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

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

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 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 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. Farou?

Thank you, Jan. Good morning, everyone. We appreciate you joining our call today. We are pleased to have delivered another strong quarter, led by continued momentum in our data solutions and industrial end markets. We also saw increased demand through our distribution partners, which contributed positively to our performance during the quarter. It was a nice quarter to see the team deliver these results with lost productivity in certain operations due to summer vacations and holidays in places like Israel. We are very proud of the performance of our global team and the quality of its execution in a heightened demand environment. Our factories did an outstanding job securing materials, increasing manufacturing capacity and strengthening business resiliency. The operational discipline enabled us to deliver growth despite continued variability and uncertainty in global markets. We're also moving faster and operating with a more entrepreneurial mindset. We're making decisions closer to the customers, responding more quickly to changing market conditions and acting decisively on opportunities. Growth was led by our Data Solutions business, including the broadening AI ecosystem as well as our industrial applications. This performance demonstrates the strength of our global operating platform, the resilience of our business and the ability of our people to execute at a high level. As previously discussed and as some of you know, Bel is now organized under 2 end market-based segments, and we are entering an important period as we plan under the new organizational structure. We will be holding our second global leadership offsite in November, bringing together our global leadership teams for the first time since establishing the 2 new segments. The session will focus on further defining our operating model and strategic priorities as well as continuing to identify segment initiatives that unlock the full value of our structure. I'm excited about this one as we have had some new teammates at the executive level and among our key leaders at the VP level. On another note, we continue to see strong bookings across the business with record all-time high bookings, again, exceeding our level of sales during the quarter. This provides us with continued confidence in the momentum across the markets we serve. Based on information available today, we expect fourth quarter net sales to be in the range of $220 million to $240 million, with gross margin between 40% and 42%. This outlook reflects continued momentum across our key markets, including data solutions, industrial and defense as well as ongoing demand through our distribution partners. Overall, we're excited about our performance this year and how the year is shaping up. I am proud of our global team's focus on execution, their commitment to advancing the organization and their continued efforts to deliver another remarkable quarter for our shareholders. And with that, I'll turn the call over to Lynn for the financial review. Lynn?

Thank you, Farouq. From a financial perspective, we delivered a strong third quarter with double-digit year-over-year revenue growth across both segments, improved gross margin and higher adjusted EBITDA margin. Third quarter sales were $220.5 million, up 23.2% compared with the prior year quarter. Growth was strong across multiple end markets, led by data solutions and industrials. We also saw an uptick in activity through our distribution channel with strong end customer demand coming from both segments. Gross margin was 40.9%, up 120 basis points year-over-year. The increase was driven primarily by operating leverage from higher volumes, pricing and stronger execution. These benefits were partially offset by higher material costs and unfavorable foreign exchange impacts. Adjusted EBITDA was $52.5 million compared to $39.2 million a year ago, an increase of approximately 34%. Adjusted EBITDA margin increased to 23.8% from 21.9%, reflecting strong conversion of revenue growth into operating profit. From a segment perspective, ADRS revenue was $106.6 million, up $10.3 million or 10.7% compared to Q3 '25. Growth was led by sales into industrial applications, largely through the distribution channel, followed by defense. These areas of growth were partially offset by a decline in commercial aerospace due to the timing of shipments into this market. ADRS gross margin was 39.6% compared to 41.1% last year. The decrease was largely attributable to market and channel mix in addition to unfavorable FX movements related to the Israeli shekel and Mexican peso. Turning to ITDS. Revenue for the segment was $113.9 million, up $31.2 million or 37.8% year-over-year. Growth was led by the Data Solutions end market, which was up $27 million or approximately 61% compared to Q3 '25. We continue to see strong growth with our AI-focused customers, where Q3 revenue totaled approximately $12.4 million. As a reminder, this amount is what we refer to as our AI floor as we have additional exposures to AI but lose visibility within our general data solutions customers. This is an increase of $9.2 million from Q3 '25. Also, the dataMate acquisition in March 2026 contributed $4.9 million to Data Solutions revenue during the quarter. Strength across these end markets was partially offset by a decline in transportation revenue during the quarter. ITDS gross margin was 42.7%, up from 38% last year, an improvement of 470 basis points. The increase was primarily driven by higher volumes, improved utilization and pricing actions. These benefits were partially offset by foreign exchange impacts related to the Chinese renminbi and higher material costs. Regarding operating expenses for the quarter, R&D expense was $8.8 million, up $1.3 million year-over-year. The increase was primarily attributable to higher personnel costs. SG&A expense was $39.4 million, up $6.6 million from last year. The increase was primarily driven by higher compensation and benefits, including stock compensation, an increase in legal and professional fees, higher costs in USD as a result of FX movements and the inclusion of dataMates's SG&A expenses in the 2026 period. We expect SG&A to run at a similar level to the third quarter going forward. Cash flow and liquidity. We ended the quarter with $333.1 million of cash and securities compared with $57.8 million at December 31. The increase was largely the result of the equity raise completed during the second quarter of this year. We continue to be in a strong cash position to fund growth, manage volatility and pursue strategic opportunities. From a working capital perspective, we continue to invest in working capital to support our growth through the first 9 months of 2026. Accounts receivable increased by $33 million, reflecting higher sales volumes in Q3 '26 compared to Q4 '25. Inventories increased by $56 million due to investments made in raw materials to accommodate an increase in orders and timing of shipments. Accounts payable increased by $37 million, largely in line with the higher inventory levels. Capital expenditures were $11 million during the first 9 months of 2026 as we continue to invest in efficiency initiatives and capacity requirements. We continue to focus on improving the cash conversion cycle through better receivables management and payables planning. We do, however, expect inventory turns to remain challenged in the near term as we build inventory levels to support our growth projections. With that, I'll turn the call back over to the operator to open the line for questions.

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

I'm really impressed by the 4Q outlook. And I think it's more impressive when you add the context of how that really bucks the seasonality historical trend the business used to see. On that note, I just wanted to give you the floor to add that context for folks who might be newer to the story and also to expand on what factors you feel are helping drive that sequential step-up?

So you are correct. Historically, I'd say most of the time, Q4 generally is a step down from Q2. And partially, that's attributed to the productivity or their lack of that happens in Q4, whether we're thinking around end of December holidays, Thanksgiving, Asia tends to be Golden Week. And also when we look at last year, I think the Jewish holidays were in October. So when we look at Q4 this year, I'd say we have a little bit more productivity given that some of those holidays shifted into September. But there is still the fundamental reality that demand is very strong into Q4. And that demand is really cutting across the entirety or I should say, the majority of the business as we're thinking Q-over-Q, whether it be the A&D markets, data solutions markets, distribution. So there is definitely a demand uptick in drivers that's helping care momentum into Q4. So that's kind of really what resulted in the upward guide. Strong demand, strong bookings, as we said, all-time high, record for us, more than sales in the quarter, coupled with more productivity days in Q4.

That's very helpful. And it also just feels like -- piggybacking on that. It just feels like the growth initiatives launched the last year or 2 are really starting to shine through, whether that be the new sales head, revamped sales comp aligned better with KPIs or the reshaped go-to-market strategy for Tier 2 customers. So my first question is, is that fair logic? And can there even be more benefits from those? And then secondly, more recently enacted growth initiatives this year, such as the resegmentation, the go to customers by end market and be a solutions provider rather than approaching by product. Are those -- are benefits from those initiatives enacted this year kind of still developing and not reflected in today's results in the 4Q guide?

Yes. I would say, I think we've launched a fair amount of initiatives, right, including a lot of the stuff that you just talked about here, Bobby. But I would say we are seeing the benefits of a lot of those initiatives. Obviously, our business, given the nature of our design cycles, it's hard to say week-over-week. But if we zoom out and look at the first 9 months, I would say all initiatives have beared some kind of fruit. I would also say, if you remember where we launched kind of Q4 last year, and we talked about around key accounts and business development efforts to kind of drive further customer intimacy. I think that was a very crucial play for us, and we're seeing the data intimacy translate into more shots on goal. But to your point around really driving all of our portfolio to the extent that we can to our customers, I think, has been very helpful. Also, I would say some of these longer-term relationships that we've been growing up with over time, if you will, that used to be Tier 2 or maybe smaller that we have grown together and they're hitting their strides as well. So allocating some bets on some customers, I think, is also paying off for us. In terms of the, call it, system approach sale, that we always knew would be a little bit of a longer one because it's a retraining of the market perception of kind of where we are and who we are. But we're definitely seeing some glimmers of we can do this, and we can do this as well type approaches, which is nice to see. Also, let's not also kind of forget our, let's call it, our Slovakia/European efforts have also continued to bear fruit. So really, it's kind of across the board. The other thing I would say that we did this time as well is that we are -- I alluded to earlier here around pushing down the sales closer to the segment so that it's a little bit more entrepreneurial ownership mindset for faster reaction and better read on the market. So I feel like we're picking up speed. We're seeing more, and we're kind of bear hugging the customers. So I would say all around, we like a lot of our initiatives. We have better systems. If you remember, we also invested in systems. We still would like to optimize a little bit more but we're seeing the fruits of that. I can't say we have "arrived" but we're definitely becoming dangerous to see more and also really drive accountability down the organization, I would say.

That's excellent to hear. And just last question for me, kind of piggybacking on the Slovakia, U.K. EU efforts. I just any new program wins for A&D? I think last quarter, you were up to like 10 year-to-date, and a lot of those were kind of cross sales where there was an Enercon plugging in with [ Cinch ] or the reverse. Just wanted to hear any color there.

Yes. So the good news is really more of the same, right? In terms of program wins, we definitely see them come through in the third quarter. Over time, obviously, as we've talked about previously, these wins, specifically A&D kind of start out small over time to grow up. So we'll see where that goes. I think we're also -- I think recently, maybe into the fourth quarter here, we had our -- what we think is our first win as we think about using Slovakia as a little bit of the storefront for our connectivity business, which is kind of an interesting play for us here because as we talked about the impact of Brexit and where our facilities sit in the U.K. So I'd say it's more of the same, which is the good news. But I think we -- roughly the same program wins we had in the second quarter, which I think was 12 is what we called out last time, Bobby. So the good news is it's really more of the same. And if we think about starting out this year at 0 and think of where we are today, I would say it's gone very nice.

I definitely agree with that.

Our next question is from Tomo Sano with JPMorgan.

This is [ Brendan ] on for Tomo. First, I'd just like to ask on the revenue mix shift. So you've mentioned the revenue rotation into higher growth, better margin business. Is that simply a factor of markets growing faster and therefore, becoming a larger percentage of your mix? Or is that -- does that represent more of a strategic shift where you're making a more concerted effort to adjust your revenue mix?

I'll just start out with the disclaimer on this one, right? As we think about end markets or our 2 BUs, they all have their own separate commercial efforts, sales organizations, largely factories, go-to-market, right? So it's not like we're allocating decision between the BUs. What we're focused on is inside the BU, where are we better aligned from a technology, customer intimacy and better alignment and that's where we want to focus on where we can get more returns. And as we've doubled down on the, let's call it, customer intimacy and going deeper from a commercial effort and standpoint, we're seeing things that we'd like to maybe focus on more than others. I would say that's nothing unusual for really any business around our industry. I think that's a little bit of a new muscle for us. Over the past few years, as we've built up the funnel, we can have a little bit of the luxury of saying, we're going to go here a little bit more versus here. So it makes it sound, I think, a little bit more than what it really is. But I think the good news is we are having the luxury of choice nowadays, and we want to make sure we're making the right choices, both in allocating our work hours and our work dollars.

Got it. And then touching on thoughts on M&A. So last quarter, you mentioned the market was showing aggressiveness and irrationality, some peers doing acquisitions that weren't for you, particularly now that you have a net cash position. Just kind of curious how M&A ranks within capital allocation versus organic CapEx, buybacks, et cetera? And has your view on valuations within your pipeline changed at all over the past quarter?

As a long-cycle design business, we kind of need to think things out a little bit in longer-term perspectives. And from that perspective, our M&A strategy hasn't shifted or changed. We're just as hungry for M&A. We are pursuing multiple avenues of it. The market dynamics remain the same, elevated competitive sets and sometimes the feeling that people are just buying for the sake of buying. But as a long-cycle design business, we will be disciplined. We don't want to be overly conservative. We also don't want to be overly aggressive. So finding that balance is where we want to focus on. Today, when we look at the M&A pipeline, I'd say it's a range from kind of smaller assets to medium-sized assets, I think, is kind of where we're looking at it. So it always feels like we have something under LOI and NDA. But when we have something at the appropriate time, we'll share with the team. But I would say we had hoped to have done an acquisition in Q3 and Q2, but also we're going to be disciplined in our approach. So we like the pipeline. It's like anything else. We'd like to be a little bit more better in pipeline, but also we are going to be disciplined in our approach.

Our next question is from David Williams with Needham & Co.

Congrats on the really solid results and guidance here. Maybe first, I just want to ask, in the script, you had talked about some uncertainty in the global markets and maybe some volatility there. Just curious if you could maybe walk us through what you're seeing and what maybe specifically you were pointing to? And is that more global or any region specific that you're seeing any of that volatility?

I think the short answer is yes. As a global business, right, operations in Asia, Europe, North America, there's definitely always something seemingly going on. And I would say when we think about what are these headwinds. It's hard to not think about inflationary pressures on seemingly all materials, to be honest with you. So when we look at all raw materials, inputs, that seems to be obviously trending in the wrong direction. When we think about shipping and logistics, just getting things around globally to our customers or to our own factories is definitely a tight rope. The team is doing a great job walking through FX. Largely, as we've said in the past, we're exposed to renminbi, peso and shekel against the U.S. dollar also kind of trending in the wrong direction. Geopolitical tensions also are not helpful or additive as we all read the news out in the world. I'll also say we've had even kind of more interesting situations where a company gets added to the no trade list, if you will, that keeps getting updated seemingly in regular cadence where it really prevents our opportunity to just plan easier. So we had a situation like that in Q3 where one of our sub suppliers got placed on a list and all of a sudden now you're scrambling to find alternatives. So it feels that the team is constantly in some kind of scramble mode, and it's amazing to me how to see the team pull together. I know these things seem a little bit maybe insignificant from the outside looking in because I think the team does a good job making it look easy. But on the inside, there's a lot of people working really hard in all sorts of ways that they historically maybe haven't had to. So the challenges really are everywhere, political, FX, raw material and also, obviously, wages as well.

Perfect. And maybe secondly, just on the AI-focused customers that you kind of talked about in the script, really solid growth there. But just wondering if you could provide maybe a little color on the types of programs you're seeing and maybe the design win activity pipeline and how that's coming together? And then maybe where that could ultimately go in terms of revenue top side? Is there any limit or threshold that's preventing growth longer term there?

Yes. I think that just as we think about our Data Solutions business, right, while we talk about this concept of floor AI, we know AI is obviously impacting the business. Now when we also look specifically at our AI play, right, it is continuing strength to strength. And we've seen that quarter-over-quarter this year. We're seeing that into Q4. We're seeing that heading into next year. So the order book specifically, whether it be explicitly or implicitly driven by AI is definitely trending in a very positive direction for us. We talk about server storage networking, but we are also very mindful around just given our size disclosure of programs and the like. But I would say we are kind of way you would think about the ecosystem. As a reminder, we're not directly interacting with and exposed to the hyperscalers just to kind of differentiate a little bit. But obviously, a lot of our customers do spend some time there. But in terms of where it can go, like I said, we're not going to provide guidance on that. It is a fast-moving market, but we like what we're seeing out of that market for sure. And I get that AI is kind of a big focus for everyone. I think we're also seeing some really nice things in our A&D business and the growth that we're seeing there. So I'll leave it at that for now.

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

Congratulations on the good quarter. Question for you is, what are you seeing for defense industry demand in Europe? And are there any issues around getting the proper certifications for your factories?

Are you talking about our A&D exposure in Europe and certifying them for the European business?

Yes, please.

Yes. So I think that as an issue is largely behind us. The plumbing is in place, and I define plumbing as factory certification, right? So there's certain standards from an industry perspective. There's customer audits, there's regulatory approvals that we got to get. So as we think about the plumbing and opening up the store to selling, we're in a good position there. And ahead of schedule, I may have been when maybe we initially thought it was going to play out. So today, that's not really an impediment. Obviously, in the A&D world where we play, we -- there's always regulatory and check-ins that we have do and transferring and all, but that's for us regular way maintenance. But the hardest part was getting all the critical certificates. And I would say we're -- that's largely behind us now. It is entirely behind us, I would say, actually.

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

This is Jackson Schroeder on for Greg Palm. Congrats on the results. I wanted to start out with just pricing initiatives. I know one asked it earlier in the year that eventually we're going to start seeing in Q3, Q4. It looks like we did see them, I mean, obviously benefiting gross margin. I was curious if you could talk a little bit on how much revenue growth is driven by that pricing versus just higher volumes? And then secondarily to that, if you could touch on gross margin in ADRS kind of taking a small step down, while ITDS took a big step up. How should we be thinking about ADRS gross margin going forward? And if there is any potential future increases in pricing that you can enact to kind of offset some of those inflationary pressures that you just mentioned?

I appreciate the question. I'll let Lynn comment on the gross margin a little more in detail here. I just want to -- I get it -- we appreciate that when we report quarterly, that's a static picture of the business. But underneath that, there's a life that happens daily. So we did do price increases, as you had talked about in February and March. I would say that was kind of a big one because we saw everything in the world moving and we did all of that. Okay. But the reality of the matter is the pricing book, the backlog, the cost of materials are moving daily, I would argue, and if not daily, probably every other day. So there are conscious decisions and actions that are purposeful to trying to pass these things on. So since then, we've done obviously various and numerous other price increases. Why? Because the raw materials continue to go up. And we've seen our suppliers give us price increases almost seemingly monthly in some situations. So when that happens, obviously, we got a downstream. Where our balancing act needs to come in is really what do you do in relation to backlog, right? Do you reprice it? Do you slightly modify it? Do you wait for the next order to come in? That is the relationship discussion that needs to be had because sometimes we may trade off kicking the can down the road from a timing perspective for the sake of a longer-term game. So pricing is definitely part of the mix for sure. Operational leverage is part of the mix here as well. But it is a hand-to-hand combat, right? Everything we're reading constant is going up. So I just want to make sure it's not a static discussion that we're talking about. And I'll turn it over to Lynn on the gross margin side.

Yes. So on the question around the ADRS gross margin and the step down from prior year, a lot of that had to do with the mix of revenue that we saw in the quarter. So as we mentioned on the call, a lot of the growth that we saw was through industrials and through the distribution channel due to timing of shipments, commercial air was actually down year-over-year and defense was -- grew a bit, but not as much as distribution and industrials this quarter. I would say the other thing to keep in mind if we're looking year-over-year is the FX environment. So if you look at the Mexican peso or the Israeli shekel, we're definitely in a different environment right now than where we were in Q3 last year. So I think those are the large factors driving the margins in ADRS. I think as we're looking ahead, the FX environment has stabilized and has started to improve a bit on both the shekel and the peso. So we don't -- if we're talking sequentially, we don't expect FX to be a further negative, but that should provide some uptick. And then on the timing of defense and comm air, we do expect that to shift to be a little more favorable heading into Q4.