BELFB - NASDAQ

Good morning, and welcome to Bel Fuse Inc.'s Fourth Quarter and Full Year 2024 Earnings Call. At this time, all participants are in a listen-only mode. A brief 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 call is being recorded. I would now like to turn the call over to Jean Marie Young with Three Part Advisors. Please go ahead, Jean.

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 closed yesterday. Additional information about the material risks and other important factors that could potentially impact our financial performance and cause actual results to differ materially from our expectations is discussed in our filings with the Securities and Exchange Commission, including our most recent annual report on Form 10-K and our quarterly reports and other documents that we have filed or may file with the SEC from time to time. We may also discuss non-GAAP results during this call, and 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 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?

Thank you, Jean, very much. We are pleased with our fourth quarter and full year 2024 results, both in terms of our legacy business, as well as the first two months of performance from the recently acquired Enercon business. Overall, we achieved a 410 basis points improvement in gross margin full year 2024 versus 2023. Despite the 16% reduction in sales from last year, this was also the second-best year in Bel Fuse Inc.'s history for EBITDA at our highest stock price. A focus throughout 2024 was our two core strategies: the first is the future growth of the company, and the second is improved cost controls. In this regard, we've been successful on several fronts. We added two senior-level positions focused on sales and strategic procurement that we had not had previously. This is in addition to the other folks across the organization. The acquisition of Enercon, the largest transaction in Bel Fuse Inc.'s history, has enhanced Bel's position as a supplier of mission-critical components into harsh environment applications. Further, over the past year, we have engaged in two facility consolidations: one in Glen Rock, Pennsylvania, under our Connectivity segment, and the other related to the transition of a huge product line of Giant within our Power segment. The team continues to make good progress with each of these initiatives. In the fourth quarter, the goal is to complete both in the first half of 2025. The majority of the costs associated with these consolidations were already incurred in 2024. From a cost savings perspective, in aggregate, the company realized savings of $1.5 million in 2024, with more to come in 2025 once these consolidations are completed and a full year of cost savings is realized. Further, there are two other properties that have been held for sale in connection with these moves. Each property is currently under contract for sale, and we expect them to close during the first half of 2025. Apart from each of these two projects, we have successfully implemented six facility consolidations globally in the past three years, resulting in annual cost savings totaling $11.48 million across all six projects. These efforts have further allowed us to reduce overhead care by 30% since the beginning of 2023 when we launched these activities. In closing on 2024, we have demonstrated our ability to maintain our enhanced margins and growth even during the calendar year. On top of these accomplishments, resetting those financial foundations is a result of our whole global team pulling together over the past three years on a variety of fronts to improve our underlying business. When I consider all the work that's been done, it has positioned us for long-term success. And with the collaboration with Farouq on the strategy we set, it was the right time for me to transition to the chairman role and hand over the reins to Farouq. Farouq will be the third CEO in the 76-year history of Bel Fuse Inc., and it marks the first time the office will be held by a person outside the Bernstein family. I am extremely excited to continue the journey with Farouq in a different capacity. I also want to thank our hardworking associates around the world for their dedication and ensuring Bel's continued commitment to success.

Thank you, Dan. To echo Dan's sentiment, I think the team really pulled through this past year, making marked improvements in the areas which were within our control. We look to continue this momentum into 2025 with new team members around the table. On the team side, our global head of sales, who joined Bel in October, has been fast at work in assessing the sales and marketing organization as they stand today and what the future state should look like. Out of the gate, he has already improved upon the sales commission structure we put in place last year. As we get into 2025, the focus this year in this important area will be expanding customer depth and breadth that align well with our capabilities, allowing us to better return on our efforts. We will also be focused on better opportunity targeting, customer tracking, and installing various efficiency tools to achieve such outcomes. From a cost perspective, there are a few key areas on our radar in 2025. On the positive side, we are excited about our new global head of all things procurement as well, who's taken a fresh look at our costs. While he has only been in the role for about two quarters, he has already identified a series of upcoming initiatives to streamline our supplier base and take advantage of our consolidated purchasing power across our global entities. While potential cost savings here are not quantifiable at this moment, we're confident that his effort will be additive to Bel's financials over the coming years. As we look to 2025 from an end-market perspective, we see trends as largely favorable in this upcoming year. We believe AI, defense, and space have the potential to be the largest areas of new growth for us in 2025. A first full year with Enercon will be significantly additive to our revenue base given the current business it has, and we are actively working on identifying and executing on a variety of revenue opportunities between our Cinch business and Enercon. This process is already underway, and while these initiatives will take time for realization, the early signs of potential are encouraging. The areas of distribution, networking, and industrial have faced challenges over the past two years due to inventory destocking. We continue to see signs of recovery in each of these areas during the fourth quarter and anticipate these markets to show signs of improvement in 2025 as compared to 2024. As noted in the past two quarters, our consumer end market continues to struggle, and we anticipate this to persist through much of 2025. If you recall, this was the end market in which the US government placed trading restrictions on one of Bel's suppliers in the PRC. This will result in challenging year-over-year comparisons for this end market through the first half of 2025, as approximately $6 million of sales related to this supplier occurred in the first half of 2024. Expanding our lens to the broader geopolitical situation we are in, tariffs are in the headlines all around us. Effective February 4th, an additional tariff of 10% was placed on imports to the US from China. As a reminder, we have already been operating in a 25% tariff world imposed on such imports, and an additional 10% will increase this to 35%. On a revenue basis in 2024, we had approximately 12% to 13% of our total revenue subject to tariffs. Historically, Bel has passed these incremental tariffs onto its customers, and we anticipate that will continue to be the case, resulting in minimal, if any, impact on Bel's financials. This is an overall concern for our customers, and we have been working with them on exploring other manufacturing sites out of China. Keep in mind the 12% to 13% noted is for 2024. Obviously, with Enercon, that percentage will be a little bit less heading into 2025. As for the tariffs in Mexico, and assuming they do go in place, barring any last-minute agreements, this would be new and impact approximately $20 million of our 2024 revenue, representing just under 4% of sales. We expect to handle these in the same way as China, but we'll see how that goes. Mexico overall is a key manufacturing location for a number of our competitors and us. Thus, we are wrestling with what is happening. As for Canada tariffs, there's no exposure for us as we neither manufacture nor import/export to Canada. In looking at the business as a whole, we believe 2024 was the trough of many of our end markets, and we're generally optimistic entering into 2025. As we discussed on the October call, we expect growth across the business with varying degrees. Our largest percentage grower should come from magnetics, led by networking and our key customer recovery. As for connectivity, we expect growth as well, but do keep in mind this group has grown nicely over the last three years driven by commercial air, defense, and space. So while exciting, any new growth will be, comparatively speaking, a little bit smaller on a percentage basis. As for power, when assessing year-over-year growth and excluding the impact of the Chinese supplier we discussed previously, we anticipate that AI and distribution will be leading the way, and we expect that power segment to be a little bit more flat to up on a pre-Enercon basis. With Enercon, we expect a stronger performance and growth as well. I should say that Enercon is expected to be most likely the only second to magnetics in terms of percentage growth. In closing out on a personal note, I could not be more excited to be taking the helm. Dan has done an amazing job in not only building and diversifying Bel over his tenure but encouraging the vast changes that have taken place internally over the past three years. Bel has a very strong foundation today and is well-positioned for future growth. With that, I'll turn the call over to Lynn to run through some financials.

Thank you for that. Before getting into the financial results of the quarter, I wanted to highlight a few changes to the reconciliation tables included in our earnings release. In the fourth quarter of 2024, we modified our presentation of non-GAAP financial measures, including revising our definitions of adjusted EBITDA and non-GAAP EPS to additionally exclude from these non-GAAP measures the following three items: one, stock-based compensation; two, amortization of intangibles, which primarily relates to the amortization of finite-lived customer relationships and technologies associated with the company's historical acquisitions, including those associated with the recent acquisition of Enercon; and three, unrealized foreign currency exchange gains and losses. We believe that change enhances investor insight into our operational performance. We have applied this modified definition of adjusted EBITDA and non-GAAP EPS to all periods presented. Turning to the financial results, sales came in at $149.9 million for the fourth quarter, compared to $140 million for the fourth quarter of 2023. Full-year 2024 sales came in at $535 million as compared to $640 million in 2023. The addition of Enercon sales and strength in our connectivity segment helped to mitigate the continued year-over-year decline seen in our magnetics and legacy power segment during 2024 versus the 2023 period. Gross margin reached 37.5% in the fourth quarter of 2024, as compared to 36.6% in Q4 2023. Looking at the full year, gross margin was up by 410 basis points in 2024, as compared to 2023. Margin improvement continued to be led by favorable product mix and the successful execution of a variety of cost reduction and efficiency programs. Now turning to our product groups, sales of power solutions and protection products in Q4 2024 amounted to $78.1 million, a 13.2% growth from the previous year's fourth quarter. The increase from Q4 2023 was primarily driven by the addition of Enercon, which contributed $20.8 million in sales to the power segment during the fourth quarter of 2024. On a full-year basis, the power segment showed a decrease of 21.8% compared to 2023, landing at $245.6 million in sales for 2024. The decline for the full year was mainly driven by lower sales of our front-end power products, of $45.3 million, and board-mounted power products of $9.5 million, both of which serve our networking end market. Sales of our CEY products were down $21.2 million in 2024 as compared to 2023, due to the trade restriction placed on one of our suppliers in the PRC, as we discussed previously. Sales of our eMobility end market decreased by $12.9 million in 2024 as compared to 2023. These declines were partially offset by an increase in sales of our rail products, of $11.8 million, and an increase in sales of used products by $2.6 million as compared to 2023, and $20.8 million from Enercon. As a reference for full-year activity, rail sales were $41.9 million for 2024, up 39% from 2023, and eMobility sales were $15 million for the full year, down 46% from the 2023 level. The gross margin for the power segment was 40.6% for the fourth quarter of 2024, representing a 40 basis point improvement from Q4 2023. On a full-year basis, the gross margin increased by 430 basis points to 42.4% in 2024 as compared to 38.1% for 2023. These increases were primarily driven by the acquisition of Enercon, pricing actions, favorable FX from the Chinese renminbi, and a favorable shift in product mix. Our connectivity solutions group achieved sales of $52.5 million during the fourth quarter of 2024, an increase of 4% compared to Q4 2023. On a full-year basis, 2024 connectivity sales amounted to $220 million, an increase of almost 5% versus 2023. This improvement was due to the continued growth in the defense and aerospace industries. In 2024, we also experienced an increased volume of connectivity products sold through our distribution channel. For full-year 2024, sales of products into the commercial aerospace end market amounted to $56.9 million, an increase of 7% from the 2023 level. Products sold into defense applications totaled $47 million for full-year 2024, up 5% from 2023. Sales into space applications totaled $8 million for the full year of 2024. Products sold through the distribution channel totaled $82 million for the full year of 2024, up 2.9% from 2023. The gross margin for this group was 36.6% in the fourth quarter of 2024, up 730 basis points from 29.3% in the same quarter of 2023. On a full-year basis, the gross margin improved by 290 basis points to 37.1% compared to 34.2% in 2023. Gross margins for the 2024 periods were favorably impacted by the higher overall sales volume, favorable fluctuation in exchange rates between the US dollar and the Mexican peso in 2024, and operational efficiencies implemented during 2023, partially offset by higher wage rates in Mexico in 2024 as compared to 2023. Lastly, our Magnetic Solutions group sales declined by 6% from Q4 2023 levels to $19.2 million for the fourth quarter of 2024. This resulted in full-year 2024 sales for the magnetic segment of $58.9 million as compared to $115 million in 2023. This segment has a large concentration of sales in the networking end market and is largely tied to the ordering patterns and end demand of a few large customers in that space. Full quarterly sales within the segment remained at significantly depressed levels throughout 2024, but volumes have stabilized since the second quarter of 2024. The gross margin for the Magnetic segment was 29.1% for Q4 2024, a 1200 basis point improvement from the 17.1% gross margin in Q4 2023. On a full-year basis, Magnetic gross margin was 25.3% in 2024, as compared to 22% in 2023. The recent facility consolidations in China and the related elimination of the dual cost structure that was in place during the 2023 transition were the primary drivers for the improved margin profile of this segment. At the consolidated level across all product segments, our backlog of orders totaled $382 million. This is comprised of $263 million of legacy Bel backlog and $119 million of Enercon backlog at December 31, 2024. Selling, general, and administrative expenses for the fourth quarter of 2024 were $34.8 million, up by $9.9 million from $24.9 million in Q4 2023. On a year-to-date basis, SG&A increased by $11.5 million during 2024. The primary drivers for the increases in SG&A during the 2024 period related to the acquisition of Enercon. Non-recurring acquisition-related costs amounted to $8.6 million during the fourth quarter and $12.9 million for the full year of 2024, and the majority of these were included in SG&A. In addition, incremental amortization expense of approximately $1.3 million was recorded during the fourth quarter of 2024 in SG&A related to the evaluation of customer relationships. Other SG&A expenses related to Enercon amounted to $2.5 million during the fourth quarter. Excluding these items related to Enercon, legacy Bel SG&A expenses showed a decline of $3.6 million during the full year of 2024 versus 2023. This decrease was the result of reductions in incentive compensation, sales commissions, and business promotion expenses. Turning to our balance sheet and cash flow, we closed the year with $69 million in cash and securities, down $58 million from the $127 million we had at the end of 2023. This was primarily due to the utilization of the $86 million in cash to fund the Enercon acquisition during the fourth quarter. During the full year of 2024, we generated cash flows from operating activities of $77.7 million. From a debt perspective, our outstanding balance increased to $287.5 million at the end of the year, largely due to the new debt of $240 million related to the Enercon acquisition. Taking into account our swap agreements, the weighted average interest rate on our debt balance at December 31, 2024, was 5.5%. As a reminder, our credit facility expires in September 2026, and as a result, we will be looking to refinance the facility during the summer of 2025 to ensure a new agreement is in place prior to the current facility going into a current liability classification. Now turning to Enercon, while we've touched upon this in pieces throughout our commentary today, we thought it would be helpful to highlight some of the financial impacts related to the acquisition. First, we utilized $86 million of cash and $240 million of new borrowings under our credit facility to finance the acquisition. Next, the current run rate of interest expense at the current interest rates and at our December 31 outstanding debt balance is approximately $4 million per quarter. At December 31, our net leverage ratio in accordance with the calculation outlined in our credit agreement was 2.1 times. Keep in mind, our credit facility leverage ratio only nets out foreign cash. If netting out global cash, we were under the 2 times mark at December 31. Bel acquired 80% of Enercon, and the Enercon financials are fully consolidated into Bel's. The 20% of net earnings attributable to the non-controlling interest is shown at the bottom of our P&L. Enercon contributed $20.8 million of revenue to Bel's financials during the two months in 2024. For modeling purposes, Enercon's annual R&D expenses are approximately $6.5 million, and its annual SG&A expenses are approximately $13.5 million. Enercon's blended tax rate is approximately 17%. The last item I'd like to touch upon is related to the redeemable non-controlling interest, which is a new line item on our balance sheet. This relates to the 20% of Enercon that Bel currently does not own, but for which there were put and call options which may be exercised in early 2027. Upon the acquisition of Enercon in November 2024, the fair value of the NCI was determined to be $72.3 million. In accordance with GAAP accounting and the various policy elections the company made related to NCI accounting, the redeemable NCI in the balance sheet was remeasured to its redemption value at December 31. This led to a $7.7 million increase in the NCI amount on the balance sheet, with the offset being attributable to the non-controlling interests at the bottom of our P&L. This, in turn, reduced the net earnings amount attributable to Bel shareholders. This item is included as a non-GAAP adjustment in our non-GAAP EPS reconciliation table. We wanted to highlight this one-time adjustment from fair value to redemption value, as this resulted in Bel reporting a net loss on a GAAP basis during the fourth quarter. I would now like to turn the call back to the operator to open the call for questions.

Thank you. We will now be conducting a question and answer session. Confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your questions from the queue. Before pressing the star keys. One moment please while we poll for questions. The first question comes from the line of Christopher Glynn with Oppenheimer. Please go ahead.

Hey. Good morning. Congrats on closing Enercon. Just wanted to connect the dots from some of the third-quarter orders momentum you talked about for PSP and Magnetics. You saw a nice counter-seasonal core PSP sales increase excluding Enercon. Not the case for Magnetics, but you had pointed out longer lead times there. So just want to revisit that contrast in lead times and also if the orders trend was pretty sticky relative to what you saw in the third quarter versus maybe some continued intermittency.

Yeah. So hey, Chris. Nice to connect here. On Magnetics, it's seasonal, and generally, we think of Magnetics and largely Power as having Q2, Q3 being the strongest quarters, and Q1 usually being the weakest and Q4 somewhere in the middle. So that's going to be expected on the Magnetic side. On the Power side, we did see some maybe more robust pull-ins, and that led us to be a little bit north of the midpoint of our previous guided range just for the Bel base business. We think some of the pull-ins that did come in were to get out ahead of some of the tariffs that were potentially coming in Q1. But outside of that, I think everything kind of went and landed as we thought it would, given the seasonality within both PSP and Magnetics.

Okay, great. And I think last quarter you mentioned growth in all segments in 2025. I think you referred more to a flattish outlook for PSP for 2025. If you could verify if I heard that correctly. And also maybe go down a layer or two on the puts and takes to kind of defer growth recovery for PSP.

Yep. So on PSP comments here, I'm going to give, obviously, is excluding Enercon. So a couple of things happened there throughout 2024. One is the Chinese supplier that we've talked about, and we had roughly, let's call it, $5 million of pull-in that happened in Q4, which we were not expecting. When we look at the amalgamation of those two, just year-over-year comparison becomes a little harder for PSP given both of those were largely impacting PSP. So when looking at that, it kind of gives us this, let's call it, you know, will be flattish. Could it be more? Yes. We just need to see kind of how the world plays out from the end market perspective and some of the issues going on. So given that, call it, you know, optics harder comparison that will happen with the Chinese supplier and the pull-ins, that's going to give us a guide as we try to manage expectations here.

Okay. Great. And congrats on the transitions, Dan and Farouq, across the company and in the CEO role in particular.

Thank you. Thank you.

Thank you. Next question comes from the line of Bobby Brooks with Northland Capital Markets. Please go ahead.

Hey, good morning, guys. Thank you for taking my question. I guess, I just want to first start on the 1Q sales guide. Could you maybe just give us a sense of how much of that is attributable strictly from Enercon business?

Yeah. So I think, you know, going forward, Bobby, we'll be blending them here. I think, directionally, when we do look at it, we guided PSP to roughly, you know, from a Q1 perspective, year over year given the pull-ins at a slightly down. And also remember Q1 last year had the Chinese supplier in it. Right? So you have the Chinese supplier going against you, coupled with some of the pull-ins. So PSP on a base level will be down Q1 2025 over Q1 2024. Obviously, Enercon would be additive to that.

Okay. I appreciate that. And then, you know, I just think we've talked about this before, but just wanted to kind of circle back on it now that you've had Enercon come under your own ownership. How quickly do you think it'll take for real cross-selling opportunities to begin to emerge here? Just trying to get a sense of how it's trying to get a sense of that.

Yeah. I think similar to anybody touching defense, it's a slow-moving environment and either unseating an incumbent or new designs. And I think that generally holds globally true, whether it be European defense, American defense, or Israeli defense. So my guess is we probably are not going to see much, if any, in 2025 on the cross-sell. But we could see it. Right? It's just going to really depend. But to manage expectations here, I think what's important for us, though, is one, are there opportunities out there for cross-pollination and bringing the resources of Bel to bear to customers? The answer is yes. Two is ensuring that our teams are talking together with the proper incentives to really motivate people to jointly go out there and tackle the world, and we've done that on the process, people, and incentive side of it. So I'd leave it at that, but generally, defense is a slow-moving existence.

Fair enough. And then maybe this kind of ties into that last point that you made there. But so your new global head of sales, you had some time now to get adjusted into the seat. You talked about it a little bit, some of the stuff that, you know, he's already implemented, and you kind of touched on it there, right, in the previous answer, but could you maybe just dive a little bit deeper and highlight some of the initiatives he's kicked off or changes he's made and maybe just compare that to what kind of previously was the case?

Yeah. So and I appreciate that question there, Bobby. You know, as I kind of think about things, I kind of say to myself, people, process, performance, people, process, performance. On the people side of it, we have, you know, maybe moved some things around a little bit in terms of responsibility and reporting structure and making sure we are better aligned as a team, so that's on the people side of it. I'll kind of leave it at that. On the process side of it, it's really a question of where are we going to sell? Who are we targeting to sell to? Right? So how do we establish further breadth and depth within the customers and new customers? So we spent a fair amount of time with Uma really understanding where do we go deeper with certain customers and where are the parallel pathways for us to grow. So we'll be, you know, kind of really thinking a little bit harder, especially on the parallel or competitive or we could be going after inside lanes. The performance piece of it is making sure if your people are performing enabled by the process that there is recognition on the performance side of it, measuring performance. So that's to my earlier commentary and the commission structure changes that we have implemented. And we've added more built-in results than we did last year. We've also established a structure whereby we reward, let's call it, cross-selling between our connectivity segment and Enercon, and then making sure we measure it and compensate for it. That's how we kind of think about it is about a well-rounded perspective.

And just to add a little bit to that, you know, Farouq came from a very strong e-commerce distributor. So for us, as we move forward, we know more and more sales in the past were direct sales between our people, the reps, engineering communities. As we move forward, we know the future engineers don't want to talk to people. They want to get their products as quickly as possible off the Internet, either from us or from DigiKey, Mouser, or these e-commerce distributors. And his focus is really what we do well, you know, is on the key customers, the Ciscos of the world, and the Honeywell, Boeing people. What we need help with is really addressing the second-tier, third-tier, fourth-tier accounts and building those relationships. And I think the other problem is we have been historically very siloed in our approach to sales. How we combine our total sales force to work as efficiently as possible. It might be two sales forces, it might be one sales force. But he's really taking a hard look at how we go to market, what's the best strategy to make sure that we cover all the bases. So so far, we're very pleased with the direction we're moving, and we're moving a lot quicker than we thought.

That's terrific, color. I appreciate it, guys. And congrats, Dan, on the great career and Farouq on the step up to CEO. I'll return to the queue.

Thank you.

Next question comes from the line of James Ricchiuti with Needham & Company. Please go ahead.

Hi. Thanks. Good morning. So I'll echo my congratulations to both of you. Looks like it's going to be a smooth transition, and I wish you both the best. So first question just relates to Enercon. Yeah. I know you've only had the business for about three months or so, but I'm wondering as you had discussions with your colleagues there, what's your sense as to, you know, the business outlook? I think, Farouq, you said it next to Magnetics, I think you said it was going to be the second strongest growing business. Is there an element of replenishment in the business in Israel? Are you seeing, you know, tell us about the activity you're seeing outside Israel in terms of I know they have a fair amount of exposure in North America as well.

Yes. I would say, I think, whether it be on the US or Israeli side, and, obviously, some, you know, as a reminder, roughly 43% of their sales is Israel, 50% US, and 10% various European, India, and the like. I think the message is, yeah, and this was kind of one of our investment theses in defense. We think that it'll be a multiyear kind of a good tailwind for that end market. There will be a replenishment cycle with some of the issues with Ukraine and that war in Israel, there is a natural replenishment cycle after a period of conflict that will be additive. We also think that a global posture around defense and defense spending has changed, and we're seeing more investment going, whether it be into new technologies or just increasing overall spending. And we see some of this commentary running through the news. Between replenishment, rearmament, and setting up defense spending, all that is additive. The other thing we're seeing, and I think there's a fair amount of coverage of this coming out, is in Israel specifically, where we're seeing the export side of that defense sector really expanding. So as we look at all these factors, spending, speed, defense postures, increased investment in new technologies, all that is additive to Enercon. And, obviously, also, they do sell into commercial air. And as we think about just that commercial air tailwind, we also think it's additive. But also as a reminder, defense is around 93% of their business, and 7% is commercial air.

Excellent. That's helpful. Yeah. You mentioned AI several times this morning, and, you know, I'm wondering as we think about the opportunity, where are you seeing the biggest impact from that? And are you in a position yet where you could actually quantify how much of the revenues that could be AI-driven in some of the business units?

So in terms of AI, our biggest beneficiary across our segment is in the power group. So I think it's safe to say when we say AI, that's the large main driver. And as we talked about before, Jim, we know where our product is going in AI, so when we say AI, that's a direct line from us to an AI-type application. But we also do know that we have some other products that go through our customers or intermediary customers that end up in AI that becomes a little bit harder to track. But when we say AI, we're talking about a hard line. I would say we're, and also just as a reminder from AI, we're generally not selling to the hyperscalers, given the cost pressures there and just, you know, business doesn't find itself for a competitive side of things. So we tend to do non-hyperscalers. We get to them through our networking customers and directly. In terms of the AI growth, and we talked about it on our October call as we started heading into Q4. So back in the September, October time frame, we started some of the business that we've been chasing for a fair amount of time, started to turn some nice orders for us. So I would say as we start heading into Q4, that's when we really start seeing AI. You know, AI, I would say, is 2024, and we're just starting that climb is around $7 million for us out of power. And we expect that number to grow, let's call it, you know, definitely very nicely into 2025.

Thanks. That's helpful. Last question for me. Just as it relates to what you're seeing at the distributor level, where do we stand relative to destocking at some of your major distributors? Is that in the rearview mirror, or are we still working through some of that in certain areas of the base?

We were with a major distributor. We're the top two. They felt that, in January, they hit bottom and that things should start improving. But, again, I think we heard that song for the past eighteen months. So we're keeping our fingers crossed that we have hit the bottom. We're starting to see improvement. If you look at our circuit protection, they're the first ones that we start to see because they're low-cost items. People order them first, and they're easy to order. So we're starting to see backlog increases there. So hopefully, that's a good sign. We should, I'd be surprised if we don't see improvement in distribution this year. And we should see it start coming, you know, the end of this first quarter.

Thanks. And, again, congratulations on the announcements and the results.

Thanks, Jim.

Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I would now like to turn the floor over to Dan Bernstein for closing comments.

Once again, thank you very much for joining the call today. We...

This is the operator. Just want to take the next in line that is Theodore O'Neill with Litchfield Hill Research. Please go ahead.

Thanks very much. Congratulations on the quarter. I just want to follow up on the previous question about AI. Is that application primarily in data centers?

Yes.

And given the contribution from Enercon in the quarter, does that change the potential earnout or the timing for acquiring the remaining 20%?

Nothing that's been discussed as of right now. We put this in the filings that we have in terms of the contract. Right now, it stipulates we're going to measure at the end of 2026, and I book a call option in early 2027. If there was any kind of, there's no accelerators built in, so to speak. If there was an acceleration to occur, it would have to be an agreement between parties. But as of right now, there are no such accelerators in that.

Okay. And my last question is, if Europe decides it needs to dramatically increase defense spending, would this be particularly positive for Enercon?

As I've said earlier, roughly 10% of Enercon sales is not Israel, not the US, and that's spread out between the Europeans and some India. So overall spending increase would be additive to Enercon, obviously, just given it's a European defense manufacturing is a little bit less from overall, it's additive for sure. I would also benefit from that on the connectivity side. More spending from the Europeans, the question also becomes where do they buy them from. Right? Are they importing it from places like Israel and the US, which would be additive, or is the whole local? So it just kind of depends a little bit on where they're buying it from.

Okay. Thanks very much.

Yep.

Thank you. Next question comes from the line of Christopher Glynn with Oppenheimer. Please go ahead.

Thanks. You know, just a housekeeping question on modeling. We have different algorithms to calculate adjusted EPS. So just like a maybe level set quantity, what we used, the intangibles amortization and stock comp add-backs per quarter or annualized going forward?

Yeah. So on this, for estimating, it will be a fairly similar level to what we had in 2023 and maybe up a little bit. So for modeling, you know, maybe call it around $4 million or so, maybe a little higher than that. And then on the amortization of intangibles, we had two months' worth of incremental amortization in the 2024 numbers. So that can be used as a proxy for going forward. That should be pretty straight-lined.

Great. Thank you.

Thank you. Next question comes from the line of Hendi Susanto with Gabelli Funds. Please go ahead.

Good morning, and congratulations, Dan. Congratulations, Farouq.

Thank you very much.

Thank you.

Two questions for me. Would you remind us of areas that may be impacted by such, say, global tariffs and potential areas of mitigation, and can you remind us about China for China?

Yeah. So I would say it's a little bit of a moving target. Right? I think for us, China, and as we think especially specifically the US, China revenue, we talked about 12% to 13% of 2024 was tariffed. And then roughly a little bit under 4% Mexico exposure. I would say if that's kind of, you know, that things are coming to you guys, we do send some stuff from Europe to the US, and some from the UK as well. So if that becomes more of a thing, then it'd be, obviously, it'd be a headwind. Generally, we manufacture around where our customers are. So a lot of, for example, our magnetics, which is manufactured in China, stays within Asia. Right? So it's either getting sent out to CMs in the Philippines and India, or stays in China. So we're generally more localized manufacturing. And I think that's one of the nice things about our business. I think in Europe, product flows within Europe, I think we feel pretty decent about product flows within Asia. You know, seemingly pretty decent. It's really when you touch the US. Right, given that we're the ones trying to institute these policies. So is it a concern or a headwind? Of course, tariffs are just generally not additives. I think the bigger concern is it's more of a moving target. It seems every day we get a new target. And I think that's the issue and the challenge that we have. But, ultimately, our process is the same. We work with our customers on trying to be cost-effective and efficient, and then also where we can pass it on, we will.

Yep. And then second question, how should we think about your M&A capacity post the acquisition of Enercon?

Yeah. So I think, you know, similar to our discussion talked about when we did announce Enercon, we have pre-business. Yes. More selective both on quality and size. But we are open for business. We understand where some of the, call it, lack of tolerance or red lines are. But, ultimately, there are things. So it's a higher hurdle if we're going to add them in a family think we're going to make sure that's additive. Some capacity at the right circumstance.

Okay. Thank you.

Thank you. As there are no further questions, ladies and gentlemen, we have reached the end of the question and answer session. I would now like to turn the floor over to Dan Bernstein for closing comments.

Yeah. Thank you for joining us today, and we look forward to speaking to you in April. Have a good day.

Thank you.