Operator: Good morning, and Welcome to the Bel Fuse Inc Q3 2026 earnings call. As a reminder, this call is being recorded. If you would like to ask a question, please press star one on your telephone keypad. I would like to now turn the call over to Jean-Marie Young with Three Part Advisors. Please go ahead, Jean.
Jean-Marie Young: Thank you, and good morning, everyone. Before we begin, I would 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.
Jean-Marie Young: 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 would like to turn the call over to Farouq. Farouq?
Farouq Tuweiq: Thank you, Jean-Marie. 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 are also moving faster and operating with a more entrepreneurial mindset.
Farouq Tuweiq: We are 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 two 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 two new segments.
Farouq Tuweiq: 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 am 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 Q4 net sales to be in the range of $220 million to $240 million, with gross margin between 40% and 42%.
Farouq Tuweiq: This outlook reflects continued momentum across our key end markets, including data solutions, industrials, and defense, as well as ongoing demand through our distribution partners. Overall, we are 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. With that, I will turn the call over to Lynn for the financial review. Lynn?
Lynn Hutkin: Thank you, Farouq. From a financial perspective, we delivered a strong Q3 with double-digit year-over-year revenue growth across both segments, improved gross margin, and higher adjusted EBITDA margin. Q3 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%.
Lynn Hutkin: 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 2025. 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.
Lynn Hutkin: Growth was led by the data solutions end market, which was up $27 million or approximately 61% compared to Q3 2025. 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 2025. 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.
Lynn Hutkin: 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 dataMate's SG&A expenses in the 2026 period. We expect SG&A to run at a similar level to the Q3 going forward. Cash flow and liquidity.
Lynn Hutkin: We ended the quarter with $333.1 million of cash and securities, compared with $57.8 million at 31 December. The increase was largely the result of the equity raise completed during Q2 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 2026 compared to Q4 2025. 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.
Lynn Hutkin: 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 will turn the call back over to the operator to open the line for questions.
Operator: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we pull for questions. Our first question is from Bobby Brooks with Northland Capital Markets. Please proceed with your question.
Bobby Brooks: Hey, good morning, team, and thank you for taking my question. I am really impressed by the Q4 outlook, and I think it is more impressive when you add the context of how that really bucks the seasonality historical trend the business used to see. On that note, 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.
Farouq Tuweiq: Thanks, Bobby. Good morning. Thank you for the question. You are correct historically. I would say most of the time, Q4 generally is a step down from Q2 and Q3, and partially that is attributed to the productivity, or their lack of, that happens in Q4, whether we are thinking around end of December holidays, Thanksgiving. In Asia tends to be Golden Week. Also when we look at last year, I think the Jewish holidays were in October. When we look at Q4 this year, I would say we have a little bit more productivity, given that some of those holidays shifted into September.
Farouq Tuweiq: There is still the fundamental reality that demand is very strong into Q4. That demand is really cutting across the entirety, or I should say, majority of the business as we are thinking quarter-over-quarter, whether it be the A&D markets, data solutions markets, distribution. There is definitely a demand uptick in drivers that is helping carry momentum into Q4. That is going to really what resulted in the upper 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.
Bobby Brooks: That is very helpful. Thank you. 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. My first question is that fair logic, and can there even be more benefits from those? Secondly, more recently enacted growth initiatives this year, such as the re-segmentation, the go to customers by end market and be a solution provider rather than approach them by product. Are benefits from those initiatives enacted this year kind of still developing and not reflected in today's results in the Q4 guide?
Farouq Tuweiq: Yeah, I would say, I think we have launched a fair amount of initiatives, including a lot of the stuff that you just talked about here, Bobby. 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 is hard to say week-over-week, but if we zoom out and look at the first 9 months, I would say all the initiatives have beared some kind of fruit. I would also say, if you remember where we launched Q4 last year, and we talked about around key accounts and business development efforts to drive further customer intimacy. I think that was a very crucial play for us, and we are seeing the data intimacy translate into more shots on goal.
Farouq Tuweiq: 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 have 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 are 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 run because it is a retraining of the market perception of where we are and who we are. But we are definitely seeing some glimmers of, we can do this and we can do this as well type approaches, which is nice to see.
Farouq Tuweiq: Also, let us not also forget our, let us call it our Slovakia/European efforts have also continued to bear fruit. So really, it is 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 it earlier here, around pushing down the sales closer to the segment so that it is a little bit more entrepreneurial ownership mindsets for faster reaction and better read on the market.
Farouq Tuweiq: So I feel like we are picking up speed, we are seeing more, and we are 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 are seeing the fruits of that. I cannot say we have "arrived," but we are definitely becoming dangerous to see more and also really drive accountability down the organization, I would say.
Bobby Brooks: That is excellent to hear. Just last question for me, kind of piggybacking on the Slovakia, UK, EU efforts. I know, just any new program wins for A&D? I think last quarter you were up to 10 year to date, and a lot of those were kind of like cross sales where there is an Enercon plugging in with the Cinch or the reverse.
Farouq Tuweiq: Yeah.
Bobby Brooks: Just want to hear any color there.
Farouq Tuweiq: Yep. The good news is really more of the same, right? In terms of program wins, we have definitely seen them come through in Q3. Over time, obviously, as we have talked about previously, these wins, specifically A&D, start off small over time to grow up. We will see where that goes. I think recently, maybe into Q4 here, we had 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 today sit in the UK.
Farouq Tuweiq: I would say it is more of the same, which is the good news. But I think we have roughly the same program wins we had in Q2, which I think was 12, is what we called out last time, Bobby. The good news is it is really more of the same. If we think about starting out this year at zero and to get where we are today, I would say it has gone very nice.
Bobby Brooks: I definitely agree with that. Congrats on the strong quarter. I will turn to the queue.
Farouq Tuweiq: Thank you.
Operator: Our next question is from Tomo Sano with JPMorgan. Please proceed with your question.
[Analyst] (JPMorgan): Hi, this is Brendan on for Tomo. Thanks for taking my questions. First, I would just like to ask on the revenue mix shift. You have 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 does that represent more of a strategic shift where you are making a more concerted effort to adjust your revenue mix?
Farouq Tuweiq: I will maybe just start out with a disclaimer on this one. As we think about end markets or our BUs, they all have their own separate commercial efforts, sales organizations. Largely factories go to market, right? So it is not like we are allocating decision between the BUs. What we are focused on is inside the BU, where are we better aligned from a technology, customer intimacy, and better alignment? That is where we want to focus on where we can get more returns. As we have doubled down on the, let us call it customer intimacy, and going deeper from a commercial effort and standpoint, we are seeing things that we would like to maybe focus on more than others. I would say that is nothing unusual for really any business or industry. I think that is a little bit of a new muscle for us.
Farouq Tuweiq: Over the past few years, as we've built up the funnel, we can have a little bit of the leisure of saying, we're going to go here a little bit more versus here. It makes it sound, I think, a little bit more than what it really is. 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.
[Analyst] (JPMorgan): Got it. Thank you. Then touching on thoughts on M&A. 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 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?
Farouq Tuweiq: As a long cycle design business, we kind of need to think things out a little bit in longer term perspectives. 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. 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.
Farouq Tuweiq: 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. 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. We like the pipeline. It's like anything else in life. We'd like to be a little bit more better in pipeline, but also we are going to be disciplined in our approach.
[Analyst] (JPMorgan): Great. Thank you.
Operator: Our next question is from David Williams with Needham and Co. Please proceed with your question.
David Williams: Hey, good morning, and congrats on the really solid results and guidance here.
Farouq Tuweiq: Thank you.
David Williams: Maybe first, 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 are seeing and what maybe specifically you were pointing to, and is that more global or any region specific that you are seeing any of that volatility?
Farouq Tuweiq: I think the short answer is yes. As a global business, operations in Asia, Europe, North America, there is definitely always something seemingly going on. I would say when we think about what are these headwinds, it is 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 have said in the past, we are exposed to renminbi, peso, and shekel against the USD also kind of trending in the wrong direction.
Farouq Tuweiq: Geopolitical tensions also are not helpful or additive as we all read the news out in the world. I will also say we have 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 a 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 are scrambling to find alternatives. So it feels that the team is constantly in some kind of scramble mode, and it is amazing to me how we see the team pull together.
Farouq Tuweiq: 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 are 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.
David Williams: Perfect. Thanks for the color there. Secondly, just on the AI-focused customers that you had talked about in the script, really solid growth there. Just wondering if you could provide a little color on the types of programs you are seeing and the design win activity pipeline and how that is coming together. Then where that could ultimately go in terms of revenue top side. Is there any limiter or threshold that is preventing growth longer term there? Thanks.
Farouq Tuweiq: Yeah, I think the gist of it as we think about our data solutions business, right? While we talk about this concept of AI floor, we know AI is obviously impacting the business. When we also look specifically at our AI play, it is continuing strength to strength. We have seen that quarter over quarter this year. We are seeing that into Q4. We are seeing that heading into next year. 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 programs and the like. I would say we are kind of what you would think about the ecosystem.
Farouq Tuweiq: As a reminder, we are not directly interacting with and exposed to the hyperscalers, just to differentiate a little bit. Obviously, a lot of our customers do spend some time there. But in terms of where it can go, like I said, we are not going to provide guidance on that. It is a fast-moving market, but we like what we are seeing out of that market for sure. I get that AI is kind of a big focus for everyone. I think we are also seeing some really nice things in our A&D business and the growth that we are seeing there. I will leave it at that for now.
David Williams: Thanks so much. Appreciate the help. Good luck on the quarter.
Farouq Tuweiq: Thank you.
Operator: Our next question is from Theodore O'Neill with Litchfield Hills Research. Please proceed with your question.
Theodore O'Neill: Thank you, and 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?
Farouq Tuweiq: Are you talking about our A&D exposure in Europe and certifying them for the European business?
Theodore O'Neill: Yes.
Farouq Tuweiq: Yep.
Theodore O'Neill: Yes, please.
Farouq Tuweiq: Yeah. I think that as an issue is largely behind us. The plumbing is in place, and I define plumbing as factory certification, right? There is certain standards from an industry perspective. There is customer audits, there is regulatory approvals that we got to get. As we think about the plumbing and opening up the store to selling, we are in good position there and ahead of schedule, I may have than when maybe we initially thought it was going to play out. Today, that is not really an impediment. Obviously, in the A&D world where we play, there is always regulatory and check-ins that we have to do and transferring and all that. That is for us regular way maintenance. The hardest part was getting all the critical certificates in. I would say that is largely behind us now.
Theodore O'Neill: Okay. Thank you very much.
Farouq Tuweiq: It is entirely behind us, I would say, actually.
Theodore O'Neill: Okay, great. Thanks.
Operator: Our next question is from Greg Palm with the Craig-Hallum Capital Group. Please proceed with your question.
Jackson Schroeder: Thanks. Good morning. This is Jackson Schroeder on for Greg Palm. Congrats on the results. I wanted to start out with just pricing initiatives I know enacted earlier in the year that eventually we're going to start seeing Q3, Q4. Looks like we did see them, I mean, obviously benefiting gross margins. Was curious if you could talk a little on how much revenue growth is driven by that pricing versus just higher volume. Then secondarily to that, if you could touch on gross margin ADRS kind of taking a small step down while ITDS, I mean, took a big step up. How should we be thinking about ADRS gross margin going forward and if there's any potential future increases in pricing that you can enact to kind of offset some of those inflationary pressures that you just mentioned?
Farouq Tuweiq: Yeah, I appreciate the question. I'll let Lynn comment on the gross margins a little more in detail here. 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, 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. Since then, we've done obviously various and numerous other price increases. Why?
Farouq Tuweiq: Because the raw materials continue to go up, and we have seen our suppliers give us price increases almost seemingly monthly in some situations. When that happens, obviously we have to downstream. 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?
Farouq Tuweiq: 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 gain. 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 are reading, costs is going up. I just want to make sure it is not a static discussion that we are talking about, and I will turn over to Lynn on the gross margin side.
Lynn Hutkin: Yep. 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. 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. Defense 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 are looking year over year is the FX environment.
Lynn Hutkin: If you look at the Mexican peso or the Israeli shekel, we are definitely in a different environment right now than where we were in Q3 last year. I think those are the large factors driving the margins in ADRS. I think as we are looking ahead, the FX environment has stabilized and has started to improve a bit on both the shekel and the peso. If we are talking sequentially, we do not expect FX to be a further negative. That should provide some uptick. On the timing of defense and commercial air, we do expect that to shift to be a little more favorable heading into Q4.
Farouq Tuweiq: One of the other things I would say is we think, and we talked about this a little bit as well, but as we end of life and shift away from some lower margin business volumes, that should also have a positive impact on the business. That obviously happens in spurts, and there is a smart way to do that. I would say it is really an amalgamation of things that is reflective of our global business and customer base.
Jackson Schroeder: Perfect. That is helpful. Then kind of just high level, talking about defense. I feel like everyone has this, it is well known, increased spending, and some of these primes getting some big munitions replenishment long-term contracts versus we are operating on a continuing resolution right now, and it seems like there is some uncertainty. Can you just talk about what you are seeing from customers within defense, both kind of like having long-term, very clear high demand versus some near-term uncertainty?
Farouq Tuweiq: Yeah, I think that is a good way of characterizing it. When we talk to the primes, and I will also caveat our prime discussion is really in three separate regions, like the US, the Europeans, which that is multiple regions as well, but it is a different, let us call it environment, and then obviously Israel. On the US side of the business, where the language, the chatter in the channel, our customer relationships very clearly indicates that there is a strong need and unmet demand. Whether we are talking about the readiness in terms of stockpiles or the like, I think the demand is not really debatable, and the need for replenishment and investing in new emerging technologies is not debatable. The body language that we are getting downstream, obviously we are down the channel here, very strong, positive momentum and discussions.
Farouq Tuweiq: It gives us confidence in that the need and demand is there. We are seeing increased booking across all of our customers and programs, right? So we are seeing it translate, especially when we look at, I think our backlog in A&D this go around was also an all-time record. So we are seeing it. It is still not enough, I think, to meet the demand. So I think that will be the question for the funding that comes out of the programs there.
Farouq Tuweiq: On the Europeans, we are seeing the spending. We are seeing the growth. It is reflected in our Slovakia. So I think they are moving a little bit quicker, just given the realities on the ground and for potentially years of underinvestment. On the Israeli side, again, given different dynamics, they tend to move quicker. Also the need is there as well. So we know the need is globally there. It's really how question does it translate down the channel into operations. But all in all, I think the demand drivers are all there, which is good for our business, and we see that in our backlog and our discussions around new wins and new discussions with our customers.
Jackson Schroeder: Perfect. I'll leave it there. Thank you.
Operator: Our next question is from Wamsi Mohan with Bank of America. Please proceed with your question.
Wamsi Mohan: Yes, thank you. As you think about channel inventory levels, it seems like at least there's been very strong demand and momentum that's continuing and restocking channel inventory. How would you characterize the levels of channel inventory, given that we're coming from a pretty destocked state to where we are now, and how much more of a potential positive could it be as we look beyond next quarter?
Farouq Tuweiq: Yeah, no, that's a fair question. I think, right, there's always, maybe to extend on your question there a little bit, there's always a view on double ordering, channel stuffing, all that kind of things that we all think about. I would say that does not seem to be the case on average in the industry and the channel. The need and demand is real, so we don't see that double booking channel stuffing side of the business. We do think of it as being more demand. I would say as we just kind of canvassed the industry, I would say that general view holds, especially in the passives where we play. As we think about booking and backlog, there is life and there's vibrancy there, which is obviously good to see.
Farouq Tuweiq: As we look out and extended beyond Q4, I think the body language, the discussion around the need through the channel also holds. I would also say that this story, quote unquote, "through the channel" is not just North America. We're seeing that also in EMEA and APAC. Which to me indicates the demand at a global level is positive momentum. So, we like what we're seeing, and we think it's positive overall.
Wamsi Mohan: Okay. Thanks for that, Farouq. Maybe just to follow up, it might be a little bit of a harder hypothetical question to answer, but if you were to look at the demand levels, which obviously are quite strong over here. If you were to, let's say, raise pricing 5% across the board, across everything that you can, how much of that do you think would stick? I'm trying to ascertain what is the appetite for increased pricing within your SKUs at your customers?
Farouq Tuweiq: Let's be realistic, similar to personal levels, I don't think anybody wakes up and says, "I would love a price increase to anything that we're doing." Right? So I don't think anybody's waking up and giving me hugs. I've yet to discover that customer. But the way we are seeing is inflationary environment is everywhere. Similar to our raw material customers are passing costs on to us, we're passing them on. I think we may sometimes make strategic decisions, maybe we're not going to do that for a very purposeful reason. But most of the time, we're passing them on. As we've done that, like I said earlier, we're seeing the increased bookings across all our customers and programs. So the pricing side of it, we have to be made net neutral.
Farouq Tuweiq: If we waked up and arbitrarily did a 5% increase, given where cost was and everything else is coming in, obviously, we are also in a comparative world, right? If we just wake up and do it and nobody else is doing it because they are not seeing inflationary pressures, that is a problem. But assuming we are in this environment, everybody is doing it, we would probably be pretty okay here. As a reminder, we have been reacting quickly, right, as this happens. So I would say we are doing a good job staying on top of it. We need to continue to stay on top of it. But if we just arbitrarily set a 5%, my guess is probably would be okay.
Wamsi Mohan: Yeah
Farouq Tuweiq: in this hypothetical that we are going through.
Wamsi Mohan: Right. Okay. Well, thank you. Thanks for acknowledging that. Look, I guess the last thing from me is, clearly, to the first question you answered, is a much better than seasonal guide for Q4. As we look beyond Q4 into Q1, should we be thinking, given what we know today, and I know you are not guiding Q1 explicitly, but should we be thinking of trends to be seasonal or sub-seasonal as we look out to Q1? Thank you.
Farouq Tuweiq: I would say it is probably going to buck the historical trend. To the extent of how much and all that kind of good stuff, we will wait and see. Like we kind of said before, there is loss of productivity in the first quarter. Also, people come back from New Year's, starting the business and turning on the factories, coupled with Chinese New Year. So you do have some loss of productivity there. But I do think that this will be maybe not a typical Q1 for us.
Lynn Hutkin: Yeah, I think just to add to that, about half of our business today is aerospace and defense, which does not have that typical Q1 seasonality tied to it. That is part of why we are looking to buck the trend here. Also, as we have talked about on the data solution side, we are in a bit of a ramp environment there. That is also something that will likely buck that trend.
Farouq Tuweiq: I also said earlier, we are seeing record backlogs. We will kind of frame that a little bit more as time goes on. We definitely, knock on wood, all things being equal, we appreciate how the year will probably close out, and we kind of are excited about 2027.
Wamsi Mohan: Okay. That is great. Thanks, Farouq. Thanks, Lynn.
Farouq Tuweiq: Yeah.
Operator: Our next question is from Hendi Susanto with Gabelli Funds. Please proceed with your question.
Hendi Susanto: Good morning, Farouq and Lynn.
Farouq Tuweiq: Good morning, Hendi.
Lynn Hutkin: Good morning.
Hendi Susanto: Well, I have a question about the decline in commercial aerospace due to the timing of shipment into this market. Should we expect some type of recovery in Q4 or in early 2027?
Lynn Hutkin: Yeah. I think on the commercial air side, our shipping patterns do not entirely correlate to the underlying demand there. We are a very small component into their larger production cycle. So the ordering and shipping patterns as dictated by the customer there tends to be choppy, I will say. So last quarter and this quarter, we certainly had lower shipments going out, but that is not indicative of the underlying demand. So do we expect to see that coming back in future quarters? That answer would be yes. Yeah.
Hendi Susanto: Thank you, Lynn. Farouq, I would like to follow up Wamsi's questions on price increase. I would like to ask on the other side, like in the inventories and lead times. Some companies discuss extended lead times, and how some customers are willing to secure supplies way ahead. Others have been building inventory to better capture upside in a stronger demand environment, meaning many companies are pointing to next year. I did see that your inventories increased sequentially. I am wondering whether that is reflective of this type of dynamic. How are you thinking about those dynamics, the puts and takes for Bel Fuse?
Farouq Tuweiq: Yeah, no, I think that is a great question, Hendi. In addition to an inflationary environment, it is a pretty robust demand environment globally. As we think about that and our downstream suppliers have increased their lead times, we are back in close contact with our customers to ensure that we are building to forecast. So in some more common area components, we are definitely doing some advance buys or security buys to get it. So I would say our increase is largely in the raw material side of the business. The demand is there, the orders are there. Just as a reminder, Hendi, the vast majority of our businesses we are building to an order book. We are not really in the business of making things and sitting on it and hope for demand. So these conversations and backlog orders with our customers are real-time.
Farouq Tuweiq: As these conversations are happening, we are securing materials and getting in line at some of our suppliers. Worst thing we can do is not ship in a hot demand environment across the business. That is one way to really drop customer satisfaction and impact negatively new wins and new designs. It kind of poisons the well in terms of the discussions. So back to what Lynn was saying, we are putting money in inventory. We have to meet customer demand, and that is kind of part of what we do. It is not unusual in these cycles when you have growth and demand coming. So, do we like it from a financial working capital perspective? No. But at the same time, we are here to satisfy customer demands.
Hendi Susanto: Thank you.
Farouq Tuweiq: Sure thing.
Operator: Our next question is from Christopher Glynn with Oppenheimer and Co. Please proceed with your question.
Christopher Glynn: Thank you. Good morning, Farouq, Lynn, Jean. Building off that last topic, just curious, you have done a lot of rooftop consolidation optimization over the years, I think with automation investment. You have also talked about increasing net throughput despite all that. But now with backlogs and revenue really ramping and projecting the next couple of quarters to exceed normal seasonality, just wonder if you could highlight what kind of resourcefulness and success you are seeing in the system for throughput other than supply chain, which you already just covered.
Farouq Tuweiq: Yeah, I think the work that we've done in the last few years to get the factories ready, more leaning into lean. We've spent a lot of CapEx, a lot of great automation programs, even at a systems level across the company. This has allowed us to be more efficient with production and manufacturing. One of the things that we're not talking about here, to your point, Chris, is we're not talking about capacity constraints as an example. I think we've done a pretty good job at managing it, so we feel good about it. I'll give you another example of this. As we have opened the storefront in Slovakia, this example, it gives operational leverage to our Enercon facilities in India and in Israel. We're learning to kind of make sure we're moving things around. Same thing with China and India production.
Farouq Tuweiq: We are moving some things across geographic lines to meet customer demands or requirements. That investment and collaboration between these two factories, as an example, is another good one. Obviously, we invested a lot, as we said, in manufacturing execution systems, and we're doing some interesting things on AI and automation. It really is an all hands-on effort. I'd say the bigger maybe discussion with our customers is around where do they want things manufactured. Obviously we talked about Slovakia as the European storefront and in China and India.
Farouq Tuweiq: It's an interesting time where I'd say location and manufacturing is potentially becoming a bigger topic. We'll need to stay close to these things. Depending on where the customer's desires and wishes land, that may take us down different outcomes. We do know things are moving around, and dexterity and flexibility between the factories are going to be pretty key going forward.
Christopher Glynn: Cool. Thanks for that. Just a follow-up one, just at a high level headline even, since time's tight here. Global leadership confab coming up, second one. What's your top priority or two in terms of just cultivating the enterprise group?
Farouq Tuweiq: I think I am very excited about this one. Last year when we did it, we walked away with certain tasks and strategic priorities. I think we have done a pretty good job at executing against that, and we have seen some of the benefits of that, including some of the systems discussion we have had in the past. I would also say that we have done a fair amount of, obviously, re-segmenting the business was part of those priorities. As we look since we did it last year, roughly 12 months ago, we have had some new teammates join across our leadership team, and they have hit the ground running great. Now we get to show up again with new teammates, our existing teammates, and making sure that we are all rowing in the same direction.
Farouq Tuweiq: Obviously, we want to think big, we want to think measurable impact, and we want to continue to play to win. We like what we saw, and we would not mind a little bit more. We want to see leadership, we want to see growth mindset, we want to see operation, we want to see supply chain. There are some big topics and discussions that we need to have, but I am definitely excited to get into the room with the team there to think big and continue to drive impact, because I think the last 12 months have benefited our shareholders tremendously, and we are seeing it across the business. We got more room to go, but we like what we see. Hopefully, we can get to the stuff that we have not gotten to yet as well.
Christopher Glynn: Sounds great. Have fun.
Farouq Tuweiq: Thank you.
Operator: Our next question is from Luke Junk with Baird. Please proceed with your question.
Luke Junk: Hi, good morning. Thanks to take the question. I know we have covered a lot of ground, so maybe just one question for me, Farouq. Would love to get your perspective on scaling the business in ITDS. In other words, driving operating leverage there as these AI programs come online, both in a bigger picture, multi-year sense, sort of the art of what could be possible there, as well as maybe more specifically in the near term in terms of what is animating the gross margin upside, both on the Q3 print and kind of what you are implying in the Q4 guidance, which seems to be strong as well. Thank you.
Farouq Tuweiq: Yeah. No, thank you for the question. It is an interesting time to see where we go. So maybe I will answer it backwards. In terms of the future, right, I think it would be a great high-class problem if we continue to see the robustness and the growth and investment in the business and the future, and there is interesting technologies emerging. But also keeping in mind in the future, hopefully we have M&A, right, that allows us to leverage some of that capacity. So the future, we will see where it goes, but we kind of like where it is heading. Obviously, growth brings its own set of challenges, but we will happily take that on.
Farouq Tuweiq: In terms of the business today, I think the team has done a very good job at leveraging really across the business, whether it be the R&D capabilities, commercial efforts, procurement efforts, moving production from one facility to the other facility, or in process of moving more from one place to the other. We have some specific customers that have big opinions about where they want things manufactured for various reasons, and we are happy to oblige. So one of our focus that we spent on the last few years is can we do it quicker and faster? Keeping in mind that in our business, you cannot just pick up and move, right? There are audits that have to happen, customer visits, customer sign offs. So moving something in our world in general is not an easy few quarter thing. It takes a while.
Farouq Tuweiq: But the question is, how do we build some speed and dexterity into it? Also with some proactive thinkingness. We do have to get to that. We can move a little bit quicker, and we are seeing some of the benefits of that. I think the team on the ITDS specifically, it is nice to see. And capacity, like I said earlier, is really not a bottleneck for us, so we are okay there.
Farouq Tuweiq: It is really the footprint adjustments, and we will see where that goes, right? Because I think the geopolitical landscape seems to be changing by the minute. And what is maybe good today on this call will give you a different impression on it on the February call. We need to just make sure we are ready for a range of outcomes and scenarios and that we can move quicker. That is going to really be our focus areas.
Luke Junk: Helpful. Thank you.
Operator: Our last question is from Asiya Merchant with Citigroup. Please proceed with your question.
Asiya Merchant: Hey, great. Thanks for squeezing me in here. And actually, my question was kind of related to the last one that was just asked. CapEx here, still a small percentage of your revenues, and I get it, like you guys are investing here for the solid demand. But anything as you think about the demand picture shaping out for 2027 and beyond, how we should be thinking about CapEx intensity. And often investors will always ask about how flexible that capacity is, in the sense that could you divert some of that to, let us say, other programs that perhaps are not as impacted if there is any kind of economic downturn here. Thank you.
Farouq Tuweiq: Yeah, no, I appreciate that. It is an interesting question, right? If we look at our manufacturing footprint today, putting M&A aside or I do not know, we have so much growth, we need a new factory. Putting that aside, but we look at our footprint today, capacity is not an issue. The CapEx, and I think this is one of the unique strengths of Bel Fuse, is we are generally a low volume, medium volume, high mix, medium mix business. A lot of our business does not necessarily lend itself for over-automation where you hit a button, it comes out on the other end, right? We want to work with our customers on designing, on modifying, on customizing, really trying to drive complexity. We definitely have some commodity stuff, right? For sure, because we think maybe about some of the fuse business.
Farouq Tuweiq: Generally, most of our business is kind of what is called in the modified standard or customized type approach. Because of that, you will hit a limitation, and you will not get the ROI on a certain level of automations. I think our team, I would suggest, is probably one of the best at trying to find automation for the environments that we operate in. This is really kind of true, especially on the power side of the business. Given the nature of our business, I think that is a fair comment there, Asiya. If you look at our CapEx maybe as a percentage of revenue, and I can see where there is just that question, but our revenue is also different. Therefore, I think not sure that is a very valid metric.
Farouq Tuweiq: I will tell you, we do not have a problem spending on CapEx, especially as we are seeing growth coming in, and where there is opportunity, we will do it. We just are not going to artificially do it for the sake of automation. Also, customers are a key part of that, right? As we think about what will the customers need, and do they want that or not want that? I think just as a reminder for everybody, when we look at our power business as an example, right, across the portfolio, which is over 50% of the business today, the materials are the biggest cost in that bill of materials. As we think about overhead and labor, it is really the procurement is the key. Today we like our CapEx.
Farouq Tuweiq: Sure, there are always things you can spend money on, but we are not holding back money on investment, that is for sure. The other thing keeping in mind, kind of to what I just said earlier, which is what you are talking about, is resource allocation. I think our factories are generally designated to make something. Our power factories largely are making power components. Connector factories are making connectors.
Farouq Tuweiq: Magnetic factories are making the magnetics. When we think about factory resource allocation, we are thinking within that factory, where do we spend our time and energy? It is not, let us move power from one facility to the other, right? It is a very different product set and complicated one. We think about efficiency, productivity, quality over automation, right? That is what we are selling. I think we are at a good level in terms of CapEx, and I think we have stepped it up in the last few years for sure.
Asiya Merchant: Great. Thank you.
Operator: We have reached the end of the question and answer session. I would like to turn the floor back over to Farouq Tuweiq for closing comments.
Farouq Tuweiq: Again, thank you everybody for joining our call. We are very excited to have delivered these results to our shareholders, excited about Q4. So thank you again for joining our call, and we will look to speak to you in the next quarter. Thanks, everyone.
Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
Farouq Tuweiq: Yes, perfect. Thank you.
