管理層發言
Good morning, everyone, and welcome to the Bel Fuse Inc. Third Quarter 2025 Earnings Conference Call. This call is being recorded. I will now hand it over to Jean Marie Young with Three Part Advisors. Please proceed.
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. Thank you. 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 outsourcing in this instance 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 an over 600,000 square footage reduction on our manufacturing lines while leaning into automation and investing in the future of our factories. And I recall that, again, just to put a pin on it in terms of where we are heading, which is the more important part. As we approach the end of 2025 and look ahead to 2026, our focus is and 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. This is an exciting effort and one that is key for a long-cycle design business such as Bel. In addition to driving growth, we're investing in the 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 our CRM platforms, travel management software, 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. Lynn?
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 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 the 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 $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 a 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 our period 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'd now like to turn the call back to the operator to open it up for questions.
分析師問答
The first question comes from the line of Bobby Brooks from Northland Capital Markets.
I wanted to follow up on what Lynn mentioned regarding the guidance for the fourth quarter. I noticed that it goes against the typical trend of the fourth quarter being weaker than the third quarter. You indicated that the trend of intra-quarter sales has resumed, and this guidance assumes that will continue into the fourth quarter. Could we explore what other factors might be influencing this outlook in a bit more detail? I think this is an exciting development for your team.
Yes. Bobby, I'll let Lynn provide more details. I want to highlight a comment that stood out to me regarding the potential step down in Q4, which you mentioned goes against the typical seasonal trend. If you consider the projected range of $165 million to $180 million compared to the $179 million that was achieved, it could be possible. However, I believe the range indicates we are still anticipating some seasonality. Ultimately, we'll have fewer working days as the holiday season approaches, with various holidays worldwide, such as Golden Week and those in Israel. It's important to recognize that we will have less time available for work. So could it occur? Yes. The positive aspect is that we expect a strong quarter, and while we may surpass Q3, I want to keep that in mind. Now I'll turn it over to Lynn.
Yes. To add to what Farouq mentioned, we are experiencing ongoing strength in sectors such as commercial air, defense, AI, and space. The rebound is also becoming evident in networking and distribution. These trends are carrying over from Q3 into Q4, indicating continued strength in the end market. However, as Farouq pointed out, there are fewer production days in this quarter due to Golden Week in China during the first week of October, as well as Thanksgiving and various winter holidays worldwide in December. If we were to exclude the impact of these holidays, the outlook might be different. Historically, it's common for us to see a decline from Q3 to Q4, so...
I appreciate the clarification. I understand that the fourth quarter is expected to be lower than the third quarter. What stood out to me was that the guidance you provided for the fourth quarter aligns with the guidance for the third quarter. Typically, even the higher end of your guidance tends to be lower than the third quarter figures. I see the nuances you mentioned. Regarding legacy customers and order trends, can we assume that these are still showing positive momentum? Could you provide more insight into what we might expect for their future trajectory? Clearly, we are emerging from low levels in 2024, but do you believe they are on a path of continued improvement, or are they stabilizing at a higher level? I’d like to hear more about this.
If we take a broader perspective and consider the last five years from 2020 to 2025, it's clear that the industry has not experienced a typical trajectory. We encountered extraordinarily long lead times at the start of this period, followed by an extended downturn where the industry was underperforming longer than usual. Additionally, there have been various geopolitical and economic uncertainties at play. The significance of this is that the situation still feels somewhat abnormal. We are observing some hesitance from customers in vigorously returning to pre-pandemic levels. However, the positive news is that attitudes have shifted somewhat compared to the past. In analyzing our business and reviewing our backlog and customer discussions, there remains an optimistic outlook. While we have diverse customers across different regions, the general trend indicates that they are gradually coming back stronger.
At a recent conference I attended, I noticed a degree of caution among industry participants, with many opting not to invest heavily in buffer stock and instead ordering on an as-needed basis. Our primary focus is on the end demand from our business-to-business customers. We assess their demand cycles, where their products are headed, and whether they are experiencing growth, which they are, as reflected in our numbers and guidance. We are confident in our outlook, although it's challenging to claim that everyone is feeling exceptionally optimistic. Nevertheless, we are satisfied with our position and our relationships with our customers, and we anticipate positive outcomes moving forward.
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. I was really impressed, Lynn, when you detailed each segment of power; it seems like the strong performance in power came from many different areas. It was also great to hear you explain what Enercon is. I'm curious if the integration of Enercon into your operations is complete now, or if there's still some work left to do. Also, I wonder if you have any initial insights on potential cross-selling opportunities that might be emerging, especially considering you're focused on long lead time projects.
Yes. I think we want to be careful with the term integration because our approach wasn't a traditional one. When we refer to integration, we are really focusing on alignment in terms of our go-to-market strategy, addressing opportunities, co-selling, and collaborating to create opportunities together. In Europe, our strategy is somewhat different as we've discussed before, as we aim to increase our presence and manufacturing there, keeping closer to our customers. That said, we are definitely making progress. While there is still more to accomplish, we are beginning to see positive signs where one part of our organization is generating opportunities for another. Our efforts in lead sharing and collaboration are improving, although we recognize there’s still more to be done, especially considering the competitive market. Our first priority is to focus on our core responsibilities and take action, and we’re already seeing the advantages of this strategy, while also aiming for better alignment. Overall, we are pleased with our current actions, but we believe there is potential for further improvement, and we plan to enhance our efforts.
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 remarks that there was a shift of a customer from distribution to service directly. I have three questions related to that. How often does this happen? What factors determine the shift? And how does the distributor respond to it?
Thank you for the question, Theo. We've discussed before that distribution is a dynamic channel and key partners for us within our industry. It's difficult to generalize, but I'll do my best. Some customers prefer to have the distributor handle all their purchases, even if we initially engage with them directly. This means that while we might start the relationship directly, it can shift to a distribution model where a fixed fee is involved. Conversely, some customers approach us through distribution, and together we develop products that can be distributed through the distributor or directly. This dynamic can happen in both directions. Additionally, one of the guiding principles is the minimum order quantity. For smaller orders, we prefer to work through distribution to optimize our costs in servicing these customers. Therefore, distribution is definitely a changing landscape. It's also an effective channel for discovering new customers. Our practices are fairly standard within the industry; we value our relationships and aren't trying to disrupt them. Not all distributors operate the same way. Some focus on smaller quantities and may prefer to remove your offerings once they grow, while others thrive on larger volumes and expanding opportunities. So, the answer really depends on the specific situation, but nothing unusual is occurring here.
Okay. And what's the M&A opportunity looking like for you right now?
Yes, I believe we've been very clear. We are satisfied with our balance sheet and continue to reduce it. We're pleased with the direction of paying down more as we move into Q4 and next year. We feel we are well-positioned to pursue an M&A deal. The main consideration is the size and complexity of the deal, as well as the purchase price. Currently, the M&A environment is still not ideal, but we're noticing an increase in opportunities compared to the first half of this year. There are more options available, although I wouldn’t say it’s normalized yet. We definitely have some prospects that we are evaluating. Throughout the quarter, we consistently have something active. The key question is whether we want to proceed and if the business fundamentals are right. I hope that answers 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, it's within our Magnetics segment. We conducted an analysis to determine whether it was more cost-efficient to manufacture internally or to outsource. In this instance, we concluded that outsourcing was the better option. The impact on gross margin would be approximately $1 million a year.
Yes, give or take. Obviously, we're in the process of moving that, but it will be positive. And more importantly, I'd say than that, Jim, is allow us to focus on the things that we excel at, right? So hopefully, it unlocks more bandwidth than beamwidth 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. In networking, are you asking about a specific segment or just in general?
I'm talking about networking because you did highlight that as one of the areas.
Yes. So, 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.
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 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, Dan. If we take a step back and look at our end markets, it's clear that over two-thirds of our business is primarily focused on U.S.-based customers. Currently, Aerospace and Defense is our largest end market, which is relevant to the U.S., Israel, and Europe. When we analyze geographies through the lens of end markets, U.S.-based and Israeli customers lead in terms of activity. Additionally, from the networking perspective, these customers also constitute the majority of our engagements. Our exposure to Asia is the smallest, while Europe and Israel fall somewhere in between. Mathematically speaking, our performance will significantly be influenced by the shifts in our U.S. and Israeli business. Regarding the demand environment, the U.S. appears to be stronger overall. In contrast, Europe presents a mixed picture. For instance, our rail business has seen some decline in Europe.
The electric vehicle and eMobility sectors, which are under our Power group, have a higher concentration in Europe. There are various dynamics in play within the sector. As for Asia, although it represents a smaller part of our business, we have invested in senior leadership within our sales organization there this year and are starting to see promising opportunities. We recognize that Asia is a selective strategic market for us, focusing on specific areas rather than being heavily involved in consumer markets or automotive sectors. We plan to expand our efforts in Asia, but for now, we will continue to evaluate our approach by considering each geographical opportunity.
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. And 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.
We also need to consider that some of our other higher-margin businesses, such as eMobility and rail, are currently experiencing declines. The more significant point is that we are currently achieving strong gross margins. As we think about growth, we need to explore opportunities to reach new customers, offerings, and products instead of strictly adhering to gross margin limits. This is something we're analyzing to effectively drive earnings per share. Historically, our selling, general, and administrative expenses, along with research and development costs, have been fairly stable. Therefore, we need to find ways to leverage our operational structure to continue boosting revenue. These are considerations we are all currently addressing. Overall, our margin performance is strong at this time.
Okay. Yes. This relates to my last question regarding the Q4 guidance and the gross margin range. Looking back year-to-date, the gross margin has been around 39%. The revenue levels in Q4 suggest they will be significantly higher than what we experienced in the first half at the midpoint. I'm sure many of the factors you mentioned contribute to this, but are there any other considerations affecting the gross margin assumption, such as product mix or potential conservatism? Any thoughts on that?
I believe there are a few factors at play. Firstly, our Magnetics group has faced challenges over the past few years, and as it starts to recover, it remains our lowest gross margin segment. This means that as Magnetics accounts for a larger share of our overall business, it could exert downward pressure on our total gross margin. Additionally, when comparing Q3 sales to Q4, we typically see a decline in Q4, which would reduce the leverage on our fixed cost absorption and may further impact our gross margin. Lastly, fluctuations in foreign exchange rates, particularly with the peso, renminbi, and shekel, also directly affect our margins. These are some of the considerations we took into account when providing 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 are some other cross-sections to bring into the discussion as well.
Thanks for that, Chris. I think your question is just more commercial across the business and where they're coming from, the new wins?
Yes. Yes, exactly. And maybe a little color on new business opportunities, what's the growth there year-over-year?
Yes. In general, as an engineering-led organization, we operate on a medium to long-term design cycle. The actions and results we are seeing today in Q3 are tied to efforts from one to three years ago, which have led to our current wins. While there are some intra-quarter changes, the outcomes in Q3 are largely influenced by developments from Q2 and possibly Q1. This puts pressure on us to ensure that we are actively working on initiatives for next year and beyond. The question is how our team is addressing go-to-market strategies, sales initiatives, and data efforts to drive these initiatives. The activity surrounding new developments and wins in Q3 is quite encouraging. We are securing bigger wins and attracting new customers that we have not historically competed against effectively. For long-standing customers, we consistently win new programs. In the defense sector, our primary market, there aren't many primes in the U.S., so we assess whether we are gaining more opportunities for design wins, and I believe we are.
Our teams at Bel Fuse are quite aggressive in pursuing new opportunities. We are defining what new means to us, focusing on specific margin profiles of business, and learning to win more effectively. We've always approached this throughout our 76-year history, but we are intensifying our efforts lately. Currently, our business is somewhat product-oriented, but we have multiple products aimed at the same customers. We need to align ourselves better to provide comprehensive solutions, ensuring we don't miss sales on cables, connectors, or fuses while selling power systems. We believe there is more potential within our product portfolio, and this aligns with my earlier point about investing in the systems and structures that allow us to target the highest return on investment opportunities and effectively measure performance. This is a relatively new approach for us, but early indicators and wins suggest we need to look back before 2025 to gauge our progress accurately.
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 just relative to your understanding of the improved cost structure and kind of what that can mean incrementally as you do add volume?
I appreciate the question, Luke. It's something we've been pondering a lot—determining our position. Overall, aside from our mix between Magnetics and other segments, we are indeed experiencing an increase in margin as sales rise and we achieve operational leverage. The challenge now is shifting our focus beyond just operations and cost efficiency, which have become standard expectations, to how we can drive growth. As we introduce new products, seek new customers, and invest in new relationships and technologies, we need to be realistic about our pricing strategy. For instance, if there's a business opportunity valued at $1 million to $2 million that falls short of corporate averages, we need to evaluate whether it’s worth pursuing if it aligns strategically. Our approach to gross margin is relatively new for us, so we need to see it as an asset and a tool. We have worked hard to achieve our gross margins and do not want to push it arbitrarily towards the 37% to 39% range.
There is some self-discovery involved in determining our optimal position. Today, we must be cautious not to focus too heavily on gross margins that could hinder EPS growth, given our relatively stable SG&A and R&D expenses. I recognize the public markets emphasize managing expectations, but our goal is to stay within a consistent range without exceeding it significantly in either direction. Over the past couple of quarters, we may have exhibited some conservatism, which is understandable. The key question for next year is where we want to be. The positive aspect is that we have numerous options available to achieve strong returns and gross margins for our investors, and that's our top priority. Overall, it's an ongoing journey of self-discovery for us.
That's all very helpful. I have a second question regarding networking and AI, specifically about the design win activity and how we can shift the organization towards growth overall. I'm particularly interested in Power and how you see its future. We're observing a rebound in demand from an inventory perspective and those direct AI sales. As you plan to build the pipeline, what do you see as the opportunities within Power specifically?
Today, with our improved cost structure and investments in factory automation, along with the quicker product launches from our R&D teams and our sales team being more strategic about our goals, we find ourselves in a stronger position to pursue opportunities more earnestly than before. In terms of networking, we are aware of the trajectory of our AI products, and while those represent a baseline, we also recognize that our sales to other networking companies involved in AI are likely influenced by these developments. Measuring that impact is complex, as our high-end products are applicable to both AI and other uses. However, it's clear that trends in the AI data center sector are having a positive effect on our business. Additionally, with our enhanced operational structure and a sharper market focus, we have begun to reach out to customers who previously might have seen us as less competitive or who we overlooked while staying within our comfort zone.
We're observing some freshness in our approach. In networking, there is increased investment and interest, leading to new entrants with innovative technologies. All of this is beneficial for us in the networking domain. We need to ensure that we're not solely expecting the return of past customers. While that remains a plus, it's also essential that we cultivate new relationships. Within our current customer base, we are improving how we support and integrate into those relationships to create more opportunities. For our major clients, there is significant potential for us to expand our contributions. The challenge is figuring out how we can maximize that potential, and that's what we are encouraging our team to focus on. We are already seeing promising results from these efforts.
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. I would like to provide some context. We're primarily discussing the U.S. side of our business. We are all aware of the current state of health care and medical services. We operate a self-insured plan, and whenever we conduct market assessments, we find it to be the most cost-effective approach. Every few years, we evaluate to ensure this remains the case. Currently, we are self-insured. The disadvantage of self-insurance is the variability in claims, which we have observed in the second and third quarters. However, this variability is difficult to predict, as we can't anticipate when someone might face a significant medical issue. On the other hand, opting for a standard health care plan offers fixed costs, but every year, health care providers tend to propose substantial rate increases. From our standpoint, we believe we are still in a cost-effective position, but this does introduce variability. Additionally, given the overall age of our organization, increased medical claims are not surprising. As for what next year holds, that’s a challenging question for us, especially since we noticed a rise in claims 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 the 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 asking for a breakdown by product group, Hendi, or information about other end markets besides 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 believe the other two areas that have shown a rebound, which were previously weak, are in the consumer end market. If you remember, last year, this market was affected by one of our major suppliers in China, resulting in a prolonged decline. However, we observed a recovery in that business during the third quarter. It was encouraging to see, especially now that we have identified new suppliers and are getting products back into the market. Additionally, on the fuses side, which are used in various applications, we noticed a rebound there as well after a period of softness. These are likely the other two areas, along with networking and distribution, that are experiencing positive trends.
Got it. Magnetics sales are still significantly below pre-COVID levels. What are your expectations for Magnetics sales moving forward, particularly regarding the recovery in the short to midterm?
Yes. When we examine Magnetics, it's clear that the industry experienced an unusual spike in 2022-2023, as customers were buying and renting new warehouses to store these components. This led to some atypical behavior. If we consider the range of our performance, it was between $175 million and approximately $75 million at its peak and trough. I believe reaching $175 million in the next few years is unlikely, especially since we've moved away from certain business ventures and are being cautious about our focus. Additionally, keep in mind that within Magnetics, there is a concentration of products and two main markets, which are networking and distribution. So, looking at the range between $75 million and $175 million, or more accurately, $180 million to $70 million, I'll let you assess where we stand. We are seeing year-over-year growth, but the $180 million figure from 2022 was very unusual, and we've streamlined our business since then. Therefore, I wouldn't really base our expectations on that number. We acknowledge that there's still progress to be made.
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?
Yes. Yes.
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. And 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.