Bel Fuse - Earnings Call - Q1 2025

Executive Summary

• Q1 2025 delivered top-line and margin expansion: net sales $152.24M (+18.9% YoY), gross margin 38.6% (+110 bps), and Adjusted EBITDA $30.91M (20.3% of sales). EPS outperformed Street: Primary EPS 1.28 vs 0.825 consensus; revenue beat $152.24M vs $147.93M consensus (small sample) (*Values retrieved from S&P Global).
• Mix shift to defense/aerospace and emerging AI offset softer consumer, rail and e‑mobility; A&D represented 38% of sales; AI contributed $4.6M, both up double‑digit YoY.
• Q2 2025 outlook: net sales $145–$155M and gross margin 37–39%, explicitly trimmed by ~$8–$10M for potential China tariff impacts and lower intra‑quarter turns; management expects tariff clarity in Q2 and aims to pass exposures onward.
• Backlog rose 4% QoQ to $395.7M; cost actions, facility consolidations, FX tailwinds and Enercon integration supported margins and cash generation ($8.15M CFO).
• Catalysts: tariff resolution and Q2 bookings, A&D/space momentum, AI customer ramps, networking/distribution recovery; risks: tariff persistence and commercial aerospace timing.

What Went Well and What Went Wrong

What Went Well

• Defense/aerospace mix and AI strength: “We are pleased…benefitted from our increased exposure within the defense and commercial aerospace industries and strength in the emerging AI end market”. A&D was 38% of sales; AI revenue reached $4.6M (+double‑digit YoY).
• Margin expansion and EBITDA: gross margin 38.6% (+110 bps YoY) on favorable mix, cost programs and FX; Adjusted EBITDA rose to $30.91M (20.3% of sales).
• Backlog and operational execution: backlog increased to $395.7M (+4% QoQ); consolidations in China/Mexico and FX tailwinds improved segment margins (Connectivity +180 bps; Magnetics +870 bps YoY).

What Went Wrong

• Tariffs created demand uncertainty and pushed out orders: Q2 guide reduced by ~$8–$10M to reflect China‑related tariff downside and softer intra‑quarter turns. Management expects to pass tariff exposures to customers but sees near‑term pauses.
• Segment softness: Connectivity sales -6.5% YoY (commercial air -12%); Networking down within Power in Q1, with recovery expected later in 2025.
• Higher interest expense from Enercon financing: interest expense rose to $4.15M (vs $0.43M in Q1‑24), reflecting revolver borrowings for acquisition.

Transcript

Operator (participant)

Greetings and welcome to the Bel Fuse First Quarter 2025 Earnings Call. At this time, all participants are in a listen-only mode. The question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jean Marie Young, with Three Part Advisors. Please go ahead, Jean.

Jean Marie Young (Head of Investor Relations)

Thank you, Daryl, 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 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 the website. Joining me today on the call is Dan Bernstein, President and CEO, Farouq Tuweiq, CFO, and Lynn Hutkin, Vice President of Financial Reporting and Investor Relations. With that, I'd like to turn the call over to Dan. Dan?

Dan Bernstein (President and CEO)

Thank you, Jean. We are pleased with our first quarter results, which were in line with our expectations for the quarter. Our recent acquisition of Enercon continued to perform well and has helped to further diversify Bel from our end markets and geographic perspective. During the first quarter of 2025, the aerospace defense, or A&D, end markets accounted for 38% of our global sales, making it our largest end market segment. Other highlights during the first quarter included AI, which contributed $4.6 million of revenue, and space, which contributed $2.3 million of revenue during the first quarter of 2025. This represents double-digit growth in each of these end markets compared to the first quarter of 2024. Other factors impacting the quarter were lower sales into our consumer market related to a banned Chinese supplier, e-mobility, and a normalization of sales into our rail end market.

We are definitely entering a new challenging phase with the global tariffs. However, based on our diversification strategy for manufacturing and our product portfolio, I am confident that we will navigate through this. With that, I'm turning the call over to Lynn.

Lynn Hutkin (VP of Financial Reporting and Investor Relations)

Thank you, Dan. From a financial perspective, we observe continued margin expansion when comparing Q1 2025 to Q1 2024. Sales for the first quarter of 2025 reached $152.2 million, reflecting an 18.9% increase from the first quarter of 2024. The strong performance within our A&D end market and the improvement in sales in our magnetic segment helped offset the year-over-year decline in our networking, consumer, rail, and e-mobility end markets within our power segment during the first quarter of 2025 compared to the same quarter of 2024. Our gross margin improved to 38.6% in Q1 2025, up from 37.5% in Q1 2024, with these profitability gains primarily driven by our magnetics and connectivity segments. Gross margin increased by 110 basis points in Q1 2025 compared to Q1 2024. This margin improvement was supported by a favorable product mix and the successful implementation of various cost reduction and efficiency programs.

Now turning to our product groups, sales of Power Solutions and Protection in the first quarter of 2025 amounted to $83.1 million, reflecting a 37.9% increase compared to the same period last year. This growth was largely driven by our new aerospace and defense exposure, which contributed $32.4 million to the power segment for the first three months of 2025. On the consumer side, sales decreased by $2.8 million in Q1 2025 compared to Q1 2024, primarily due to the trade restriction imposed on one of our suppliers in China, as mentioned in our prior earnings calls. Additionally, given e-mobility sales were still robust in Q1 of 2024, we saw a $1.6 million year-over-year decline in this end market in Q1 2025. Sales into the rail end market have started to normalize, coming off an unusually strong 2024, resulting in a $1.5 million reduction during Q1 2025 compared to the same period of 2024.

These declines were partially offset by a $3.8 million increase in sales to our AI customers, bringing total AI sales for Q1 2025 to $4.6 million. Further, Circuit Protection sales increased by $700,000 in Q1 2025 compared to Q1 2024. The gross margin for the Power segment in the first quarter of 2025 was 42.6%, reflecting a decline of 140 basis points from Q1 2024. This decrease was primarily attributed to non-recurring items that were recorded at a 100% gross margin in Q1 2024. On the plus side, our Power gross margins were favorably impacted by appreciation of the US dollar versus the Chinese renminbi during the 2025 quarter. Turning to our Connectivity Solutions group, sales for Q1 2025 reached $50.7 million, a decrease of 6.5% compared to Q1 2024. Sales for commercial air applications in Q1 2025 were $12.9 million, which represents a decline of $1.7 million, or 12% from Q1 2024.

Additionally, sales into the industrial end markets fell by $800,000 compared to the same period last year. On the positive side, connectivity products sold into defense applications totaled $12.2 million in Q1 2025, an increase of 13% from Q1 2024, and sales into the space end market reached $2.3 million in Q1 2025, up by 15% from Q1 2024. The gross margin for this group was 37.9% in the first quarter of 2025, representing an improvement of 180 basis points from Q1 2024. This margin expansion was largely attributable to operational efficiencies achieved through facility consolidations completed in 2024, along with favorable foreign exchange impacts related to the peso. These positive drivers were partially offset by minimum wage increases in Mexico that took effect in Q1 2025. Lastly, in the first quarter of 2025, our Magnetic Solutions group recorded sales of $18.5 million, representing a 36.1% increase compared to the first quarter of 2024.

This level of growth aligns with expectations discussed during last quarter's earnings calls, where we noted that sales volumes had stabilized and we were beginning to see a rebound since the second quarter of 2024. The gross margin for this group improved to 24.7% in Q1 2025 compared to 16% in Q1 2024, marking an 870 basis point improvement year-over-year. This increase in margin was primarily driven by the higher sales volume in Q1 2025, as well as recent facility consolidations in China and favorable exchange rates related to the Chinese renminbi compared to Q1 2024. At the consolidated level across all product segments, our total backlog of orders reached $395.7 million, reflecting an increase of $14.1 million, or 4%, compared to December 31, 2024. R&D expenses reached $7.2 million in Q1 2025, a higher level compared to Q1 2024, primarily due to the acquisition of Enercon and the inclusion of their expenses.

We expect future quarters to generally align with the Q1 2025 expense. Selling, general and administrative expenses totaled $29.5 million, representing 19.4% of sales. Compared to the previous year, SG&A increased by $4.6 million in 2025. Again, the primary factor contributing to this rise in SG&A is the inclusion of Enercon expenses. Within SG&A, increases were seen in legal fees, salaries, fringe benefits, and amortization expense, which were largely offset by a reduction in incentive compensation. As there were no unusual items in SG&A during Q1 2025, we believe this level of expense is generally indicative of the expected run rate for future quarters in 2025. Looking at our balance sheet and cash flow, we finished the quarter with $67 million in cash and securities, a decrease of $2 million from the $69 million we reported at the end of 2024.

This change was mainly due to the repayment of long-term debt amounting to $7.5 million, $2.8 million spent on capital expenditures, and a dividend payment of $829,000. These cash outflows were partially offset by $8.1 million in net cash generated from operating activities. I would now like to turn the call over to Farouq.

Farouq Tuweiq (CFO)

Thank you, Lynn. Good morning, everybody. After coming out of a solid and predictable first quarter, we have less clarity as we look ahead to the second quarter. In order to frame what we are seeing, let's first talk about our base business demand, putting tariffs aside. As we mentioned on our February call, we were largely optimistic entering into 2025, with growth expected across the business with varying degrees. We said magnetics was expected to be our largest percentage of grower this year, followed by Enercon on a pro forma basis. The end markets of defense, space, AI were all robust and growing. We expected to see a rebound in networking and distribution sales as we went through the year, predominantly in the second half.

Year-over-year challenges this year would largely be in our power segment, with tough comps to 2024 for the rail and consumer markets and continued softness in e-mobility. Each of these comments from our February call is still the current state of affairs of our base business. The good news is, aside from tariffs, there are no changes to report at this time. Now, on to the tariff discussion. To provide some broad context, approximately 25% of our consolidated sales are brought into the U.S. from countries outside of the U.S. and therefore potentially could be subject to recent tariffs. The other 75%, the majority of our business, is either manufactured outside the U.S. and shipped to customers located outside of the U.S., or is manufactured in the U.S. for local consumption.

Of the 25%, a little over 10% is China, with the balance largely coming from Europe, India, Israel, and Mexico, along with a few other places. Keep in mind that even these imports are not all equal, and certain of our products imported into the U.S. come through various trade advantage zones. For example, our Mexico products are covered under the USMCA trade agreement, and these are currently exempt from tariffs. A similar trade agreement exists between the U.S. and the Dominican Republic and the Caribbean broader nations. However, those do appear to be subject to tariffs today. Even as it relates to imports from China, certain of our customers who are the importers of record operate within free trade zones in the U.S. and therefore can receive product into the U.S. and ship it back out of the U.S., all on a tariff-free basis.

As we look at the road ahead on trade, we view tariffs in two separate buckets: China and everybody else. China is its own concern, as we all know about, so we believe that. As for the rest, we feel clarity will come in Q2 as agreements are reached with friendly nations such as India and Israel. The bottom line is we will be looking to pass all tariff exposures onward. As of today, we have started to see push-out requests from some customers related to products coming into the U.S. from China, specifically until there is further clarity. We believe our second quarter will likely be the most impacted as customers remain in a holding pattern while the administration works out the individual trade deals. In yesterday afternoon's earnings release, we noted a revenue guide for Q2 of a range from $145 million-$155 million.

Given the information we have as of today, this is our best estimate of where the quarter will land based on underlying demand and taking into account some potential downside related to tariffs. Please keep in mind this is a highly dynamic and changing environment that we're all working closely with our customers to navigate. Today, we are better prepared to deal with these uncertain times as we have built a more nimble and resilient organization in recent years, including us starting to move some products from China into our India operations mid to late last year and expect to do more so as time goes on. While tariffs do create uncertainty, they also do create an opportunity for us, and we will be looking for it on the sales and procurement sides.

On the sales front, we aim to develop and grow our tier two customer base as a means of mitigating fluctuations that can happen with our tier one customer volumes. New tools will enable our sales team to engage in digital data mining and opportunity pipeline tracking. These items, coupled with enhancements to our commission structure, aim to drive growth within new customers. On the procurement side, a series of initiatives are currently underway. Rising geopolitical tensions are driving tariff increases and trade restrictions, reinforcing the need for supplier diversification and regional sourcing strategies. Further, inflationary pressures are resulting in higher wages in the countries in which Bel operates, emphasizing the need for further automation. As we did on the SKU level profitability side a few years back and more recently, our procurement spend will be managed through data analytics and KPI tracking.

Cost savings are expected to be realized over the next 12-18 months, driven by price negotiation, spend consolidation, identifying of alternate suppliers, automation, and other cost optimization opportunities. These are all things we are excited about. From a liquidity perspective, this has become more of a focus for us given the murky near-term outlook. As a reminder, our credit facility is set to expire in September 2026, and our plan was to refinance the facility during the summer of 2025 to ensure a new arrangement was in place prior to the current facility going into a current liability classification. Given the current macro environment and uncertainty of how the market will look this summer, we decided it's best to be more proactive in this regard versus waiting until the summertime.

We're currently, and we have launched the process of working with our bank group to amend our existing credit facility to increase our capacity under the agreement and to extend the maturity date. We anticipate this will be finalized in the next week or two. We're focused on debt paydown as well. While we did not pay as much as we had hoped in Q1, only about $7 million, this is understandable and expected as Q1 is a very heavy cash outflow quarter for Bel Fuse due to our various annual payments, such as IT licenses, insurance, dividends, and annual bonuses. To put that in perspective, in April alone, by this coming Monday, Tuesday, we would have paid $10 million down further against our debt and expect to pay down an incremental $10-15 million by end of this quarter, so May and June.

In summary, while we are encouraged by our business demand and internal issues on the sales and procurement fronts, the current tariff landscape cannot be ignored. Bel will almost certainly be impacted by it in some way. However, we believe our exposure is contained to a relatively small percentage of our business, especially given the industries in which we operate. While the current levels of China tariffs are unprecedented, tariffs in general are not new to Bel, and we have successfully navigated them in the past. Importantly, our business today is more diversified and less dependent on China than it has ever been. We will continue to take actions within our control to mitigate those factors outside of us. With that, I'll turn the call over to Dan.

Dan Bernstein (President and CEO)

All right. Thank you, Farouq. Before opening the call for questions, as this is my last earnings call as CEO, I wanted to take this opportunity to thank all our associates around the world for the tremendous level of hard work and dedication to Bel over these many years. To think back at the business my father founded over 75 years ago, he would be amazed at what we have achieved together as a team. It's been a true honor to lead such a talented group of individuals during my tenure as CEO. To the Bel shareholders, thank you for your support and belief in Bel as we grow and continue to evolve. I'm grateful that you have chosen to be part of Bel during this journey. As a large shareholder myself, I'm confident that Farouq and the executive team will do an excellent job.

With that, I'd like to turn the call back to Daryl to open up the call for questions.

Operator (participant)

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove yourself from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. Our first questions come from the line of Bobby Brooks with Northland Capital Markets. Please proceed with your questions.

Bobby Brooks (VP and Senior Equity Research Analyst)

Hey, good morning, guys. Thank you for taking my question. I just want to say first, great call on the tariff impact. That's really appreciated. It seems like you guys have really good insulation from it. I was just hoping maybe could you just discuss it a little bit by product segment, kind of contrasting how maybe magnetics, power, and connectivity are separately impacted. Maybe it is all the same between all three, but I feel like there's probably a little bit of divergence between the three.

Lynn Hutkin (VP of Financial Reporting and Investor Relations)

Sure. Hi, Bobby. This is Lynn. By product segment, I guess let's first start with connectivity. The vast majority of connectivity is not impacted by the U.S. tariffs. They do the majority of their manufacturing in the U.S. and in the U.K. for local consumption in each of those regions. There is a very small amount of impact there. Largely unimpacted, let's say. On the power side, we estimate that about 60% or thereabouts of power is not impacted by the U.S. tariffs. The balance of power, as you know, there is manufacturing in China, Slovakia, Israel. A portion of those goods that are manufactured there do come into the U.S. and are currently subject to tariffs. On the magnetic side, again, it's a similar percentage. About 60% there is not subject to U.S. tariffs.

There is a portion that is manufactured in the DR, which, as Farouq mentioned, is currently subject. Even though it is under CAFTA, it still appears to be subject to those 10% tariffs that are in place today. That is how it breaks down by product group.

Bobby Brooks (VP and Senior Equity Research Analyst)

Got it. That's super helpful, Color. Then, connectivity the past several quarters has kind of been the bright spot for you guys in terms of year-over-year growth. I was a little surprised to see it down 6.5% this quarter. You did mention that commercial air was down 12% year-over-year. Was that really the primary driver of this decline? I was just hoping to get more color on that decrease and maybe how you think that dynamic evolves going forward.

Thank you.

Lynn Hutkin (VP of Financial Reporting and Investor Relations)

Yeah. On the connectivity side, the year-over-year decline was largely driven by the reduction in commercial air. A lot of that just has to do with timing where their production levels are still down a bit. That was the main driver. There was also some softness in the industrial area, but the balance of the segment was still strong. Defense was up year-over-year. I would say largely commercial air was the driver there.

Farouq Tuweiq (CFO)

I think, Bobby, based on all the public comments that are out there, right, there is a hope and expectation of continuing to ramp up the outputs as we go through the year and we see kind of the requests coming into the FAA. The other thing, keeping in mind that things kind of went on pause back in the fall timeframe with all the union negotiations. All that is going to bring work on the system. I think when we look at the outlook and the backlog, we definitely expect this to recover, but it just happened to play out here this way.

Bobby Brooks (VP and Senior Equity Research Analyst)

Fair enough. That makes a lot of sense. Maybe last one for me, obviously, you guys gave some pretty good nominal color on the AI benefits. It was like $4.6 million in the quarter, right? And that was up a double digit year-over-year.

Could you maybe just rehash for us to remind? I think it would be helpful for everybody on the call to get reminded of, my understanding, it's really the power segment that is seeing that AI benefit. Could you just discuss who these—I know sometimes you don't have visibility because it's going through distribution, but any visibility you can have on the type of AI customers and ultimately what those products are being used for in the AI space? That'd be helpful. Thank you.

Farouq Tuweiq (CFO)

Yeah. Bobby, I appreciate the question. As you called it out, right, when we call out AI, we think of that as the floor because above that, some of our other products will make their way into AI-type applications through various channels, including some of our networking customers.

When we talk about AI, this is kind of undoubtable floor base case, if you will. That revenue is largely going to GPU manufacturers. I want to be very careful with saying that because we are not aligned to the kind of headline-grabbing guys, the large public companies that we all read about. We are focused generally on more private, heavily funded next-gen type GPU manufacturers in the U.S. largely. That is really a testament to how Bel does things very well, which is we do a lot of hand-to-hand holding with our engineers, our customer engineers. We co-develop, and we become a true partner to them throughout their journey of growth. In short, I would think of these as GPU-type manufacturers.

Bobby Brooks (VP and Senior Equity Research Analyst)

Super, super helpful, Color. I appreciate the call and congrats on the strong one-Q print.

Dan, cheers to the next step in your career. Thank you for all the help. I'll return to the queue.

Dan Bernstein (President and CEO)

Thank you for the kind words.

Bobby Brooks (VP and Senior Equity Research Analyst)

Thanks, Bobby.

Operator (participant)

Thank you. Our next questions come from the line of James Ricchiuti with Needham & Company. Please proceed with your questions.

James Ricchiuti (Analyst)

Hi, good morning. Hey, Dan, I'll echo my congratulations as well. Wish you the best. Farouq and Lynn, a couple of questions. I'm wondering if you could talk about the Enercon business, what you're seeing in that business, maybe including, if you can, the change in the business, the growth of the business on a pro forma basis year-over-year since we don't have a lot of experience with it for the March quarter.

Farouq Tuweiq (CFO)

Yeah. I'd say, Jim, it is what it is. It's what we thought it was, which is all good, right?

James Ricchiuti (Analyst)

Farouq, we think it's better than what we thought it was. Come on.

There you go.

Don't undersell it, Farouq. Come on.

Farouq Tuweiq (CFO)

Yeah. No, it's a great business.

James Ricchiuti (Analyst)

There you go.

Farouq Tuweiq (CFO)

It's interesting because Dan and I and Steve were just in Israel roughly the first week in April. We're kind of up to date there. As you remember, Jim, we initially talked about this back in September. We closed it in November. We talked about it in February. Here we are again. I think the theme throughout all these conversations is continued robustness and growth, excellent, excellent team, technology, alignment with customers, financial profile is kind of the growth side of things, the margin profile. To Dan's point, we're very excited about having the team. Also, as we just think about on the Bel side of things, right, today, as Dan said, A&D is roughly 38% of our business in the quarter. It's our largest market. Good tailwinds. Obviously, as Enercon is both suppliers into U.S.

Israel and some other places such as the Europeans and India. We continue to be very excited about that. We also do see the opportunity to further accelerate that growth in places like Europe and in America. There are a lot of exciting kind of things for us. It is, at a minimum, as advertised, but it is definitely ahead for us, which is great. Dan, you want to add to that, or is that about covered?

Dan Bernstein (President and CEO)

I think, again, we were surprised, again, how much we do like it. We tend to be somewhat hesitant. I think there's a lot of things going on at this time that they're looking outside the box that we don't want to discuss because it's too initial. They are looking at a lot of exciting opportunities that, personally, we didn't have in our own house. We think the future is very, very strong for them. We just see a lot of upside. I think it's a great deal for the company and our shareholders. The price we paid was, as you know, a very excellent price compared to what it's being sold in the marketplace today.

James Ricchiuti (Analyst)

Got it. Maybe a little early. Farouq, you may have alluded to this in the answer you just gave, but are you seeing any revenue synergy opportunities yet, or is that something you anticipate coming later on?

Farouq Tuweiq (CFO)

Yeah. No. Remember, putting aside that this is all defense, right, which takes a little bit of a while. It starts out with filling out the funnel in, let's call it, new opportunities. As we think about the funneling process, we definitely see some of the benefits of flagging things, let's say, between the Enercon folks and the Bel Fuse folks. We have a program in place to kind of really push this to ensure that our sales team and our business development market intelligence folks are aligned.

As we see about filling in the funnel, right, beyond what was already in the funnel, just the benefits of synergies, we are definitely seeing some of those opportunities. We have referred some of these opportunities to each other, if you will. We are definitely excited. In terms of monetization, this is a little bit of a longer design cycle, but step one, fill up the funnel, which we are seeing and doing, which is good to see. When we do look at the underlying fundamentals of what is going on in broader defense, things are moving quicker just given the global world that we are living in today. We think that potentially being accelerant than base normal times, right? I think we are in a good market, in a good time, and we have the right team around the table.

I think all that should yield pretty good outcomes for us.

James Ricchiuti (Analyst)

Got it. Final question for me is just, I think last call, you talked about a couple of facility consolidations and the product transition line, the Fuse line in China. Any update and any other plans for consolidation or changes in the footprint, just given what we're seeing out in the market?

Farouq Tuweiq (CFO)

Yeah. No, it's a good question there, Jim. Correct, we are fully out of the Fuse. We have a fully empty facility. I think we're out of there in the first maybe week or two in January. That's another one that we'll say we're fully out now. We're just in the process of winding that out from an entity and a building perspective. That's good to see. We're seeing that cleanup in that operational structure, which is great to see. In terms of operations, everything's kind of proceeding on path. Nothing new to announce. Maybe just to extend your question there a little bit. I alluded to it in my comments. Obviously, there's China and there's everybody else in this day and age that we're living in.

We had started moving some of our products, both on the power and the magnetic side, from China into our India facility. Remember, we acquired an India facility there back in 2021, and that is kind of our foothold there into India. As we started that, roughly, I think Q3 last year to Q4, we are getting the lines up and going. We did that in advance of, obviously, any of the tariffs or even the new administration coming in. As we look for the rest of the year, we will be looking to shift more, let's call it, at-risk revenue into our India operations. As we said earlier, roughly 10% of our revenue is subject to China. We will want to move some of that as we can into the extent that we can into other places.

I'd say the team has really done an excellent job on being nimble and forward along with tight partnership with our customers to really try to kind of move these things. Our teams have been great, both in China and India. That may be an extension of your question there, Jim, a little bit, but that's not to be slept on. As we build a more connected organization globally, we're putting in the plumbing to more dynamically move things across facilities, which is very good in this day and age.

James Ricchiuti (Analyst)

Thanks very much.

Farouq Tuweiq (CFO)

You're welcome.

Operator (participant)

Thank you. Our next questions come from the line of Christopher Glynn with Oppenheimer. Please proceed with your questions.

Christopher Glynn (Equity Analyst)

Thanks. Good morning, everyone. As much as Farouq's added to insight and execution over the past few years, it sounds like, Dan, you're still adding some value to his curve there with the advice on answering intercom. And good luck in the future. Wanted to ask about the $8 million-$10 million allowance there. A couple of things. Do you see that as deferred or migrated from Bel? Hypothetically, say, if you think if tariffs were maybe cut in half, would that break an impasse? Because it seems like the implication of the allowance is that you're holding price discipline and not willing to eat any tariffs.

Farouq Tuweiq (CFO)

Yeah. That's a good question, Chris, right? What we're seeing is, I'd say, largely maybe the distributors, but also some OEMs as well. I'm going to put some broad strokes here because there's always, obviously, exceptions. If you're going to take product coming in from China and pay, let's use our numbers, 150% tariff, and then the tariff gets resolved for, let's say, in a month, all of a sudden, you have this really expensive product, right, that you have paid for to bring it into the U.S. How do you sell that, right, if now the gates of cheaper products or lower tariffs come in? As people wrestle with having expensive goods coming in, that's one piece of it. We're seeing a few folks just say, "Listen, let's just take a breather here. I got some componentry in the inventory.

Let me chew into that inventory just until we get a little bit of clarity. To your question, what happens? I think there are a few different outcomes. One, people really go deep into their inventory and become overdepleted. Then all of a sudden, you could potentially start getting this, let's say, makeup ordering or acceleration of ordering. More of a push-out type approach. That is a possibility. The other possibility is it is also going to depend on what happens with some of this gray trade zone that we keep hearing about and what happens to the others, right? To put it in perspective, India today is at 27%, I believe, right? If today it is 150 tariffs versus 27%, that is a pretty big difference.

If India goes to zero and China comes down to 40% or 50%, I think you might be back into the same game because there is a lot of efficiencies to be gained in places like China. It is hard to just look at China because we have to look at what happens to everybody else. I would say some of the other locations globally got hit a lot harder, including Vietnam and Thailand, which are not necessarily places for us. Could it be this is a push-out or a pause? Yes. Could it be you get a, I do not want to say a floodgate, but a makeup orders, if you will? Sure. Could you also lose some of this revenue? I would say maybe yes in more of our commodity consumer business, but some of our other business, I would say it is a little bit more sticky.

The answer is yes. We think there could be deferred, if you will. The question is when and how long. That is why I said earlier, I think Q2, as we think about the rest of the world working out with these one-on-one trades with the Trump administration, we think there will be a lot of clarity in May and June, and then the dust will settle. I think it sounds like the public chatter, I think there are mixed messages on what is going on with China, but we are seeing potentially some people trying to get to something. I think people are just saying, "Let's just take a breather here unless I absolutely need it." It could be deferred.

Christopher Glynn (Equity Analyst)

Great. Thank you for all that color. I just wanted to dive into the networking market a little bit. I think we have a good glimpse of how that is playing through at magnetics with the comparisons and some normalization there. Could you touch on networking as it pertains to the other two segments, please?

Lynn Hutkin (VP of Financial Reporting and Investor Relations)

Sure. On the power side, when we look at networking, and we'll carve out AI from that, right, because we talked about AI separately. AI is strong for power. On the networking side, though, we have seen some downward pressure in networking from last year versus this year. However, we have started to see an increase in bookings there. It does seem to be coming back later this year, but in Q1, networking was down. That is an area of rebound that we're still waiting to come back. On the connectivity side, there is a little bit of networking in there, but connectivity is largely A&D, industrial, and with a portion of it going through distribution. It is not as much networking exposure in connectivity.

Farouq Tuweiq (CFO)

I think, Chris, that dovetails with our expectation, right? We're seeing kind of the backlog come in. I should say throughout the quarter, in general, we've seen some very nice bookings come through, which kind of reaffirmed what I was saying earlier about our outlook for the year. Aside from tariffs.

Christopher Glynn (Equity Analyst)

Yep. Last one for me. How are you seeing design and activity in general? Is there any kind of consternation in the pacing relative to trade, or is it totally separate? In an absolute sense, how is design and activity?

Dan Bernstein (President and CEO)

I think some things, because of COVID, we still had the effects of COVID, where basically everybody's focusing on sourcing and so forth. I think it's leveled off now to a certain extent. However, we are pushing it hard. I think the point of bringing in our new head of revenue is really a go-to-market strategy, is really focused on what do we have to do to jump-start it and do a better job than we have done in the past. As Farouq mentioned, we're taking a whole unique, different approach for us of how we go to market and the strategy we're using, how to address second-tier and third-tier customers. We're very fortunate to have the person that came to us, came to one of the largest distributors in the world. His revenue was about $1.6 billion, and he oversaw over 500 people.

We do have high expectations for him to turn around our strategy of how we go to market going forward. For us, we think there's still many exciting opportunities out there.

Farouq Tuweiq (CFO)

I think that's the overarching view there, Chris, when we kind of lay it into kind of end markets. Obviously, AI bucks that trend, right? It's kind of what Dan talked about. Then defense, right? We're seeing some nice stuff there, obviously. I think our overarching theme is I think we're in a good place. To Dan's point, we want more, and we think we're driving to a lot of that. This will be a big year to put down the plumbing for that. In some areas, just given the dynamics of the world we're in, we're seeing some good stuff. It's interesting. Dan's comment just reminded me, if you remember on our consumer side, we always talk about that Chinese supplier that got banned in Q2 last year.

When we look at our business within consumer aside from that Chinese consumer, it is actually experiencing really nice growth, which is, I think, a testament to the team. Now, it is obviously smaller dollar amounts, but the growth we are seeing there from a percentage perspective is very good. I think some of the shift in the way we are thinking about things, we are seeing some bright spots. Obviously, I think tariffs are going to move things a little bit here. Ultimately, we want more going forward.

Christopher Glynn (Equity Analyst)

Thanks. Thanks, guys.

Operator (participant)

Thank you. Our next questions come from the line of Greg Palm with Craig-Hallum Capital Group. Please proceed with your questions.

Greg Palm (Senior Research Analyst)

Good morning, everybody. Dan, would just like to echo my congratulations as well on a very successful tenure and career at Bel.

Dan Bernstein (President and CEO)

Thank you so much.

Greg Palm (Senior Research Analyst)

Can we maybe just start on the quarter? It was sort of at the upper end of the guidance. I'm curious, did you see any pull-in of orders ahead of those tariffs?

Farouq Tuweiq (CFO)

Yeah. Not so much this go around. We saw the inverse of that. I would say no. There might be an exception here and there, but it wasn't a theme for us this quarter.

Greg Palm (Senior Research Analyst)

Okay. As you kind of think ahead, as a reaction to these tariffs, I mean, how quickly can you move manufacturing around into other regions if this becomes a permanent thing? I guess the bigger question is, what kind of capacity do you have?

Dan Bernstein (President and CEO)

Let me just answer that question. I think the question is for you is, where do we move? I mean, I think that was the concern we had four years ago. A lot of our competitors, a lot of our customers moved to Mexico or Vietnam. I know those at this point have been hit very hard. That is our biggest problem, where do we go and so forth. We have done a good job of looking at building a base in India. Four years ago, we had no operation in India. Today, we have three different operations in India. I think we are looking to—I am sorry, we are looking for a third. We really are focused to prepare ourselves to be able to move quickly if it needs to be. Farouq?

Farouq Tuweiq (CFO)

Yeah. I think, Greg, just keeping in mind that our product is we're not making stuff and just selling it, right? It comes with audits. Customers have to take a look at it. They got to make sure the facility does what they need it to do. You need customer approvals before you can move facilities. In places like defense, that takes a very long time. In places, we're not doing kind of the more heavily commodity stuff. For us, it takes a little bit of while. As a result of that, we started putting the plumbing in, like I said, into India, right, from back in Q3 last year. The question becomes is we've always contemplated where do we go? India was a very natural thing. I think we have very friendly relations with India.

I think ultimately, all the body language indicates that we will work something out. We have contemplated in the past looking at places like Thailand and Vietnam. When we look at the tariffs, those guys got hit with—I would say, thank God we didn't spend all that money moving to those places just to, I mean, whip some crazy tariffs. I think we'll get some clarity on what nations we're really friendly with, and we think India will be in that. I think that's going to probably be a focus of ours.

Greg Palm (Senior Research Analyst)

Yep. Understood. I guess lastly on the AI-related revenue. That was a pretty big step up in this quarter relative to the annual in 2024. I'm curious, is that a function of current customers ramping up? Is that expansion of new customers? What exactly are you seeing in that particular vertical?

Farouq Tuweiq (CFO)

I'd say it's a combination. I mean, it's interesting, right? When we go after these kind of customers, and to be clear, to a little bit of a different extent, but when we look at space, for example, right? Obviously, it's been around for a little bit longer, but we've seen kind of that 15% year-over-year growth. When we looked at e-mobility before, e-mobility cooled down, right? You align yourself with these customers. You get in early. You design with them. As they start ramping up their sales efforts and getting customers, you will see that pretty big step function. I would look at the AI jump as people we've had a relationship with for a long time. As they start proving out their technology and selling their technology on the GPU side, we see big steps.

I think what you're seeing right now is we're going through these big steps. I'd say these customers that we've spoken to are relatively new-ish type companies. They're not, like I said, the main headline guys that you read into the newspapers. These people are, I'd say, they're all new-ish customers. For us, new-ish means we've been with them for a while. We've talked to them for a while, but now new-ish in a sense, we start seeing that revenue side of it.

Greg Palm (Senior Research Analyst)

Understood. All right. Best of luck. Thanks.

Farouq Tuweiq (CFO)

Appreciate it.

Operator (participant)

Thank you. Our next questions come from the line of Theodore O'Neill with Litchfield Hills Research. Please proceed with your questions.

Theodore Rudd O'Neill (CEO)

Thanks very much. Congratulations on the good quarter. I was wondering if looking at your opportunity set in sort of new products, design wins, and new customers, does this change in the environment change the way you focus on those issues?

Farouq Tuweiq (CFO)

Yeah. We tend to kind of, in a very cliché manner, think about market unsettledness in terms of opportunity. Obviously, as we think about China tariffs, right? We are going to feel that a little bit on the 10% side, but we also have other competitors that will feel it. I am not entirely sure. I think it changes maybe, let's say, our operations. We have always been focused on operations. Where should we be? What should we be? To Dan's point, where do you go? We are going to get some clarity on that. We have been already kind of laying down the pipeline to India. From an operational perspective, sure. I think from a sales perspective, we do think there are opportunities.

In these times, these are the times that we need to be out there supporting our customers and ingratiating ourselves and leading with our minds versus kind of commodity. Does it change a little bit? Sure. Ultimately, we are a long design cycle business. If you remember, over 90% of our business, our customers themselves are B2B, right? Businesses will invest, and they're part of the technology solution. I would say it changes a little bit, creates opportunity, but we are committed on kind of where we go from here. Again, tariffs have been around since 2018, 2019, right? It is not a—now, nobody, I think, thought it would escalate to this level, but we do think cooler heads at some point will prevail.

Theodore Rudd O'Neill (CEO)

My last question is, given what's going on in the market, what's the level of activity you're seeing in terms of potential acquisitions?

Farouq Tuweiq (CFO)

Yeah. We are redoing our facility to get more capacity. We are focused on now paying down because we think that is just kind of a good thing to do. One of the reasons is maybe we will see how the world goes out here, but it may create opportunity on that side of it. I would say overall, we started seeing a little bit of a healthier M&A market in Q1. As the tariff discussion started taking hold, companies that were going to come out or people that were entertaining a sale kind of went on pause a little bit. I think there is just a lot of wait and see similar to our customers we are seeing on the M&A side. I would say the M&A market is quiet. It is a wait and see approach. Q2, I would say, we expect it is probably largely quiet.

We will see where the rest of the year shakes out. I'd say we were on a good glide path initially from just the overall market activity in Q1 before we kind of hit a little bit of a pause there.

Theodore Rudd O'Neill (CEO)

Okay. Thanks very much. And good luck to you, Dan.

Dan Bernstein (President and CEO)

Thank you very much.

Operator (participant)

Thank you. Our next questions come from the line of Hendi Susanto with Gabelli Funds. Please proceed with your question.

Hendi Susanto (Portfolio Manager and Research Analyst)

Good morning. First of all, to Dan, thank you for all these many years and all the best for your next chapter.

Dan Bernstein (President and CEO)

I might have to call you up every quarter because I miss you so much.

Hendi Susanto (Portfolio Manager and Research Analyst)

Please use me, Dan. My first question is, now that we have tariffs and tariff challenges, what is the latest status of inventory correction and expectation on market recovery in some areas that you have not discussed?

Farouq Tuweiq (CFO)

Yeah. Kind of there was the three tariffs. We knew consumer would be a little bit challenged kind of later on through the year. Tariffs kind of changed some of that. I remember tariffs, while we've said it's around 25% of our business, it's not all the same. We kind of look at the 10% coming out of China as the really big question mark and what happens there. The other 15%, I think, is kind of acceptable. Some of that's going into really growing into end markets like defense. I would say of that 15%, there's good market growth and recovery in some areas. It's the China piece that we're waiting to get some clarity on. I'd say overall, and this is kind of why we repeated what we talked about in February, we do expect the recovery.

I think we just need to get a little bit of clarity on Q2. Ultimately, we think we'll get through it and have a little more clarity heading in. That is why we called out in our earnings release last night some of the, let's call it, revenue that maybe got impacted with this pause that we're in right now.

Hendi Susanto (Portfolio Manager and Research Analyst)

Of the 10% of sales that has exposure, any insight into how much of those where Bel Fuse has a single supplier position? Bel Fuse is the only supplier. Is there also any insight where customers may have multiple suppliers, but all of those have the same challenge? In other words, everyone is on par with one another, and there's no alternative of shifting to, let's say, non-China location?

Farouq Tuweiq (CFO)

Yeah. I appreciate the question. I'd say it kind of runs the gamut. Some of it is we're sole source, and some of it is multi-source. Some of it is highly engineered custom work that we do, and some of it is commodity, like some of our consumer stuff. I would just say it runs the gamut. That is why even when we do look within that number, it's not one big brush where we could say, "Okay, it all goes out the window or all stays," right? It will be a few different shades of that. To your point about maybe some of the more kind of commodity stuff, could somebody switch buying from, let's say, China to a place in Vietnam? Sure, but it's not like Vietnam today has zero tariffs, right? It is better tariff level, but China has a lot of efficiencies, right?

Mathematically, sure, slower tariffs. As we think about the efficiency side of things, China still is very, very good into that world. Will we expect maybe to lose some of that and more commodity stuff? Sure. I think there is a lot of wait and see just in the market right now. Again, our industry, switching is not the easiest of choices to happen overnight. Generally, there needs to be a little bit of a plan for it.

Hendi Susanto (Portfolio Manager and Research Analyst)

Yeah. May I clarify how much exposure Enercon business has to tariff?

Farouq Tuweiq (CFO)

Yeah. I would say we do have some of their products that get shipped in from Israel. That would get tariffed and maybe a couple of other locations as well. Remember, that's all kind of largely defense sole source, right? That stuff, we are passing it on. I would say that's a high, high, high switching cost. Again, nobody likes paying those, but I think those we feel solid about or more comfortable with.

Lynn Hutkin (VP of Financial Reporting and Investor Relations)

The majority, Hendi, there is, as you know, there are a couple of manufacturing facilities for Enercon in the U.S. Part of their production process brings in partially assembled product from the Israel site. It is largely intercompany. The tariffs would be at Bel's cost currently. To Farouq's point, everything goes into defense for the most part.

Hendi Susanto (Portfolio Manager and Research Analyst)

Got it. Yeah. This is a hypothetical question. Let's say if tariff persists, based on how you dealt with tariff in the past, do you foresee negotiation on a customer-by-customer basis? Do you expect a quick or prolonged negotiation? What are some lessons learned from, let's say, negotiation on how to split the tariff with your customers in the past?

Farouq Tuweiq (CFO)

Yeah. I think I'll keep the commentary there a little bit high level, Hendi. Generally, our nature of our business, it's customer to customer, right? Anytime we do a purchase order or order or anything, it's customer to customer. Therefore, we're not just putting some things on a shelf and then people come buy them, right? Everything we do is really one-to-one. Within those one-to-ones, there's different level SKUs depending on the customer, what products we're selling, right? Again, it's hard to paint a broad brush. Generally, our approach is we are not really in a position to be eating the tariffs. Our industry, broadly speaking, and including Bel Fuse, did that back in 2018, 2019. We've been operating under those tariffs, and the industry has done that. Now, it's a different dollar amount to your point.

For us, from a scale perspective, the kind of value engineering that we bring, we're not really in a position to be eating those things. The other thing I would say is roughly 70% of, and Lynn can correct me if I'm wrong, of our imports that are coming into the U.S., our customer is the importer of record. What that basically means is we're delivering the product somewhere, let's say, for example, in Hong Kong, and they're bringing it into the U.S. They're dealing with the tariffs, right, and so on. I think that's a pretty important thing. I mean, ultimately, the tariffs are getting paid, but we're not the ones that are standing front and center on that.

Again, we realigned our shipping, let's say, routes over the last two, three years to include more of this record of import, importer of records off to the customer versus us getting into the shipping business. Long way of saying is it's all one-to-one, and our operating mantra, barring any exceptions, is to pass it on.

Hendi Susanto (Portfolio Manager and Research Analyst)

Thank you so much, Dan, Farouq, Lynn, and Jean.

Farouq Tuweiq (CFO)

Thank you.

Dan Bernstein (President and CEO)

Thank you.

Lynn Hutkin (VP of Financial Reporting and Investor Relations)

Thank you.

Operator (participant)

Thank you. This now concludes our question and answer session. I would now like to turn the floor back over to Dan Bernstein for closing comments.

Dan Bernstein (President and CEO)

Just again, I'd like to thank everybody for following us. I can't tell you how pleased I am to have Farouq Tuweiq and the executive team we put together over the past two years. As I said, I'm extremely successful on the future of the company. Once again, I truly want to thank everybody for your support over these years. You made my job a lot easier. Generally, I would say I'd speak to you in a quarter, but I'm not going to speak to you in a quarter. I'll speak to you at the annual meeting if you ever want to come to the annual meeting. Thank you.

Operator (participant)

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines and have a wonderful day.