Bel Fuse Inc. (BELFA) Earnings Call Transcript & Summary

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.