of that newness as well. The other thing I would say in the networking side, given that there's a lot of investment and focus on it, broadly speaking, we are seeing new entrants into the markets with newer technologies. So all that, I think, at the end of the day, is additive for us from a networking perspective.

So, we want to make sure that we're not just simply waiting for the same customers we had 3, 4 years ago to come back. Yes, that's a benefit, obviously. But I would also say we want to make sure we're investing in new relationships. And within the existing relationships, I think we're doing a little bit of a better job learning how to more service our customers to more ingratiate ourselves into that relationship and get more opportunities on goal. Because if you look at some of our big customers, we can do so much more. The question is, how can you do so much more, right? And that's kind of what we're trying to really push the team. And quite frankly, we're seeing some nice results of that.

All really great color. Just a quick one for my last question. And then you called out for the second straight quarter that there was some increased medical expense in the SG&A line. Just how we should think about that sequentially into the fourth quarter, if you have any visibility? And then going into next year to the extent that, that doesn't repeat, would it be reasonable to assume some normalization in SG&A?

Yes. I would say the -- just can I give some context here? We're really talking about the U.S. side of the business. And obviously, we all read and feel what's going on in all things world of health care and medical care. We are a self-insured plan, right? And whenever we do kind of market checks on it, it still is the most cost advantageous way to do it. So every kind of few years, we go out there and check and make sure it's the right. So today, we are self-insured.

The downside of self-insurance is there could be variability in claims that come in the door, and we're seeing that in Q2 and Q3. But the variability is hard to get a read on it, right? We just don't know when somebody is going to have a major medical issue that comes our way. The plus side of going to a regular way health care is you have a fixed cost, but every year somebody comes and the health care companies will give you a big increase, right? So from our perspective, we're still in a cost advantageous way, but it does introduce variability to your point. The other thing I would say is as just the overall age of our organization, right, medical claims are not unexpected. So, what does that mean for next year? I think that's a tough question to answer for us, and we obviously saw a spike in Q2 and Q3 a little bit here.

We take the next question from the line of Hendi Susanto from Gabelli Funds.

Congrats on strong results. My first question is you talk about rebound in networking and distribution customers. Can you talk about rebound or sign of rebounds across other areas, specifically, let's say, in Magnetic, Connectivity and then some major areas?

Sure. So, I think for -- so you're looking for a breakdown by product group, Hendi, or just other end markets aside from networking?

Yes. I think like where -- like besides networking and distribution channels, are there like early signs of inventory rebound, customers rebuilding their inventory or maybe whether you have some outlook or expectation on where rebounds would start to take place in other areas?

Yes. I think the other 2 areas that we've been seeing a rebound, which had been depressed in prior periods is in the consumer end market. If you recall, last year, that was the end market that was impacted by one of our large suppliers in China. And so that had been depressed for several quarters. We did see a rebound in that business in the third quarter.

So, that was nice to see now that we have some new suppliers identified, getting product back out into the market at this point. So, there's been a rebound there. And then also on the fuses side -- I mean, fuses go into everything, but that's something that had been softer in the past and we're seeing that rebound now. So, I think those are probably the other 2 areas in addition to networking and distribution.

Got it. And then Magnetics sales is still significantly below pre-COVID levels. Any puts and takes in terms of expectation on Magnetics sales, let's say, like going forward, like where the recovery is somewhat -- is likely in the short to midterm?

Yes. So, I think when we look at Magnetics, Hendi, I think when we look at the industry and we've seen this in our Power, right, there was a very unnatural spike that happened back in 2022-2023, where customers were literally buying and renting new warehouses just to store a lot of these components. So, there was a, let's say, unnatural behavior there today. So if we were to kind of put a range on where we've been, let's say, it was $175 million to roughly $75 million, we would look at peak to trough, roughly speaking. I would say $175 million is probably not in the cards for the next few years because also remember, we walked away from certain business and we are being prudent after what business we're going after.

And also keeping in mind that the Magnetics, as we talked about there, there is a product concentration and 2 end market concentration, which is networking and distribution largely. So if we look at the ranges of $75 million to $175 million, I would say the -- or I should say $70 million, sorry, the range was $180 million to $70 million. So, I'll let you kind of decide where we are, but we're seeing the year-over-year over growth. But 2022 at $180 million was extremely unnatural, and we've slimmed down the business since then. So, I would not really anchor to that. So, I'll leave it at that, but we do think that we got some ways to go here.

Got it. And then, Lynn, may I ask how we should think and project the pace of potentially early debt payment?

The pace of debt payments going forward?

Yes. Yes.

So, I mean, barring an M&A opportunity coming up or anything like that, we've been running at a rate of, call it, $20 million to $25 million a quarter just based on our cash flows. So, we would continue to pay down debt. That would be our first priority, barring anything on the M&A side.

Ladies and gentlemen, with that, we conclude the question-and-answer session. I would now hand the conference over to Farouq Tuweiq for his closing comments.

Again, I want to thank everybody for joining us here and a very big thank you for the Bel Fuse team around the world and our customers that helped us deliver this great quarter. And we'll put our head down to continue to work throughout the year here and heading into 2026.

Wishing everybody a great holiday season as we head into year-end, and I'm sure we'll be talking soon. Thank you very much for joining us this morning.

Thank you. Ladies and gentlemen, the conference of Bel Fuse Inc. has now concluded. Thank you for your participation. You may now disconnect your lines.