Prepared remarks
And all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the call, please press 0 on your telephone keypad. As a reminder, this call 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, Dylan, 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 our company's expected operating and financial performance for future periods including guidance for future periods in 2026. These statements are based on the company's current expectations and reflect the company's views only as of today which should not be considered representative of the company's views as of any subsequent date. The company disclaims any obligation to update any forward-looking statements or outlook. Actual results for future periods may differ materially from those projected by these forward-looking statements due to a number of risks, uncertainties and other factors. These material risks are summarized in the press release that we issued after the market closed yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance, and cause actual results to differ materially from our expectations is discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and our quarterly reports and other documents that we have filed or may file with the SEC from time to time. We may also discuss non-GAAP results during this call, and a reconciliation of our GAAP results to our non-GAAP results has been included in our press release. Our press release and our SEC filings are all available in the IR section of the website. Joining me on the call today is Farouq Tuweiq, President and CEO, and Lynn Hutkin, CFO. With that, I would like to turn the call over to Farouq. Farouq?
Thank you, Jean, and good morning, everyone. We appreciate you joining our call today. We are excited to have delivered another strong quarter in Q2 led by robustness across the majority of our end markets, and in particular within data solutions and defense sectors. Our distribution partners have also seen a significant uptick in demand. This trend started earlier in the year and has become more pronounced in Q2 with channel sales at its highest level since mid-2022. Bel completed an equity raise in May, selling approximately 1.7 million shares into the market generating net proceeds of approximately $440 million. The proceeds were utilized to fully pay off our debt with the balance of the cash earmarked to fund the closing of the Enercon transaction in Q1 2027, and to invest in other initiatives to support Bel's growth. As announced last quarter, Bel is now organized under two end-market-based segments: Aerospace Defense and Rugged Solutions, or ADRS, and Industrial Technology & Data Solutions, or ITDS. Q2 was the first full quarter for us under the new structure, and the team has made nice progress in our segment strategic initiatives. During the quarter, we achieved a notable milestone with Bel's facility in Slovakia gaining the required certification as a defense manufacturer in Europe. We noted on last quarter's call a European defense project win for the Slovakia site. We are excited to report that Q2 marked an additional eight project wins from European defense customers for the site. We anticipate these translating to sales beginning in the latter part of 2027, which is the normal monetization cycle of defense wins. From a people perspective, much of the year has been focused on building the team structure to support our growth. This initiative is across the board from operations and sales to IT, finance, legal, and HR. In this area, we made notable progress in Q2. We anticipate having all of the key roles filled by the end of 2026. We have also been doubling down on building out the A&D sales team in Europe and have filled some key positions there as well. We are very excited about these additions. Shifting to what is ahead, it was another strong quarter of bookings across the business, exceeding our level of sales for the sixth consecutive quarter. Based on the information available today, we are projecting sales for Q3 to be in the range of $205 to $225 million with gross margin in the range of 39% to 41%. Anticipated drivers of sequential growth from Q2 are a continuation of the same trends: defense, data solutions, and an increase in demand for components through our distribution partners. As a point of note, the recent project wins, robust bookings and overall favorable market conditions will enable us to take a fresh look at our product portfolio. In this regard, we anticipate there will be some revenue rotation in the coming quarters whereby higher-growth, better-margin business will be emphasized ahead of our larger, lower-margin business and products. We continuously evaluate our business and now have the luxury of focusing on better ROI business. Overall, we are in exciting times, and there continues to be great momentum across the business. I am proud of and thankful for our global team for their collective efforts in pulling together, pushing forward, and achieving another remarkable quarter for our shareholders. And with that, I will turn the call over to Lynn for the financial review.
Thank you, Farouq. From a financial standpoint, we delivered a strong second quarter. We grew revenue, expanded margins and materially improved liquidity. These results increased earnings quality and financial flexibility. In Q2, total sales were $210.7 million, up 25% from the prior year quarter. Growth was broad-based, led by the defense and data solutions sectors, as Farouq mentioned. The increase in sales through our distribution channel was most prominent among our component products, including fuses, integrated connector modules, and RF connectors. Gross margin was 39.9%, up 120 basis points year-over-year. The increase primarily reflected operating leverage from higher volume and improved execution. These benefits were partially offset by higher material costs and unfavorable foreign exchange impacts. Adjusted EBITDA was $48.9 million compared with $35.2 million a year ago, an increase of approximately 39%. Adjusted EBITDA margin increased to 23.2% from 20.9%. This improvement reflects stronger conversion of revenue growth into operating profit. From a segment perspective, ADRS revenue was $111 million, up $18.6 million or 20.6% from Q2 2025. Growth in ADRS was led by defense, which totaled $66.5 million in Q2 2026, a 28.4% increase from Q2 2025. Gains in industrial applications were also strong during the quarter, largely through the distribution channel. These areas of growth were partially offset by a decline in commercial air versus last year. ADRS gross margin was 41.1% compared with 41.4% last year. Higher sales volumes added leverage in the P&L, but those gains were more than offset by foreign exchange and material cost pressures during the quarter. Pricing increases implemented on new orders earlier in 2026 are expected to benefit Q3 and subsequent periods. We are also investing in capital projects and process improvements to increase throughput, efficiency and capacity. Turning to ITDS, revenue for this segment was $100 million, up $23.8 million, or 31.1% year-over-year. Growth was led by sales into the data solutions end market, which was up $20.7 million or 55% from Q2 2025. Higher demand within data solutions includes the beginning of a ramp related to recent project wins in the high-performance computing space. The acquisition of dataMate in March 2026 contributed $4.4 million of sales in Q2 2026 and is included within data solutions. While to a lesser extent, we also saw meaningful growth of sales into industrial and consumer applications, which rebounded nicely through our distribution channel in the second quarter. Strength in these end markets was partially offset by transportation, which declined modestly versus last year. ITDS gross margin was 38.8%, up from 36.6% last year, an improvement of 220 basis points. The increase was primarily driven by favorable product mix and operating efficiencies, including higher volume and improved utilization. These benefits were partially offset by foreign exchange impacts. The weaker US dollar relative to the renminbi increased costs at our Chinese manufacturing locations during the current year period. Turning to operating expenses, R&D was $9 million, up $900,000 year-over-year. The increase was primarily due to higher personnel costs in the 2026 period. SG&A was $36.3 million, up $5.4 million from last year. The increase here was primarily due to higher compensation and benefits and an increase in professional fees, some of which were nonrecurring during the quarter. We expect SG&A to run in the range of approximately $34 million to $35 million in future quarters. Turning to cash flow and liquidity, we ended the quarter with $306.1 million of cash and securities, up from $57.8 million at December 31. This largely resulted from the equity raise completed in May, which generated net proceeds of approximately $440 million. During the second quarter, as Farouq mentioned, we repaid our full debt balance of $197.5 million, resulting in no outstanding debt balance at June 30. This increase in cash materially improves liquidity and our ability to fund growth, manage volatility and pursue strategic opportunities. From a working-capital perspective, we have heavily invested in working capital to support growth through the first half of 2026. Accounts receivable increased $32 million based on higher sales volume in Q2 2026 versus Q4 2025. Inventories increased $32 million as additional raw materials were procured to accommodate the increase in orders received during the first half of 2026. And accounts payable increased $33 million largely in line with the higher inventory levels. Capital expenditures were $4.9 million during the first half of 2026. We do anticipate a slightly higher level of CapEx in the second half of 2026. We are prioritizing projects expected to improve throughput, drive growth, and have a quick ROI. Going forward, we will focus on improving the cash generation cycle through better receivables management and payables planning. We do expect inventory turns to remain challenged in the near-term as we build up our inventory levels to support our growth projections. Longer term, the objective is to convert a greater portion of earnings into consistent free cash flow as the business grows. And with that, I will turn the call back over to Dylan to open the line for questions.
Questions and answers
Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press 2 if you would like to remove your question from the queue. Pick up your handset before pressing the star keys. One moment, while we poll for questions. Our first question comes from Bobby Brooks with Northland Capital Markets. Please go ahead.
Hey, good morning team and thank you for taking my question. First, was curious to hear more discussion on the Slovakia site gaining the A&D qualification, because that seems like a very meaningful update for the efforts to grow Enercon product sales within the region. So could you expand on what this means for the long-term strategy? And I think it would also be helpful for folks to remind them of what the Slovakia site was before this.
Yeah, thanks for the question, Bobby, and good to connect with you here. So maybe start backwards from your question. Slovakia, historically, was our industrial power factory, so focused on things like rail and e-mobility, laser cutting equipment—kind of very high-power applications on the power side of the business. We have been in the process of modifying the facility so that it could also accommodate aerospace- and defense-type applications, from the acquired Enercon business to serve as a storefront for the European market as that market seeks to have more localized content. Obviously, it sounds a little bit easier than the reality of it. The team has been hard at work here for well over a year to a year and a half, gaining the appropriate certifications, government approvals, changing out some of the flow of the facility, acquiring new equipment, installing equipment, along with training the team for these applications. So it is a pretty complicated effort. That was the idea: to meet our customers where they are. And that strategy has started to take hold in terms of translating to wins. We mentioned it on the first quarter call, and we have more nice wins here in the second quarter. I would say both of these outcomes were in advance of what we initially thought. When we started this a couple years ago at this point, we said we anticipated by end of 2026 to have some wins. So that is obviously driven by the market and the realities of the world, but also driven by our investments that we have done and the headcount level, marketing level, attendance at conferences, and doubling down our efforts with the customers. I would say as we are investing in our go-to-market and sales on the A&D side across Europe, it is really for the whole A&D portfolio. We have connectivity manufacturing sites in the UK serving the European Union, so we are also needing to push those sales. So when we think about A&D, it is across the portfolio. It is not just any one product line. From our perspective, it is more of the same. Obviously, we flagged Slovakia given the interest, and it is something we have talked about. But from our perspective, it is normal investments in the business.
Very helpful color. And then, just curious, there has been a continuous focus over the last several quarters by you and the team to pull internal levers to help spur growth. And now the last two quarters, we have seen really excellent growth that is pretty much all organic, right, as the year-over-year comparisons have included the Enercon benefit. And what you guided for Q3 is a continuation of that. So I was just curious to hear—which initiatives do you feel have been most successful and maybe which more recently enacted initiatives you are most excited about going forward as it relates to growth?
Yes. I think that is a fair question. The wins in Q2 and Q1 are really the culmination—the end of the journey in terms of a lot of the work that has been done by the team earlier this year and last year. These wins, and as we have talked about especially on the A&D side, have long chase cycles. So the fact that we are seeing the results in Q2 reflects work we did further back in the rearview mirror. I would also say as we think about growth across the portfolio, it is not just one area. We are seeing great wins in data solutions, in industrial, and in distribution. So there is a swelling effect of successes. The real question for us is not are we doing good and are we winning? Because the answer is yes. Our focus is are we fully living up to our potential? We are still not at our potential. Therefore, the investments in people, systems and process driving the commercial organization harder are still happening. We talk about the strategic initiatives and put folks on it; we have been doing this for the last two to three years. We are starting to see some benefits, but we are still not where we need to be, which I think is a great opportunity, especially given all the recent wins. Optimization is really what we are focused on versus taking a break. If we were to put the discussion into two topics—people and process—on the people side, we have added headcount, elevated some internal people to help drive teams, and continue to add headcount. We have had the right people with potential who were not in the right place, so we have done movement and reassignment, reestablished KPIs and expectations of performance. On the process side, this could be anywhere from the data side—are we collecting data, are we putting eyes on it, are we pushing the data piece of it? We are still in the process of that, but we are pretty effective today in terms of tracking and managing to that. We are excited about dashboards and CRMs. Another area is incentive schemes; we will probably modify them as we evolve to better reward performance and define what performance means. Another key element is ensuring we have the right outside partners, especially the reps that we use. We had to redo many of our agreements with them to favor payment on new wins versus just legacy flow business, and I think that was a catalyst for change. When we look at people, process, and outside partners, reestablishing expectations and contracts together have collectively been the momentum. Re-segmenting our business has also been another lever and catalyst for focus. We are an end-market-driven business and speaking the language of our customers helps drive those relationships. We also created more focus around business development and key account management and are seeing the benefits of that. I am not sure there is one thing I can point to. I am excited to see what our leaders are doing and the team is delivering aided by process and outside reps.
Super helpful, Farouq. Really appreciate it. There is a lot of different pieces going to making a winning team like you have. So appreciate the time, and congrats on the good quarter.
Thanks, Bobby. Our next question comes from Wamsi Mohan with Bank of America. Please go ahead.
Yes. Thank you so much. Good to be on this call. I wanted to ask a little bit about the very strong defense growth you are delivering here. Do you see this sustaining through the rest of the year? And do you need to add capacity in defense? I know Lynn mentioned higher CapEx. What is that primarily geared towards? And I have a follow-up as well.
We definitely think the outlook is looking pretty good. When we look at revenue, it is a lagging indicator because it indicates that you have already won a project and you are starting to monetize. Forward-looking indicators are bookings and new wins. When we look at those, we are seeing robustness. We are seeing the discussion change on the defense side specifically and are expanding more on the European piece by increasing our headcount. In terms of capacity, capacity has not really been a big concern of ours. We would like to be more capacity challenged in the sense that we are investing in CapEx, but as we get Slovakia going a little bit that will give more flexibility on capacity. So capacity is not a major concern today; the focus is on the commercial front end of the house. We have the capacity and the ability to run the channel. The more interesting focus is challenges with supply-chain availability of materials. From a manufacturing perspective, not so much, but supply availability is something we think about. From a sales perspective, we are adding more because we expect more demand. We are adding engineers on the A&D business, specifically in Slovakia. All in all, we like how this is looking and we are investing in the right opportunities to get ahead of it.
And then just as a follow-up, when you look at the incremental margins in the quarter, those took a nice step up. Looks like in your guidance too, there is very strong incremental margins particularly at the operating margin level. How much of this is pricing versus mix versus other factors? And was there any pull forward as far as you can tell in the business in any areas that you would call out if you saw any of it?
When we look back at Q1, we talked about input material and cost challenges across the portfolio. Shipping costs were going up, FX was going against us, raw material inputs were going against us. The margin improvement largely has been operational leverage in nature, which helped drive the margin. In February and March we implemented price increases on new orders, which we expect to benefit Q3 and Q4. The good news is Q2 showed the model is working—despite headwinds, the business delivered operating leverage. As we head into Q3, we will start seeing the benefits of price recovery and operational leverage. We will not recover the full price in Q3 because those increases were on new orders that ship over time, but we expect to start seeing benefits of pricing in Q3.
Our next question comes from Christopher Glynn with Oppenheimer and Co. Please go ahead.
Hey. Good morning. So, just in terms of the gross margin, I think it is the second quarterly guide in a row where you ticked up from what had been the run rate of guidance for three or four quarters previously. And today, Farouq, you noted that you have a nice opportunity to continue to press higher-margin, higher-growth products. Are you suggesting that some of the take rates and the overall growth are allowing you to deemphasize more of the lower-margin end of your volume so you see a fresh kind of mix lever that has become available as the economy and some of your end markets have strengthened?
Yeah. We called that out. When you start having an abundance of wins or new opportunities, you think about where to allocate hours and money. We have done a nice job on wins and expect more from the commercial organization. We can start thinking about where we get better ROI on time and dollars spent. If we get better-ROI SKUs, it frees up the team to pursue other things and deemphasize some lower-return items. This is normal and many competitors do this regularly; for us, it is a newer luxury as we evolve as a company. It is a testament to the team's work that allows us to rotate the portfolio.
So we just called it out really in the spirit of flagging behavior and messaging that we historically have not done as much of. Okay. Great. Thanks. And a little bit on the Data Solutions side. I think Lynn said up 55%, maybe $20.7 million in sales, but also key customers hitting scaling inflection has been kind of a topic year to date for the Data Solutions business. I understand some of your customers in the AI space might have some optionality in take-rate opportunities. Are you seeing some of that start to play through?
Overall, your assessment is correct. We are seeing inflection points and growth. We have played it wisely about where to allocate resources, and we are seeing efforts from two to four years ago paying off today. Lynn, you want to comment on that?
Thanks, Christopher. Just to clarify the numbers on data solutions: it was about $58 million in Q2 2026, up from $38 million in Q2 last year. So it was a $20.7 million, or 55%, increase year-over-year.
Great. Thanks for that. Last one for me. I think you mentioned eight new European defense design wins and last quarter you mentioned a couple. Just curious about the spectrum of size of those applications. I know Enercon specializes in small lots—what is the breadth? Is this a couple of customers, or a wide range of customers? Small lots versus potentially larger lots—just a little more context?
It is kind of a combination. Europe tends to have concentration of OEMs, but we think around platforms you want diversity across flying, ground, and maritime platforms. We like the diversity: there are OEMs but a diversity of platforms. In terms of scale, we think these are multimillion-dollar opportunities collectively over the life cycle of the programs, so they could turn into very nice big wins for us. We would not say there is one dominant customer; we like the diversity because funding cycles differ by program and technology. For example, we have a heavy presence on the U.S. missile side—launchers and missiles—and we will benefit from that growth. Diversity and new wins are our focus, though we cannot control funding cycles.
Thank you. Our next question comes from James Ricchiuti with Needham and Co. Please go ahead.
Hi. Thank you. Good morning. I was wondering if you could provide any color on the bookings in ITDS and ADRS—where you see strength. Obviously you called out data solutions and defense, but just if you can give a little color on the bookings activity you are seeing?
Thanks for the question. On bookings, we have seen positive book-to-bill ratios for six consecutive quarters. That has been broad-based across both segments, most product lines, and most end markets. I would say it is largely in defense and data solutions, and also through our distribution channels. This is something that had been soft for the last couple of years and we are seeing it rebound nicely over the last couple of quarters, with Q2 particularly strong. Distribution items include things like fuses, ICMs, and RF connectors—components that go into a wide variety of applications. So there is concentration in defense and data solutions, but it is broad-based.
What about the replenishment that is going to be required on the defense side, particularly in the missile area? Are you seeing that yet, or is it something you are anticipating that potentially comes later in the year, early 2027?
Public discourse leads the money; discussions are happening. We are seeing positive momentum but there's a gap between the required funding and actual replenishment. Some orders have come through and chatter in the channel around expectations and build rates is positive, but we are still waiting on government funding to come through. We are seeing increased orders, but funding needs to continue to achieve normalization of stockpiles, and that will be an ongoing effort for the near future.
Are you seeing more activity in the space market? Can you quantify what kind of revenues you are seeing or the growth in this part of the business? I know it is an area you have been putting more resources into.
Space for this quarter was $3 million, up slightly from where it was last year. It continues to be small for us but an area with a lot of potential over the next couple of years. We are on many platforms and designs—over 250 customers—but the bottleneck is launch capacity. Until launch bottlenecks are addressed, we may not see much bigger numbers, but we are well positioned given our wins and customer relationships. Design wins are the leading indicator for us.
Our next question comes from Luke Junk with Baird. Please go ahead.
Good morning. Thanks for taking the questions. Farouq, I want to start in Europe. The eight project wins in Slovakia—what does that mean about the pipeline and the commercial development activity that is driving that from an internal standpoint?
When we acquired Enercon in Q4 2024, we said Europe would be an important commercial synergy play. We expected to do work on the Slovakia facility, add headcount, restructure and pace the rollout with European dynamics. We anticipated seeing some benefits of commercial synergies by end of 2026; the fact we have wins in Q1 and Q2 2026 means we are ahead of schedule. That acceleration is partially due to changes in geopolitical dynamics and the market seeking more localized production. We have added headcount and are seeing more shots on goal. We still need to add a few more people in Europe and are not fully ramped on the team side yet. As we bring on new people and they get their legs under them across countries in Europe, we expect more robustness in growth. Europe is the biggest opportunity across both connectivity and power businesses because we have an end-market-agnostic sales team in Europe selling all our A&D products.
Lynn, you mentioned in your remarks that the higher demand in data solutions included the beginning of a program ramp in high-performance compute. Can you expound on that in terms of materiality and looking into the back half of the year? Is this one of the things we are seeing in the revenue guidance walking into Q3?
Yes. We are seeing programmatic wins feeding into the ramp. Many of these wins were achieved a while back and we are starting to see them monetize as our customers deploy products. Bookings and planning discussions indicate an upward trend and further ramp as we close out the year and head into next year.
And maybe bigger picture for you: updated filter lens for M&A now with some dry powder on the balance sheet and some activity in the market in general?
We think about M&A in the context of our long-cycle design business and medium- to long-term investments where there is good growth, technology alignment and customer fit. We will continue to invest in the business for the medium and long term—technologies, capacity additions, and new end markets. We have seen peers do acquisitions at premiums we think are excessive; we will be disciplined. Our recent equity offering gives us flexibility, and we will be balanced and mature in our approach—neither overly conservative nor irrationally aggressive.
Our next question comes from Gregory William Palm with Craig-Hallum Capital Group. Please go ahead.
Good morning. Quick follow-up to that M&A piece. That extra 20% left for Enercon coming next year, is that as simple as just the 20% coming off that $400 million, or should we expect some kind of upward or downward adjustment for that?
It is not 20% of the $400 million. It is the purchase of the remaining 20% equity interest in the business, measured against EBITDA and paid as a multiple that we then convert to equity value to get to the 20%. We put a cap on the upside to 135% of the original valuation back when we did the acquisition. So the calculation is EBITDA-based and we do accrue for it.
Each quarter we carry a redeemable noncontrolling interest on the balance sheet. As of June 30, it was $102.6 million, which is representative of that liability as of that date. As Enercon's trailing twelve-month EBITDA increases, that number increases, up to the cap. Also, there is another earn-out payment structure—one was paid based on 2025 results, and there is a similar one based on 2026 results that would be paid in early 2027. Those are two components of cash needs related to the transaction.
Perfect. And then on organic versus inorganic, can you size your excitement and what you are seeing with organic growth and the elevated CapEx on short-term high ROI projects? How much of the focus going forward is really on organic versus inorganic?
We view organic and inorganic as distinct tracks. Our day-to-day focus—hiring, CapEx, technology—is mostly organic. Inorganic opportunities are pursued by a separate team that partners with leadership. We will run both tracks hard; we are not commingling them. We expect continued robustness from organic initiatives while being disciplined about inorganic opportunities.
Our next question is from Tomo Sano with JPMorgan. Please go ahead.
Hi, good morning, everyone. With the dataMate facility transitions and ERP conversions completed, could you talk about what steady-state benefits we should expect and when they should show up in the numbers, please?
Sorry—your audio broke up a bit, Tomo, but I believe the question is about the dataMate integration. We restructured our business and created a key accounts group and business development team within ITDS, where dataMate sits. The team that came with dataMate has done great work in addition to a facility move and ERP conversion; we've been throwing more at them and they have embraced it. We are seeing benefits in backlog and opportunities as we feed those into the Bel machine. We invested more in BD for their products and have already identified a few opportunities. For context, dataMate was around $18 million in annual revenue at acquisition, so while important, it is not a massive mover by itself for ITDS or Bel overall. We expect benefits to show up progressively as those programs ramp.
Our next question comes from Theodore O'Neill with Litchfield Hills Research. Please go ahead.
Congratulations on the good quarter. With Enercon, you are in a much better place to capitalize on the A&D spend in the EU. Do you worry that it will cannibalize spending in U.S. levels?
If this were normal times, you might see some shifting to local production, but given current dynamics—NATO replenishment, resilience investments driven by events on the ground—net spending is rising. The U.S. is also selling more equipment internationally and has gained customers. Even if some demand shifts to Europe, we are capturing both sides. Net, the current A&D environment is a benefit to us. Also, we are seeing investments in new technologies and new players emerge; we feel well positioned to tackle geographic and technological changes across end markets.
Our next question comes from Asiya Merchant with Citigroup. Please go ahead.
Great. Thanks for squeezing me in. Between the two segments, could you peel back a little about demand dynamics and how we should think about what is baked into the guidance here—both on the top line and on gross margins? ITDS took a nice step up in gross margin. Farouq, you talked a little about price recovery in the second half—so if you could help us think about how the gross margin ramp looks across the two segments?
On ADRS, the main driver was defense spending and production. On ITDS, the leader was data solutions with strength also in industrial technology and distribution. A common factor across both segments was increased demand through distribution. We implemented broad price increases in February and March, but the step-up in Q2 gross margin was primarily operational leverage. Heading into Q3, gross margin improvement will be a combination of operational leverage and the start of price recovery, though not all price benefit will be realized immediately because increases were on new orders that ship over time.
On the FX side, Q2 had significant pressure, especially from the Chinese renminbi and the Israeli shekel. Those trends have stabilized and are starting to recover slightly in recent weeks. We are not expecting further downward pressure from Q2 to Q3 on FX; if anything they may improve a bit, which would assist margin expansion. FX has a big impact on our margin.
Our last question comes from Hendi Susanto with Gabelli Funds. Please go ahead.
Thank you, Lynn. Thank you, Farouq, and congrats on great results. Two questions in one: First, would you be able to share the magnitude of the price increase? And second, you talk about revenue rotation into more favorable, higher-margin products—can you share more color on timing and which product lines or groups this would affect, or is it broad-based?
Our pricing actions were surgical across many SKUs given different input cost increases and market tolerance. It was broad-based across a wide range, but we are not providing a specific percentage on a public call. On rotation, we see this more within ITDS—data solutions are an area where we have wins and want to allocate resources. We expect to start rotating the portfolio and impact will become more visible as we head into Q4 and into 2027, but we are being measured and will not commit to a dollar amount on the rotation as that would be arbitrary.
We have reached the end of our question-and-answer session. I would now like to turn the floor back over to Farouq Tuweiq for closing comments.
So thank you, everyone, for joining our call today. We definitely enjoy these questions. We think we have an exciting story, and we continue to deliver despite some of the choppiness in the market. We are excited to be halfway through the year and continue to look to hopefully a good close for the year. Thanks again to everyone for their vote of confidence. Looking forward to our next call, and everybody enjoy the rest of your summer.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.