Prepared remarks
Good morning, and welcome to the Bel Fuse Fourth Quarter 2025 Earnings Call. As a reminder, this call is being recorded. I would now like to turn the call over to Jean Marie Young with Three-part Advisers. Please go ahead, Jean.
Thank you, and good morning, everyone. Before we begin, I'd like to remind everybody that during today's conference call, we will make statements relating to our business that will be considered forward-looking statements under federal securities laws, such as statements regarding the company's expected operating and financial performance for future periods, including guidance for future periods in 2026. These statements are based on the company's current expectations and reflect the company's views only as of today and should not be considered representative of the company's views as of any subsequent date. The company disclaims any obligation to update any forward-looking statements or outlook. Actual results for future periods may differ materially from those projected by these forward-looking statements due to a number of risks, uncertainties, and other factors. These material risks are summarized in the press release that we issued after market close yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause actual results to differ materially from our expectations as 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 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. Farouq?
Thank you, Jean, and good morning, everyone. We appreciate you joining our call today. I want to begin by expressing a big thank you to our global team for making customer service and meeting demand their top priorities and for delivering innovative technologies as a key partner to our customers. As a result, 2025 was a milestone year for Bell, with record revenue and EBITDA. We delivered net sales of $675.5 million for the full year, a 26.3% increase over 2024 and achieved a record GAAP and non-GAAP EPS. Fourth quarter sales reached $175.9 million, up 17.4% year-over-year. Our gross margins expanded to 39.1% for the year, reflecting strong execution and operational discipline. Aerospace and defense, including space, continued to be strong drivers for us in 2025. For the full year, A&D accounted for 38% of our consolidated sales, with 28% from defense and 10% from commercial aerospace. Recovery in the networking end market and growth in AI applications also contributed to higher sales in 2025. Order volumes remained strong across multiple end markets throughout the year, resulting in a full year book-to-bill ratio of 1.1. We have seen continued improvement and strength heading into Q1. This sustained momentum in incoming orders highlights a healthy demand environment across our end markets and positions us well as we move into 2026. Our team delivered these record results despite headwinds from material pricing, particularly gold, copper, and PCBs, and unfavorable FX movements in the peso, renminbi, and shekel. We're actively monitoring these factors and have and will continue to take pricing actions to mitigate incremental costs, ensuring continued margin strength. Operationally, we successfully completed the closure of our China facility in Q4, transitioning operations to a third-party supplier without interruption to the business. This move is part of our ongoing efforts to optimize our global footprint and drive cost efficiencies. We also made significant progress in strengthening our balance sheet, paying down our debt by $90 million during 2025. This has created additional capacity and flexibility for future investments and potential acquisitions as we continue to pursue growth opportunities. Looking ahead to 2026, we anticipate continued growth in aerospace, defense, space, and AI, the same revenue drivers that have benefited Bell over the past few quarters. Additionally, we have seen a positive shift in sales across the networking and consumer premise wiring markets as well as through our distribution channel. The rebound in these areas is expected to continue into 2026. We also foresee increased raw material input costs and a weaker USD, which will require us to proactively manage pricing and pass costs along where appropriate. Our pipeline for M&A activity remains active, and we are excited about several opportunities currently in various stages of evaluation. We anticipate a better backdrop in terms of M&A opportunities as the market noise settles down a bit in 2026. As announced a few weeks ago, we're excited to welcome Tom Smelker to our executive team. Tom joins us from Mercury Systems, bringing valuable experience and a fresh perspective in aerospace and defense. His leadership will help us better align our organization with changing customer needs and industry trends. As we continue to evolve, we are reviewing our segment structures to ensure we're well positioned for future growth. With aerospace and defense now representing a significant portion of our business, we see opportunities to further tailor our leadership and strategy to the unique demands of these markets. Before turning the call over to Lynn here, I would like to take a moment to recognize Pete Bittner, President of our Connectivity Solutions business, who will be retiring in April after 23 years with Bell. Pete has been instrumental in shaping and growing this segment and leaving it in great conditions as he pursues his next chapter, and we thank him for his many meaningful contributions. We wish you great luck, and you'll be missed, but will surely enjoy his time with his wife and family. I'd also like to take a moment to recognize Dan Bernstein, who transitioned out of the CEO role in May 2025. This last year has been one of significant transition for Bell, and I want to sincerely thank Dan for making it a seamless one. Our business transformation, which began years ago under Dan's leadership, laid a strong foundation for the company's continued success. His vision and commitment to Bell's growth have positioned us well for the future, and we're grateful for his guidance and dedication. On behalf of the entire organization, thank you, Dan, for your outstanding contributions and for setting Bell up for success. With that, I'll turn the call over to Lynn to run through the financial highlights from the quarter and provide color on the outlook for Q1 2026. Lynn?
Thank you, Farouq. From a financial standpoint, we had another strong quarter and year with continued margin expansion and solid sales growth across all segments. Fourth quarter 2025 sales were $175.9 million, up 17.4% from the same quarter last year. Full year 2025 sales totaled $675.5 million, a 26.3% increase over 2024. On an organic basis, sales grew by $41.5 million or 7.8% over 2024. All three product segments delivered organic growth for the quarter, demonstrating the strength of our diversified portfolio. Profitability improved alongside sales with gross margin rising to 39.4% in Q4 '25, up from 37.5% in Q4 '24. For the full year 2025, gross margin was 39.1% compared to 37.8% in 2024. This margin expansion was driven by improved absorption of fixed costs in our factories due to higher sales volumes and by strong execution within each segment, maintaining discipline around SKU level profitability. These results highlight our ability to drive value through operational efficiency and strategic focus. Now turning to our product groups. Power Solutions and Protection delivered another exceptional quarter with sales reaching $92.5 million in Q4 '25, an increase of 18.5% compared to the fourth quarter of last year. The sales growth in the Power Solutions segment was driven by several key end markets, including a $1.5 million increase in sales of our front-end power products serving the networking end market in Q4 '25 compared to Q4 last year. Fourth quarter sales into AI-specific customers reached $4 million in Q4 '25, up from the $3.3 million in Q4 '24. Fuse product sales were up by $1.4 million in Q4 '25, a 31% increase from Q4 '24. Sales into consumer applications increased by $1.8 million in the current quarter, up 32% from Q4 '24. And just to note, in our Power segment, this is also where we had the acquisition last year, so there was some organic growth on the defense side as well. These areas of growth were partially offset by a decrease in sales of our rail products by $4 million and e-mobility sales were down $1.1 million compared to Q4 '24. The gross margin for the Power segment was 44.5% for the fourth quarter of 2025, representing a 390 basis point improvement from Q4 '24. This improvement was primarily driven by higher power sales into the aerospace and defense end markets, a favorable shift in product mix, and better absorption of fixed costs at our factories. Our Connectivity Solutions group achieved sales growth of 15.1% during the fourth quarter of 2025 as it reached $60.5 million compared to Q4 '24. This improvement was due to the continued strong performance in commercial aerospace applications, where sales totaled $18.2 million, an increase of $3.8 million or 26% year-over-year. Sales into space applications amounted to $2.6 million in Q4 '25, up 53% from Q4 '24. Connectivity sales through the distribution channel were up $3.8 million or 20% versus Q4 '24, primarily due to shipments into the defense end market through the distribution channel. Profitability within the Connectivity segment continued to improve, with gross margin for the group rising to 37.2% in Q4 '25 from 36.6% in Q4 '24. This margin expansion reflects the benefits of operational efficiencies achieved through improved revenue, a more favorable product mix, and facility consolidations completed last year. These positive factors were partially offset by minimum wage increases in Mexico. Lastly, our Magnetic Solutions group sales delivered a solid quarter with sales reaching $22.9 million in Q4 '25, a 19.1% increase compared to Q4 '24. This performance was primarily driven by higher shipments to a major networking customer. Gross margin for the group was 27.3% in Q4 '25, down from 29.1% in Q4 '24. This margin differential was due to minimum wage increases in China, an increase in material costs, primarily in gold and PCBs, and unfavorable foreign exchange impacts related to the renminbi. Research and development expenses totaled $8 million in Q4 '25, representing an increase of $1.1 million compared to Q4 '24. This increase was primarily attributable to the inclusion of Entercom's R&D costs, which amounted to an incremental increase of $1 million during Q4 '25. We anticipate that R&D expenses in future quarters will generally remain consistent with the Q4 '25 level as we continue to invest in new technologies and solutions to support our customers and drive long-term growth. Selling, general and administrative expenses for the fourth quarter of 2025 were $32.6 million, down $2.2 million from the $34.8 million in Q4 '24, driven primarily by lower acquisition-related legal and professional fees in 2025 compared to 2024. Turning to our balance sheet and cash flow. We closed the year with $57.8 million in cash, down $10.5 million from last year, primarily driven by our proactive efforts to strengthen our balance sheet, including paying down $90 million in long-term debt, resulting in $197.5 million of total debt outstanding at December 31, 2025. Additionally, we made $3.5 million in dividend payments and invested $12 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 mature securities earlier in the year. During the full year 2025, we generated cash flows from operations of $80.6 million. Taking into account our swap agreements, the weighted average interest rate on our debt balance at December 31, 2025, was 4.4%. Looking ahead to the first quarter of 2026, we continue to see strength across all three segments. Historically, our first quarter tends to be our lowest sales quarter of the year, given the impacts of the Lunar New Year holiday in China. In light of this historical trend and based on the information available as of today, we expect Q1 26 sales to be in the range of $165 million to $180 million. Gross margin is expected to be in the range of 37% to 39% given anticipated headwinds related to higher material costs and the unfavorable FX environment we are in. Overall, our consistent performance, strategic investments, and operational excellence have positioned Bel for continued success. We remain committed to driving shareholder value, innovating for our customers, and capitalizing on growth opportunities across our markets. I'd now like to turn the call back to the operator to open the call for questions.
Questions and answers
The first question is from Bobby Brooks from Northland Capital Markets.
So I wanted to touch on kind of sales initiatives moving forward. So you guys brought in the new head of sales about a year ago, right? And I'd just be curious to hear where he sees the most interesting opportunities for growth. Obviously, for Roop, when you initially joined as CFO a handful of years ago, you had a massive shift in the margin profile of the company, which a lot of that was sort of low-hanging fruit that you targeted. So I'm just curious to hear if that sort of same scenario if Ooma has seen that sort of same scenario, and again, like what he sees as the largest opportunities to go after.
Yes. Thanks, Bobby, and good to speak with you here. I think that's a pretty nuanced question. As a reminder, we are largely in medium- to long-term design cycle businesses, right? So as we think about influence, and we think about A&D, I'd probably suggest that the largest part of A&D for 2026 is going to be simply receiving orders from the customers as they get funding and deployment. So if we were to think about sitting early on in the year here about new wins and when they get funding, you're at least a year out probably 1 to 2 years before you monetize them. And for some of our shorter design cycle businesses on the other end, I would say something like fuses you could probably see a win a couple of quarters out, and that translate into some sales of some of our consumer business. So we are a long-cycle design business. There's no quick claims here. We sell technology. We want to get in with the customer. We want to do the hard stuff. Therefore, that does take a while. If we look at the past few quarters on some of the benefits I have in there, that has been a reflection of the work that the team has done at a global level within the various businesses, right? So I would suggest that the wins and the performance that was probably not much due to sales efforts that happened in Q4, right? This is stuff that probably happened early on in 2026. So we are seeing the benefits of the global team folks in doubling down. When we look across the business, we have new wins across probably all our end markets, maybe a little bit less so in places like e-mobility or maybe some of our, I'd say, rail is kind of a little bit of a slow year. But I would say more often than not, we always have new wins. And when we think about the funneling process, right, we want to make sure we're going after a robust set of opportunities that are good for opportunities and try to convert them to sales. And that process, we started a while back. Now that's not to suggest that we don't have work to do. On the last call, we talked about CRM implementation in Q4. We did a little over three dozen worth of contracts with our reps in the U.S. to really lean into new opportunities. So we're trying to move the whole system forward from compensation structures to software and data to a shift, and it's been happening, right? It's evolutionary. So we've seen the wins. Where is it going to come from? I mean we think probably there's a lot of money going into A&D, data centers, AI, a lot of obvious interest going in there. But quite frankly, our consumer business did very well last year. So I think what we like about us is we touch a lot of end markets, and we like the way they're looking today heading into 2026, a little bit more than early '25 or '24. So a long answer to your question. I just want to caution, we're not a quick turn business, and we're trying to sell more design-in type work or modified solutions versus just purely off-the-shelf stuff.
Absolutely. Really appreciate that detailed color, Farouq. And then maybe just turn into the Q1 guide, very, very impressive, but just wanted to maybe unpack that a little bit more and maybe hoping to get a little bit more granular on the expectations for growth across the three segments?
Sure, Bobby. So as we look to the first quarter, and I guess I'll compare it to this recent Q4 that just ended here. We're seeing a lot of the same areas of strength across all three segments. So not seeing much in the way of significant shifts or changes from Q4 to Q1. I think the only variable in there is the Lunar New Year holiday, which impacts primarily magnetics and then to a lesser extent, power. So those are the areas where we may see a little bit of softness from Q4 to Q1. But other than that factor, everything is pretty similar to the Q4 drivers.
Got it. I appreciate the color there. Congrats on the great quarter.
The next question is from Christopher Glynn from Oppenheimer & Company.
I just want to build on Bobby's question about developing the commercial funnel. So you mentioned focus on designing and modified solutions. Is how you're developing the funnel that makes sense. We've heard that. Curious if you're noting any traction in win rates for us historically as you mature these strategies.
I think we're doing a better job at defining what a win is and how we want it to be at certain levels of margin. The other thing I think we are moving more towards 2026, and we talked about last call, is we want to really try to bring the whole Bel portfolio to our customers. I think historically, we've been really more focused around selling specific products like fuses or a connector power supply. And we do need to do a better job at doing a little bit more systems-type sales to our customers. Now this is a little bit of a longer journey. But the idea there is we want to get more alignment to the customer, solve more of their problems and challenges, and really be a little bit more of a solutions provider to address the difficult things for our customers. So it's not just simply about more shots on goal, which we are seeing. We're seeing better shots on goal, but we still want to continue to evolve to higher content on goal. So yes, we're seeing better also the markets in a little bit better place, right, which creates more opportunities for us. I think the team also remember, we spoke on the last call, where we started creating new internal groups and structures to align to that. So, for example, we created a key accounts group, right, which we have not had that most of the time it was kind of sitting inside the business units, now we want to have a more Bel-focused key account group that brings all of our products to the customers because we do have a lot of SKUs. Same thing on the business development efforts. We're aligning the teams around end markets as we think about products and directions. So I would also argue customer service is an extremely important part of this as we create an easier user experience for our customers. And we just have a lot of different email addresses to customers in different forms or different pricing lists to our distribution partners. So I think calling these things out to not underemphasize that there is robustness in what we're doing that needs to be pervasive in our holistic approach to the market. So the short answer is yes there, Chris, but it's also more than just trying to get more shots on goal.
Great. That was great color, Farouq. And then on the AI customer base, you mentioned that as one of the continued drivers of growth next year. You've often described it as being in early stage. I think with single source to well-funded more start-ups for us the headline, big 3 or 4. Just curious if any of those customers are potentially positioning for an adoption curve to their technology where you can co-tail, not necessarily first half of '26, but more conceptually.
Yes. I think the answer is yes in short. The body language from our customers, I'd say, across the networking side. But specific to your question around AI, yes, and that is obviously reflected based on the bookings that came in towards the end of the last year, the discussions that are ongoing with our customers and obviously, the ultimate outlook that we put out there in the quarter. So the answer is yes, we're seeing the positive momentum scaling and continuing to move forward. And also, let's not forget, there's a networking set of customers that bundle our product into their solutions that ultimately make it to folks like hyperscalers, right? So when we think about networking, it is obviously AI, and that is not an insignificant number for us, which is nice to see the team's efforts pay off there, but also the networking side is just as important because we do touch AI in a couple of different ways, right?
Yes. Understood. And then just defense, just wanted to clarify. I get a lot of questions about the mix. I think you're pretty broad-based rotor, fixed wing, munitions, comms, radars, maybe even just curious if all those categories, if that is accurate, where the weightings are.
Yes, in short, we want to be cautious about discussing our position here. However, we are involved in all the major programs as well as some minor ones, which gives us a very diverse portfolio. This includes munitions and aerial systems, and we are also increasing our focus on ground systems. Space is somewhat related to this as well. Additionally, we cover encryption communications, so we likely touch on all the areas you mentioned.
Great. And last one, just a housekeeping question about thoughts on share class consolidation. I think one of your holders generated a headline.
Yes. I would say I think from the gist of it, our shareholder structure is a little bit more nuanced from the perspective of the economic differential between the two shares, right, versus just a vote, no vote. So that's one. I would say, as an appropriate due course, we'll have a company response and views on that at the appropriate time. I don't want to speak on behalf of the board, but at the appropriate time, we'll address that. And also, what we're trying to do here, Chris, and we've really been at this for the last handful of years here, is we want our fiduciary duty to serve the best interest of all of our shareholders, As and the Bs. And as we build a company that's set up for the future, with good performance and investing in our employees and our customers, ultimately, that's kind of what moves the needle. So I just wonder, we're very aware of the fiduciary duty, but I think the Board at the appropriate time will have a response that's a little more formal to this.
The next question is from Theodore O'Neill from Litchfield Hills Research.
Congratulations on the good quarter.
Thank you, Theo.
So are you guys seeing any impact from the spike in prices on memory?
I was going to say, our customers, I would say, largely are the ones that feel it. We are not directly impacted by that. Obviously, we have our other, let's say, spikes in prices that we're dealing with, like gold and copper we spoke about. But on the memory specifically, it's more, I'd say our customers are influenced by that.
Okay. And on the gold, copper and printed circuit board side and the weaker dollar, do you have the ability to hedge some of those? Or do you pass the pricing on? How do you adjust for that?
Yes, that's a good point. Today, we hedge our FX exposure from a raw material perspective. We're in the business of providing solutions to our customers and technology. So we want to focus on what we're good at. We're not running a prop desk trying to hedge everything, right? So I think our approach has been we want to try to do our best to mitigate and offset price increases but to the extent that we can't work with our customers to the extent that we can, we, unfortunately, have to pass that along, and I think that's not unique to us and really kind of in line with the supply chain behavior. But ultimately, we want to be great partners to the extent we can offset it. Sometimes we will find alternative sources. We want to be a solutions provider really to our partners. But in cases we can't, we need to make the unfortunate decision of passing it along.
Okay. And finally, on the Aerospace side, do you have any exposure to the drone market?
I would say we generally do, yes. I think the drone market is going through some interesting things, right, where there's, let's call it, more consumer that tends to get retrofitted as we're seeing out in the world in, like Ukraine. That's not really our market. We're more in the military kind of U.S. primes and some of the European and Israeli OEMs, the stuff they manufacture. So we're not in the drones that you and I are maybe buying or in the more sophisticated drone game.
The next question is from Greg Palm from Craig-Hallum Capital Group.
This is Dany Egerton for Greg today. Maybe just hitting again on A&D and maybe unpacking how you saw that develop in the quarter maybe between Enercon and Corbel and maybe what you saw in some cross-sell business. And then obviously, we know kind of about the increased spend. But as you look into 2026 here, what gets you excited about the growth in this business? And what kind of visibility do you have here?
Yes. So Danny, I'll take the first part of that question. So the growth that we saw when we talk about defense, it's both in our legacy Sinch business and through Enercon. We definitely saw growth in the Enercon business. As we look at the business, I think it's important to also keep in mind what we sell through our distribution channel. So there are direct sales and then there are sales through distribution, which we don't really break out into those end markets today. But we did see, as we mentioned in the commentary, a nice increase in distribution that related to growth in defense for that fine business. So I would say that it was pretty split between the two. Both Sinch and Enercon had robust growth in defense in Q4.
One thing we would just add is we're seeing the build rates on the plan side continue to increase and head in the right direction. Also a lot of the programs around munitions and given kind of what's going on in the world, these are well-funded programs. So we think there'll be a prioritization to make sure those get to fruition and the finish line. So as we look at the amalgamation of that, we feel pretty good as to where we stand compared to what's funded out there.
Okay. No, that's very helpful. Then maybe if I can just touch on gross margin here, which was pretty strong in the quarter, especially in power. I know you mentioned some of those headwinds with FX and input costs, but any way to quantify those? And then as we kind of have that push-pull between input costs and passing on price, any way to think about potential margin expansion in '26?
Yes. I think as we look at the fourth quarter, we thought that we may have had some additional FX headwinds in Q4. But we have had hedging programs in place, as Bruce mentioned. So we're still seeing the benefits of those prior hedging programs come through the current period. So as we look, we do foresee some margin pressure there on FX. I mean, if you look at the peso, renminbi, they're all moving in an unfavorable direction. And we do hedge probably half of that, but that's going to start rolling off. So we definitely see pressures there. And then even on the material side, that's something that takes time to ultimately come through our numbers, right, as we're buying raw materials today, that's something that will flow through our financials at a later date. So we do think that we will see margin pressures in '26. And this is why we're really being mindful of pricing actions that we may need to take with customers.
It’s important to note that adjusting our pricing is not as straightforward as simply deciding to increase prices. There’s a process involved. We need to consider whether to reprice our backlog or create a new pricing list for distribution, which would take about 30 days to implement. Timing is a factor here. Additionally, while we continue to prioritize margin expansion, our focus has shifted from simply gaining margins to driving growth. We must ensure that we capture our fair share of market opportunities. To support this, we are making some investments in our go-to-market strategies, systems, and personnel. I want to highlight that while our margins have been a popular topic, and we take pride in them, we are also dealing with challenges that necessitate careful positioning as we pursue future growth without overextending ourselves.
The next question is from Luke Junk from Baird.
I wanted to follow up on our discussion about realigning the sales force and how you plan to target markets or key customers. You mentioned in your remarks that with the new leadership in the connectivity business, there could be opportunities within the organization. Am I correct in understanding that there may be a need to align operations, possibly including the manufacturing footprint, to better take advantage of these specific opportunities?
Thanks for the question there. Look, I would say a couple of things to maybe answer it from the back way of your question here. So on the operational side, we have 7, 8 facilities. We've done a lot. So what's going to dictate facility moves is the current state of the business and the customer demand, right? We pride ourselves on our customers. So obviously, for a while, there was a lot of discussions around China and India than that froze. If that kind of starts up for some people at a startup, we were going to move some of our products to India. So I would say, given the geopolitical world that we live in and the realignment of localization of supply chains, we are in these active discussions, right? But in terms of Bel as a stand-alone basis in putting a political supply chains, our facilities are pretty good. So we have to react to the fundamentals of the market. I think our biggest opportunity here is around the go-to-market and sales piece of it. I think maybe just to highlight on moving a facility for us is a big task, and it's not simply just moving equipment and building some buffer supply, moving equipment from place A to place B. You need to set up a lot of kind of the legal structures. And if you're talking about A&D, there are a lot of regulatory hurdles to jump through. As we're setting up, for example, our Slovakia factory to be more A&D facing to the European markets, we're living through the complexity and spider web of getting all the clearances and certifications on defense weaponry control. In addition to that, customers usually always want to come up to your facility and do audits, and usually, there's feedback, and that takes a whole issue. So it's not easy. We don't take these decisions on moving facilities lightly. So we need our customer market changing dynamics to force our hand on a facility move. Our go-to-market are products today that we have that can be bundled together that can be brought to bear as we talked about the key accounts group earlier, that is our biggest opportunity at hand. And then operations, there's always things to be done, sure. But I think we've done so many of them that we need to live in growth land. And if we're not going to move a facility unless it's going to help us grow.
Yes. That's super helpful. Near term, just curious from a guidance standpoint, New Year, obviously, having a seasonal impact as we've normally seen in the business, but it's pretty late this year. I think it's almost as late as it can be just from a calendar standpoint. Would you normally have maybe a little better feel for that seasonal impact in the fiscal year? Is there any conservatism just because of your timing and the guidance?
As you know, Luke, in public land, everyone is always trying to determine the best way to guide the market. Our approach to guidance is to aim for a range, centered around the midpoint. We don't set it at the high end and hope to exceed that; instead, we set it at the midpoint to allow for some fluctuations from quarter to quarter. Being in A&D, things can sometimes be tricky. If we allow for some overordering issues, especially given how late we are in the quarter, talking about Q4 now in late February, we do have better visibility. Regarding your question about Chinese New Year, it's just two weeks away. Everyone pauses during this time, not just us but all our customers in the Far East. As a result, there's a two-week downtime, and when everyone returns, it usually takes about a week to get back into the rhythm. So, that's about two to three weeks of potential loss in a three-month period, which is significant. I wouldn’t call it conservatism; rather, we are aiming to meet our commitments with our best estimate, and we're not trying to err on the side of caution here.
Fair enough. And then I just want to zoom out for my last question. The Power side of networking. Obviously, you've got some exposure there. I mean, the higher levels of power that power these more capable chips are really becoming quite apparent in that world right now. And I'm just wondering to what extent you're seeing any pull-through from a design cycle point of view for high-voltage components from either your Tier 1 customers or your direct customers in that world? And especially if there's any IP that might be leverageable either, I think, rail or mobility, both of which have some high-voltage IP that might be interesting.
I think there are a few things to consider here. In the AI networking space, we're seeing a trend towards more power, higher density, less energy consumption, and increased efficiency. This has become a consistent theme. We're also noticing some new designs emerging more quickly than in the past, where device cycles used to take about three to four years, but now things are arriving sooner. For example, we're currently selling some products while simultaneously working on next-generation solutions, which is happening at a faster pace. Generally speaking, we do have some exceptions, but we're not primarily focused on being an IP business. Our research and development is aimed at solving specific problems. We excel at leveraging what we've developed within our business units to either standardize it or make slight modifications, allowing us to extend our products through distribution or to similar customers. Additionally, in some of our e-mobility products, we're starting to see interest from military entities exploring high-end products and services that do not meet full military specifications, which we refer to as semi-military applications. This indicates that our R&D efforts in e-mobility are branching into other markets. While we haven't secured any contracts yet, we are optimistic about potential opportunities on the horizon. This is how we utilize our R&D investments; our goal isn't to reinvent everything each time.
The next question is from Jacob Parsons from Needham & Company.
I'm just asking a question on behalf of Jim Ricchiuti. So we've been kind of hearing a better tone in the commercial aerospace market. Really, particularly with the leading domestic players in the marketplace. So how are you guys thinking about this area of the business in 2026 and the potential for better growth within the Connectivity Solutions area?
In terms of the commercial air sector, we are impacted by our largest North American customer. Our revenue growth is tied directly to an increase in production rates. We've experienced challenges in the past, such as during union negotiations and the MAX grounding. We will monitor how these factors affect production rates. There's also a relationship with our Connectivity business, distinct from our Power segment. As the maintenance, repair, and overhaul (MRO) cycle progresses, it’s important to consider the usage of planes and the miles flown, which eventually leads to necessary retrofitting. Observing the performance of flight operators confirms that both OEM and MRO sides are optimistic, as planes are being utilized and moving effectively.
Yes. That's all super, super helpful. And if I can just kind of get one more in. So I'm curious, how's the book-to-bill ratio varied much by market vertical and which areas of the business have you guys seen the biggest changes relative to last quarter?
Yes. So I think on the book-to-bill side, Farouq had mentioned we were at 1.1 for the full year. I think our book-to-bill has strengthened as the year progressed. In Q4, our book-to-bill was 1.3. And I would say that strength was seen across all three product segments. So there's not one segment that is really high, while someone else is below 1. All three are very strong in Q4.
The next question is from Hendi Susanto from Gabelli Funds.
I have several questions. Farouq, can you help unpack more details on your AI opportunities in terms of end products or devices to help us build better ideas? Some products that come to mind are power modules, network switches, traditional compute, AI services, and optical networking. Perhaps you can help us build better ideas of your devices?
Yes. I would say, Hendi, we want to be a little bit careful here, but our products are going to be more around the power side of the business, and the Bel Power is kind of where it's at. I would say from a direct where we know things are going for AI. Obviously, our magnetics business is also a beneficiary from the networking guys, and then they're kind of the RJ-45s, kind of what we call magnetic solutions, which is really more maybe a potential interconnect product. So that's how we go at it largely. Our connectivity business doesn't do too much into those end markets given that we're really more low volume, medium volume harsh environment applications in that product that coupled with it being more copper-based. So that's how we kind of go at the AI piece of it. Generally, we do some stuff with the hyperscalers, but that's not really our focus market. So if you remember, we got in trouble there back in 2020. So we want to make sure we pick slots where technology and service matters versus just a copy product with a race to the bottom on pricing.
Yes. And if I may quickly check if there are products that may carry some opportunity for physical AI or humanoid robots?
I think the humanoid market is still getting settled. Today, it's definitely not a big dollar amount. It's very much R&D-centric. I think there's a question around from a humanoids perspective, is that ultimately a consumer product like auto, or is that going to be a technology play? I still think we're far out from mass production. But today, it has not been a discussion level for us. That's a dominant one.
Okay. And then what are your latest view and outlook on pockets of market recovery and inventory rebuild activities among customers?
I don't think we are quite right. I believe the inventory rebuild is primarily affecting our customers. Given that everyone experienced a challenging period back in '23 and '24, combined with the current geopolitical situation regarding tariffs, people are generally ordering based on demand rather than just stockpiling. Honestly, I think this is a positive development. If you want to maintain your inventory, you have to manage the consequences of overstocking. Currently, we feel it’s better to shift towards fulfilling demand instead of just shipping for the sake of filling shelves and creating buffer stock. With tariffs, any changes can quickly impact what’s on the shelves, which has made our customers a bit uneasy.
Yes. Lynn, I have a question about the seasonality of sales in aerospace and defense. If I look at Enercon sales, what seasonality should we expect? Additionally, considering you may also be winning more designs, what kind of seasonality can we anticipate in 2026 for aerospace and defense?
I'd say generally, aerospace and defense is not a seasonal business where we play, right? North America, Israel, Europe, right? I would say it's really more around sometimes they move from a core to the other when things get funding, right? That's kind of where the choppiest comes from. But it's not really a seasonal to seasonal play, I would say, if there was a seasonality I mean not to the Enercon business, obviously, our connector business. But there are some less working days generally in Q4 just with the holidays and Thanksgiving and some of the Jewish holidays in October. But other than that, I would not say it's a seasonal business.
Okay. And then I have a question on capital allocation and debt payment, especially following the $90 million of debt payment in 2025. What is your playbook for capital allocation and debt payment?
Yes, go ahead, Lynn.
As we consider capital allocation, our top priority is reinvesting in the business through capital expenditures. We continue to pay regular dividends. In terms of debt paydown, unless there are any developments on the M&A front, we have seen significant debt reductions in the last few quarters, averaging between $20 million and $30 million per quarter. We plan to maintain this approach moving forward. It's important to remember that the first quarter typically involves higher cash utilization due to annual bonuses and insurance payments, so I anticipate that Q1 will reflect lower debt paydown. However, for the second, third, and fourth quarters, we expect to achieve similar levels of debt paydown, assuming no changes regarding M&A activity.
The next question is from Bobby Brooks from Northland Capital Markets.
So just wanted to circle back and ask specifically kind of on Enercon and cross-selling opportunities there. Obviously, you mentioned this spend more specifically with aerospace and defense, these are long-cycle programs, right? So these aren't happening in one quarter and seeing the outcome the next. But just curious to hear if maybe that's still on the back burner just because demand was so robust in 2025 and the segments kind of just had to deal with the demand that they were seeing. So just kind of curious to hear more on that.
Yes. No back burners here. Yes, we understand we've got to prioritize. But also remember, we have to live in new wins, land, right, because we can't influence when orders come from our customers, right? When the program gets funding, can they sell it, right? What do the military budgets look like? And then you get an order. The thing that we can influence is going after new programs and aligning ourselves to new wins and new design cycles, right? So as we go after these, we are doing a better job at collaborating. I think we're doing a better job at ensuring that both the connectivity and the power side of the house understand what they're going after, weekly calls, and putting in some incentives along the way, we can do a little bit better job, but that process is in place. And what's interesting is we're definitely seeing some of this, let's say, go-to-market. So there were a couple of interesting quotes in Israel, where I was aligning to earn from our e-mobility products that there was a need locally in Israel that our team flagged but didn't need quite the, let's say, high levelness of the military stuff, but they need really complex products, which are e-mobility and Slovakia teams do a great job at. So we're trying to quote those into Israel. So I classify that as kind of a real-time opportunity that we're chasing. And we've seen a few of those as well. Another example of this is there was a cabling need at our let's say, U.S. Enercom business, which our connectivity group can assist with. So they're working on kind of getting all that qualified and approved normally. In this case, Entercom had to go outside and deal with others, but we're able to capture more of this. And so the opportunities are real, but in the spirit of greeting is, we'd always love to do more. But I think as we're getting more bids out there now at a joint level, we're seeing some nice traction. Hopefully, we continue to do that and kick that into gear a little bit more.
There are no further questions at this time. I would like to turn the floor back over to Farouq Tuweiq for closing comments.
Thank you for that. Again, I could not be more proud of the team for the great year. Again, also thank you for all of you guys joining the call today, taking interest in what we think is a very, very exciting time for Bel. So thank you, and look forward to speaking to you in a couple of months from now.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.