Ladies and gentlemen, good morning, and welcome to the Bel Fuse Inc. Third Quarter 2025 Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the call over to Jean Marie Young with Three Part Advisors. Please go ahead.

Thank you, and good morning, everyone. Before we begin, I'd like to remind everyone that during today's conference call, we will make statements relating to our business that will be considered forward-looking statements under federal securities laws, such as statements regarding the company's expected operating and financial performance for future periods, including guidance for future periods in 2025. These statements are based on the company's current expectations and reflect the company's views only as of today and should not be considered representative of the company's views as of any subsequent date. The company disclaims any obligation to update any forward-looking statements or outlook. Actual results for future periods may differ materially from those projected by these forward-looking statements due to a number of risks, uncertainties and other factors. These material risks are summarized in the press release that we issued after market close yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause actual results to differ materially from our expectations is discussed in our filings with the Securities and Exchange Commission, including our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2024, and our quarterly reports and other documents that we have filed or may file with the SEC from time to time. We may also discuss non-GAAP results during this call, and reconciliations of our GAAP results to non-GAAP results have been included in our press release. Our press release and our SEC filings are all available at the IR section of our website. Joining me today on the call is Farouq Tuweiq, President and CEO; and Lynn Hutkin, CFO. With that, I'd like to turn the call over to Farouq.

Thank you, Jean. And we appreciate everyone joining our call this morning. During the third quarter, we continued to see robustness across most of our end markets, particularly within the commercial aerospace, defense, and networking sectors, with continued steady rebound within our distribution channel and consumer lines. Our profitability this quarter surpassed our expectations, thanks to the continued dedication and discipline of our global team. This strong performance reflects our global team's dedication from pursuing strategic business opportunities and investing in key customers to effective procurement cost management, operational efficiencies, and improved fixed cost absorption resulting from increased sales volumes. As part of our ongoing commitment to operational excellence, we are continuously reviewing our global footprint with an eye towards scaling Bel for long-term performance. In October, we made the strategic decision to transition operations from an additional facility in China to a subcontractor during the fourth quarter of 2025. This move follows a thorough evaluation of internal manufacturing costs versus outsourcing, and in this instance, outsourcing proved to be the better alternative. We expect the transition to largely be completed by December 2025, with a fair amount of annualized cost savings occurring as we head into next year. We're also progressing with the restructuring initiative at our Glen Rock, Pennsylvania facility. Following the sale of the building in the second quarter of 2025, we are now transitioning the remaining manufacturing operations to other Bel sites, with full completion expected by early 2026. The Glen Rock initiative is projected to incur minimal incremental restructuring costs in Q4 2025. Throughout this process, we have already realized significant annualized savings as we had previously discussed. To put this in perspective for some of our newer investors, our restructuring efforts over the past four years have resulted in seven facility consolidations in addition to the sale of our Czech business in 2023. These actions have resulted in over 600,000 net square footage reduction on our manufacturing lines while leaning into automation and investing for the future of our factories. As we approach the end of 2025 and look ahead to 2026, our focus has been firmly on our go-to-market strategy and driving growth, both organically and inorganically. Throughout the past few months, we have been meeting with Bel's key leadership across the world to identify the areas, methods, and resources needed to better achieve top-line growth. While we're in the early stages of strategic planning, I want to emphasize the exciting collaboration and energy within Bel's extended leadership team as we chart our next chapter. One of the common themes emerging is shifting our historical focus from products to end markets and customers to ensure we are delivering the totality of Bel to them. This mindset shift will take a while to cement but is a logical step for a company such as Bel given the impressive breadth of our product portfolio. We're also investing in foundational structures that support our business, especially around IT systems and data infrastructure. To give you an example of some of the current initiatives, we are in the process of updating and implementing CRM platforms, travel management software, and developing various dashboard tools for key financial and operational metrics and KPIs. These enhancements will enable our leaders to make faster data-driven decisions, strengthen accountability, and improve overall performance. Standardizing our processes and terminology will also allow us to scale efficiently and seamlessly integrate future acquisitions. In summary, there is a tremendous amount of activity and excitement underway at Bel, all aligned to our common goal of growth and continued maturity. With that, I'll turn the call over to Lynn to run through the financial highlights from the quarter and some color on the Q4 outlook.

Thank you, Farouq. From a financial perspective, we delivered another strong quarter, marked by continued margin expansion and robust sales growth across all segments. Third quarter 2025 sales totaled $179 million, representing a 44.8% increase compared to the same quarter last year. In addition to the $34.4 million of incremental revenue in the current quarter related to the Enercon acquisition, each of our three product segments achieved double-digit organic growth over last year's third quarter. Profitability improved alongside sales, with gross margin rising to 39.7% in Q3 '25, up from 36.1% in Q3 '24. This margin expansion was driven by improved absorption of our fixed costs in our factories with the higher sales volumes and by strong execution within each of our segments while maintaining discipline around the SKU-level profitability. Turning to some details at the product group level. Power Solutions and Protection delivered another exceptional quarter, with sales reaching $94.4 million, representing a 94% increase compared to the third quarter of last year. Excluding A&D, organic sales grew by $11.3 million or 23.2%, reflecting strong demand for our power products in key markets. Sales of power products for networking applications increased by $11.4 million. Growth within the networking market reflects both a rebound in demand following a long period of inventory destocking and new incremental demand driven by AI. As we've noted in the past, it is difficult to isolate exactly how much of this growth is AI-driven. But to provide a comparable metric to prior quarters, our third quarter sales into AI-specific customers were $3.2 million in Q3 '25, up from $1.8 million in Q3 '24. Other areas of strength within the Power segment were seen in sales of our fuse products, which were up $1.8 million or 41% from Q3 '24, and an increase of sales into consumer applications of $2.3 million or 39% from Q3 '24. As an important note, fuse products and consumer-facing products have very short lead times and are generally the first areas where we see the pickup in intra-quarter turns, which is a positive indicator for the overall business. As an offsetting factor, eMobility sales were $2.2 million in Q3 '25 versus the $3.4 million in Q3 '24, and sales into the rail market were $8 million in Q3 '25 versus $9 million in Q3 '24. Gross margin for the segment came in at 41.8% for the quarter, up 240 basis points from Q3 '24, largely driven by the higher sales volumes and better absorption of fixed costs at our factories. Turning to our Connectivity Solutions Group. Sales for the third quarter of 2025 reached $61.9 million, up 11% compared to Q3 '24. This growth was primarily driven by strong performance in commercial aerospace applications, where sales totaled $18.8 million, an increase of $6.3 million or 50.5% year-over-year. Connectivity product sales into defense applications also continued to be robust in the third quarter, with sales rising $3.6 million, a 31.2% increase from the prior year quarter. Contained within our defense number here are sales into space applications, which amounted to $2.5 million in Q3 '25, up 25% from Q3 '24. While connectivity sales through the distribution channel were down $1.9 million or 9.7% versus Q3 '24, it's important to note that this reflects the shift of an end customer out of the distribution channel and we are now servicing directly. Profitability within the connectivity segment continued to improve, with gross margin for the group rising to 40.3% in Q3 '25 from 36.6% in Q3 '24. This margin expansion reflects the benefits of operational efficiencies achieved through facility consolidations completed last year and a more favorable product mix. These positive factors were partially offset by minimum wage increases in Mexico and foreign exchange pressures related to the peso. Lastly, our Magnetic Solutions group delivered a strong quarter, with sales reaching $22.7 million, an 18% increase compared to Q3 '24. This performance was consistent with the expectations we shared on our last earnings call and was primarily driven by higher shipments to a major networking customer. Gross margin for the group improved to 29% in Q3 '25, up from 27.3% in Q3 '24. This margin expansion was supported by higher sales base and the benefits of facility consolidations in China, which helped reduce fixed overhead costs. These gains were partially offset by minimum wage increases in China and unfavorable foreign exchange impacts related to the renminbi. At September 30, 2025, R&D expenses totaled $7.5 million in Q3 '25, representing an increase of $2.1 million compared to Q3 '24. This increase was primarily attributable to the inclusion of Enercon's R&D costs, which amounted to $2 million during Q3 '25. Looking ahead, we anticipate that R&D expenses in future quarters will generally remain consistent with the Q3 '25 level as we continue to invest in new technologies and solutions to support our customers and drive long-term growth. Our selling, general and administrative expenses for the third quarter of 2025 were $32.8 million or 18.3% of sales, up from $26.7 million in Q3 '24. Importantly, SG&A as a percentage of sales declined from 21.6% last year, reflecting continued progress in managing our cost structure as our business grows. The increase in total SG&A dollars was primarily driven by the inclusion of Enercon's SG&A expenses, which contributed $6.6 million to the quarter, and our U.S. medical claims continued to be high in the third quarter. As noted in prior quarters, our legacy level of SG&A expense was maintained during periods of reduced sales, such that we believe we are already spending the right amount on fixed SG&A infrastructure needed to support future growth. Turning to our balance sheet and cash flow. We closed the quarter with $57.7 million in cash and securities, down $10.5 million from year-end. This decrease was primarily driven by our proactive efforts to strengthen the balance sheet, including paying down $62.5 million in long-term debt, resulting in $225 million of total debt outstanding at September 30, 2025. Additionally, we made $2.5 million in dividend payments and invested $8.6 million in capital expenditures to support growth and efficiency initiatives. These outflows were partially offset by $7.8 million in proceeds from property sales and $1 million from the sale of held-to-maturity securities earlier in the year. Looking ahead to the fourth quarter of 2025, we continue to see strength across all three segments. Historically, we have seen seasonality in the fourth quarter with fewer production days due to the holidays being celebrated around the world. In light of this historical trend and based on the information available as of today, we expect Q4 '25 sales to be in the range of $165 million to $180 million. We noted in the second and third quarters that the trend of intra-quarter sales has resumed, and this range assumes that trend continues into the fourth quarter. And with that, I'll now turn the call back to the operator to open it up for questions.

The first question comes from Bobby Brooks from Northland Capital Markets.

I wanted to revisit the last point that Lynn mentioned regarding the fourth quarter guidance. It was interesting to see that for the fourth quarter, we might not follow the usual trend of lower sales compared to the third quarter. You pointed out that intra-quarter sales trends have picked up again, and this estimate suggests that will continue into the fourth quarter. I would like to discuss what other factors might be influencing this outlook in more detail, as it seems like an exciting development for your team.

Yes. Bobby, I'll let Lynn provide more details. I want to highlight a point that caught my attention about the decrease in Q4. If you examine the range we projected, $165 million to $180 million compared to the $179 million that was achieved, there’s a possibility. However, we expect some seasonality. As we approach the holiday season and year-end, we will have fewer working days globally, alongside various holidays, including those during Golden Week and in Israel. I want to emphasize that fewer working days are a factor. So, could we see a different outcome? It's possible. The positive note is that we anticipate a strong quarter, and we might surpass Q3, but I want to be cautious about that. Now, I'll turn it over to Lynn.

Yes. To build on what Farouq mentioned, we are observing ongoing strength in sectors such as commercial air, defense, AI, and space. The rebound we anticipated in networking and distribution is also materializing. These positive trends are carrying over from Q3 to Q4, indicating persistent strength in the end markets. However, as Farouq pointed out, there are fewer production days this quarter due to Golden Week in China at the beginning of October, followed by Thanksgiving and other winter holidays in December. If we exclude the impact of these holidays, our outlook might look different. Historically, it's quite common for us to experience a decline from Q3 to Q4.

I appreciate the additional information. I understand that many of the projections indicate that Q4 will be lower than Q3. However, what stood out to me was that the guidance you provided is in line with the guidance for Q3. Typically, your guidance suggests that even the upper end of the range is lower than what we saw in Q3. I also acknowledge the points you made. Regarding the legacy customers and order trends, is it reasonable to assume that these are still showing positive momentum? Could you provide more insight into their potential trajectory? Clearly, we are coming off historically low levels in 2024, but do you believe they are continuing to improve, or are they currently stabilizing at an improved level? I’m interested to hear more on this.

If we take a broader perspective and examine the last five years from 2020 to 2025, the industry consensus would indicate that this period has been anything but typical. We experienced extremely prolonged lead times early on, followed by a significant downturn where the industry faced challenges for an extended period. Additionally, numerous geopolitical and economic uncertainties have emerged. It's important to note that the situation is still somewhat atypical. We are observing a degree of hesitation among customers in fully returning to previous purchasing levels. On a positive note, customer attitudes have shifted somewhat, especially when viewed through a historical lens. However, analyzing our business, backlog, and discussions, there is definitely an optimistic outlook. In general terms, we observe that customers are starting to come back a bit stronger. While attending a conference last week, I noticed a sense of caution within the industry. Many are not investing heavily in buffer stock and are primarily ordering as required. Our main focus remains on end demand, assessing how our customers' demand cycles are evolving, where their products are headed, and whether they are experiencing growth. The answer is yes, as demonstrated by our performance and projections. We are optimistic about the outlook, but it's challenging to claim that everyone is feeling entirely positive about the current situation. Regardless, we are satisfied with our positioning and our relationships with customers, and we anticipate favorable outcomes ahead.

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

Got it. Lastly, I was really impressed when you went through each segment of power, and it seems like the robust results in power were driven across many different segments. It was nice to hear you explain what Enercon was as well. I'm curious about Enercon; is the integration into your team mostly complete now, or is there still more work to do? Also, while you are working on long lead time projects, do you have any early insights on potential cross-selling opportunities emerging?

Yes. So, I would say, I think we want to be just mindful of the word integration because the plan was never kind of a, let's say, classical approach to integration. From our perspective, when we think about integration, it's really around alignment from a go-to-market and tackling opportunities and co-selling and making sure that we are kind of creating opportunities together. Obviously, in Europe, it's a little bit of a different playbook as we talked about in the past, right, just in terms of trying to manufacture a little bit more there and be more present in our customers' backyards. But putting all that aside, I think we're definitely moving in the right direction. There's definitely obviously more work to be done, but we are seeing some nice, let's say, early sparks of where one side of the house is bringing an opportunity to the other side of the house. So I think our, let's call it, lead sharing, co-tackling is better, but we do have more room to go, keeping in mind that while we also want to do that, it is a very busy market. So step one, we got to do our day jobs and get out and push, and we're seeing the benefits of that strategy, but also want to make sure that we're more aligned. So, I would say we like what we're doing. We can do a little bit more, and we plan on doing a little bit more.

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

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

Thank you for your question, Theo. We've discussed in the past that distribution is a very dynamic channel and our distributors are important partners in our industry. It's difficult to generalize, but I'll give it a try. Some customers prefer to aggregate all their purchases through the distributor, even if we initially work with them directly. This means our relationship may begin direct and then shift to distribution with a fixed fee. Conversely, some customers find us through distribution, and we collaborate to develop a product that can be distributed through the distributor or directly. This occurs in both directions. One of the guiding principles is the minimum order quantity. For smaller orders, we prefer to go through distribution, and sometimes we encourage customers to use distribution to optimize our service costs. It's definitely a dynamic channel, and distribution serves as an excellent way to discover new customers. I wouldn't say we're doing anything out of the ordinary for our industry, and we aren't looking to damage any relationships; this is quite standard. It's also important to note that not all distributors are alike. Some focus on low quantities and may not want to work with us as we scale, while others are more open to larger opportunities. So, the situation varies, but I wouldn’t characterize it as anything strange.

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

Yes, I think we've been very clear about our stance. We are satisfied with our balance sheet and continue to reduce our debt. We are optimistic about further paydowns as we head into Q4 and next year. This positions us well for pursuing mergers and acquisitions. The primary consideration is the size and nature of potential deals, including their complexity and purchase price. Currently, the M&A environment is still challenging, but we are noticing more opportunities compared to the first and second quarters of this year. While it isn’t back to normal yet, we see some prospects to consider. Throughout the quarter, we consistently have potential deals in progress. The key questions remain whether to proceed and if the business fundamentals align with our strategy. I hope that addresses your question, Theo.

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

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

So Jim, this is related to our Magnetics segment. We conducted an analysis to determine if it would be more cost-effective to manufacture internally or to outsource production. In this case, we decided that outsourcing was the better option. The impact on gross margin would be approximately $1 million per year.

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

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

Yes. So in networking, are you asking about a particular segment or just in general?

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

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

And Lynn, you mentioned that the book-to-bill ratio was above 1. Is that correct? Can you describe the bookings across the three main product areas and whether there was much variability among them?

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

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

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

Yes, that's a great question. Taking a step back, it's important to note that over two-thirds of our business is connected to U.S.-based customers. A&D is currently our largest end market, which serves the U.S., Israel, and Europe. When we analyze geographies through the lens of these end markets, U.S. and Israeli customers are leading. The networking side also aligns with most of our engagements. Asia represents our smallest exposure, while Europe and Israel fall in between. Our U.S. and Israel business will significantly impact our results. Regarding demand, the U.S. appears to be in a healthier state overall. Europe presents a mixed scenario; for example, our rail business there has seen some decline. EV and eMobility, which are part of our Power group, have more exposure in Europe, and various sector dynamics are at play there. As for Asia, it's a smaller market for us, but we've invested in senior leadership within our sales organization this year, and we're seeing promising opportunities. While Asia remains a strategic focus for us where we choose our engagements carefully, we do plan to expand our efforts there.

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

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

And then also keeping in mind some of our other margin businesses like eMobility and rail are down and those tend to be higher margin. I think the bigger discussion is today, we're at a point where I would say we're at great levels of gross margin. And if we're trying to think about growth, right, what is the opportunity there to expand to new customers, new offerings, and new products versus having an extremely strict line on gross margin? So, for example, right, let's say there's a very nice piece of business that was, I don't know, $1 million, $2 million that was a little bit below corporate averages. But over time, we can scale it up and also get new opportunities. Would we take that business? I think we really need to consider that if it's a strategic relationship. I think the gross margin strategy let's say has not been one that was available to us through our history. So now we got to look at it as an asset and as a tool. Now keeping in mind, we work very hard to get our gross margins here, right? We don't want to arbitrarily get it further into that 37%, 39%. So, I think there's a little bit of self-discovery, to be honest with you, as to where we should be. I think when we look at gross margins today, we want to make sure we're not picking out too much and just really missing the boat on EPS growth, given that we talked about the range-boundness of our SG&A and R&D. So, these are kind of things that we're all kind of thinking about. But I would say today, we're definitely up there in terms of performance on margins.

Okay. Yes. This relates to my previous question about the Q4 guidance and gross margin expectations. Looking back at the year so far, gross margin has been around 39%. The revenue projections for Q4 suggest it will be significantly higher than what we experienced in the first half, especially at the midpoint. I'm sure many factors are contributing to this, but are there any additional considerations in your gross margin assumptions, such as product mix or perhaps some cautiousness? Any insights on that?

There are a couple of factors to consider. First, our Magnetics group has been struggling for the past few years. As it starts to recover, since it has the lowest gross margins, this could place some downward pressure on our overall gross margin as Magnetics becomes a larger part of our business. Additionally, when comparing Q3 sales to Q4, we typically see a decrease in Q4. This decline can reduce our fixed cost absorption, potentially impacting our gross margins negatively. Furthermore, fluctuations in currencies like the peso, the renminbi, and the shekel also directly affect our margins. These are some of the elements we take into account when we provide our guidance for margins in the fourth quarter.

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

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

Thanks for the question, Chris. Your inquiry is more focused on the commercial aspect of the business and the origins of our recent successes. As an engineering-driven organization, we operate on a medium to long-term design cycle. Consequently, the actions and results we are witnessing today in Q3 can be traced back to efforts made one to three years ago. Although we do experience some intra-quarter fluctuations, I would generally say that Q3 doesn't reflect a significant amount of new business compared to the developments in Q2, possibly even some from Q1. This creates considerable pressure on us to ensure that our efforts in Q3 and Q4 are paving the way for the upcoming quarters next year and beyond. The question then is how our team is strategizing our go-to-market approach, sales initiatives, and data utilization to support these leading activities. We're genuinely excited about the new developments and wins we've achieved in Q3, including some substantial victories and new customers that we historically weren't competitive with. Our long-term customers continue to present new program wins. In defense, our largest market, there are not many major players in the U.S., so we focus on getting more opportunities for design wins, and I believe we're successfully doing that. Our teams across Bel Fuse show a strong drive to pursue new opportunities, and we are clearly defining what constitutes new for us. We aim for specific profit margin profiles and have been learning how to succeed. While we've always focused on this throughout our history, we have recently intensified our efforts. Our business approach considers product perspectives, but since many of our products cater to the same customers, we need to better align ourselves to provide comprehensive solutions, ensuring we don't miss potential sales. I believe there is more we can achieve with our product portfolio. To capitalize on the highest return on investment opportunities, we need to invest in systems and processes that effectively measure performance. Although this is a relatively new challenge for us, the initial signs of success we're seeing indicate we have to look back before 2025 to fully realize our potential.

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

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

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

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

No, I appreciate that question, Luke. It's a question we've been thinking a lot about in general is where should you be, right? And I think by all accounts, putting aside our mix between Magnetics and the other segments, yes, we're seeing an uplift in margin as sales grow, and we are getting operational leverage. The question is now that we are really trying to shift our mindset away from just operations and cost efficiency, which always just become regular way table stakes, how do you drive growth? So as we launch new products and go after new customers, invest in new relationships and new technologies, we need to be honest with ourselves and say, okay, what is the pricing strategy on things. So for example, right, let's say there's a very nice piece of business that was, I don't know, $1 million, $2 million that was a little bit below corporate averages. But over time, we can scale it up and also get new opportunities. Would we take that business? I think we really need to consider that if it's a strategic relationship. I think the gross margin strategy, let's say, has not been one that was available to us through our history. So now we got to look at it as an asset and as a tool. Now keeping in mind, we work very hard to get our gross margins here, right? We don't want to arbitrarily get it further into that 37%, 39%. So, I think there's a little bit of self-discovery, to be honest with you, as to where we should be. I think when we look at gross margins today, we want to make sure we're not picking out too much and just really missing the boat on EPS growth, given that we talked about the range-boundness of our SG&A and R&D. So, these are kind of things that we're all thinking about. But I would say today, we're definitely up there in terms of performance on margins.

That's all very helpful. I have a second question regarding networking and AI, specifically about design win activity and how the organization is shifting towards growth overall. I'm particularly interested in Power and your outlook moving forward. We're noticing a rebound in demand from an inventory perspective and those direct AI sales. As you consider building the pipeline, what opportunities do you see within Power specifically?

Today, with our enhanced cost structure and investments in factory automation, alongside quicker product launches from our R&D teams and a more focused sales approach, we are now in a better position to pursue opportunities seriously. Regarding networking, while we understand the direction of our AI products, this merely sets a baseline. Our sales to networking clients, who directly cater to AI, likely indicate that our products are also benefiting from AI advancements. However, measuring this impact presents a complexity since our high-end products cater to AI and various other applications. It is challenging to assert that developments in AI data centers are not favorably influencing us. Moreover, with our improved operational efficiency and market focus, we're beginning to engage with customers that we may have overlooked in the past or deemed too costly to target. We're also witnessing new entrants in the networking market introducing innovative technologies, which ultimately benefits us. We mustn't limit ourselves to waiting for our long-standing customers to return; while that would be advantageous, we need to invest in building new relationships. Additionally, we are enhancing how we service existing customers, seeking to deepen those relationships and create more opportunities. Examining our large customers reveals that we could provide much more. The core question is how we can achieve this, and we are actively pushing our teams in that direction, with promising results so far.

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

Yes. Let me provide some context. We're primarily discussing the U.S. segment of our business. As we’re all aware, there are significant dynamics in the health care and medical care landscape. We maintain a self-insured plan, which we've found to be the most cost-effective approach. Periodically, we evaluate this to ensure it remains the best option. Currently, we are operating as a self-insured entity. One drawback of self-insurance is the unpredictability of claims, which we've experienced in the second and third quarters. However, it's challenging to gauge how these claims will unfold, as we cannot anticipate when a major medical issue may arise. On the other hand, opting for traditional insurance typically comes with a fixed cost, but health care providers often impose substantial annual increases. From our standpoint, we are still benefiting from a cost-effective model, although it does introduce some variability. Additionally, given the overall age of our workforce, increased medical claims are somewhat expected. Predicting what this means for next year is difficult, especially considering the spike we observed in the second and third quarters.

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

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

Sure. Are you looking for a breakdown by product group, Hendi, or just information about other end markets aside from networking?

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

Yes. I think the other two areas that have shown a rebound, which were previously depressed, are in the consumer end market. Last year, this market was affected by one of our large suppliers in China, leading to a downturn for several quarters. However, we observed a rebound in that business during the third quarter, which is encouraging now that we have identified new suppliers and are getting products back into the market. Additionally, we are seeing a rebound in the fuses segment as well, which had also been weaker in the past. These are the two areas, alongside networking and distribution, that I believe are improving.

Got it. Magnetics sales are still significantly below pre-COVID levels. What are your expectations for Magnetics sales going forward, specifically regarding potential recovery in the short to midterm?

Yes. When we examine Magnetics, it's clear that the industry experienced an unusual spike in 2022-2023, with customers purchasing and renting warehouses to store these components. This resulted in atypical behavior. To quantify our position, we could estimate the range was between $175 million and approximately $75 million at its peak and trough. However, I believe achieving $175 million in the next few years is unlikely, as we've strategically stepped back from certain business areas and are being careful about which opportunities we pursue. Additionally, the Magnetics sector is heavily concentrated in specific products and markets, mainly networking and distribution. The anticipated range for now would be around $70 million to $180 million, but we are experiencing year-over-year growth. Keep in mind that the $180 million figure from 2022 was highly inflated, and we have streamlined our operations since then.

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

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

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

Again, I want to thank everybody for joining us here and a very big thank you for the Bel Fuse team around the world and our customers that helped us deliver this great quarter. We'll put our head down to continue to work throughout the year here and heading into 2026. Wishing everybody a great holiday season as we head into year-end, and I'm sure we'll be talking soon. Thank you very much for joining us this morning.

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