TE Connectivity Ltd. (TEL) Earnings

Management highlights

### Overall Strategic Positioning - TE Connectivity is positioned at the intersection of accelerating global data and power secular trends, and is benefiting from the largest technology and infrastructure investment cycle in decades, as well as positive cyclical market inflections. - The company's strategy is focused on delivering broad-based growth, sustained margin expansion, and double-digit earnings growth, which is on track and showing positive results in the third quarter. ### Order and Backlog Performance - Record total third quarter orders reached $5.7 billion, growing 27% year-over-year and 7% sequentially, with double-digit order growth across every business and both segments. The company ended the quarter with a book-to-bill ratio of 1.1 and a record backlog position that provides strong visibility into 2027 growth. - Industrial segment orders grew 36% year-over-year, with year-to-date orders up 70% for DDN and 20% year-to-date for energy, aerospace and defense, and Automation and Connected Living. Transportation segment orders grew 19% year-over-year, with double-digit growth across all three transportation businesses. ### Financial and Capital Deployment - Third quarter adjusted EPS grew 22% year-over-year to a record $2.94, with overall adjusted operating margins expanding 90 basis points to 21.9%. Year-to-date free cash flow is $2.2 billion, with approximately $2 billion returned to shareholders via dividends and share buybacks, and full-year free cash flow conversion is expected to hit ~100%. - The company announced a strategic bolt-on acquisition of Astrodyne TDI for $1.4 billion, which adds power and filter products for mission-critical applications, generates ~$250 million in annual revenue, and is expected to close by the end of calendar 2024. The acquisition is accretive to growth and margins and fits within the company's existing capital deployment strategy. ### Product and End Market Highlights - AI infrastructure investment is driving strong growth across DDN and energy, with additional long-term growth opportunities in optical connectivity enabled by the Ram Photonics acquisition. - Electrification, automation, edge compute, and aerospace/defense modernization are driving broad growth across all end markets, with Aerospace and Defense seeing accelerated order growth driven by increased global defense spending.

Guidance

- Full fiscal 2026 sales are expected to grow ~15% year-over-year, representing over $2.5 billion in incremental revenue, with adjusted EPS growth of 23% year-over-year, up from prior expectations. - Fourth quarter 2026 sales are expected to be ~$5.25 billion, growing 11% year-over-year, with adjusted EPS expected to be ~$3.05. The adjusted effective tax rate for Q4 is expected to be between 22% and 23%, and full-year 2026 restructuring charges are expected to be ~$100 million. - DDN full-year 2026 growth remains on track to meet prior guidance, with strong order momentum from AI set to primarily deliver revenue growth in 2027 rather than 2026. The prior 2027 target of $3 billion for AI cloud revenue in DDN is now expected to be reached ahead of schedule, with growth continuing to shift left on the back of strong order momentum. - The Energy business is expected to deliver mid-teens annual growth for 2026 and into 2027, with approximately one-third of its growth driven by data center build-outs for AI. - TE Connectivity expects to continue delivering 4-6 points of content outperformance relative to vehicle production in the automotive segment for 2026 and 2027, with global vehicle production expected to remain slightly down year-over-year as previously expected.

Segment performance

Total company third quarter sales were $5.2 billion, split evenly between the two segments, for a 50% revenue contribution each. - **Industrial Solutions Segment**: Third quarter sales grew 22% year-over-year (21% organic), reaching $2.6 billion. Within the segment: Digital Data Networks (DDN) grew 34% year-over-year, up $100 million sequentially; Energy grew 33% organic year-over-year, driven by grid modernization and data center power infrastructure demand; Automation and Connected Living grew 16% (14% organic); Aerospace and Defense grew 12% year-over-year; Medical hit expected sales levels. Adjusted operating margins for the segment expanded 70 basis points to nearly 23%. - **Transportation Solutions Segment**: Third quarter sales grew 7% year-over-year (5% organic), reaching $2.6 billion. Within the segment: Automotive sales grew 5% (3% organic), outperforming the slight decline in global vehicle production driven by electrification and connectivity content growth; Commercial transportation grew 20% (18% organic); Sensors hit expected sales levels. Adjusted operating margins for the segment were 21%, demonstrating resilient execution.

Risks & headwinds

No material new risks or operational failures were discussed during the call. Management did not highlight any unexpected downside threats to the company's performance or outlook.

Analyst Q&A

• Q: What is TE's positioning for FAU optical connectivity ramp for AI, and how does it impact the copper vs. optical debate? /

  A: Management notes that AI architectures require both copper and optical connectivity: copper is the primary workhorse for connectivity within the rack for agentic workloads, while optical is used for longer-distance scale-out connections. The Ram Photonics acquisition expanded TE's optical FAU capabilities and opened incremental new market access as optical connectivity moves closer to switch architectures. Volume ramp is expected to begin in the 2028 timeframe, and management is scaling engineering and manufacturing capacity to meet customer demand.

• Q: How should we reconcile strong DDN order growth with in-line 2026 DDN revenue guidance, and what does record backlog mean for 2027 growth? /

  A: Half of the year-over-year industrial segment order growth came from DDN, driven primarily by AI-related demand, but most of these new orders are for new program ramps that will primarily deliver revenue in 2027 rather than 2026, given the three months remaining in fiscal 2026. DDN revenue is still expected to increase sequentially in Q4 2026, and broad-based order growth across energy, automation, and aerospace also provides strong momentum for 2027. In transportation, strong orders reinforce TE's 4-6 point content outperformance even as global vehicle production remains slightly down.

• Q: How is TE positioned in China's automotive market, given concerns about weak domestic demand? /

  A: China domestic auto production is down in line with the global slight decline, but TE's China automotive business grew 6% year-over-year, delivering 8 points of content outperformance relative to production. Weak domestic demand is largely offset by growing exports from China-based OEMs to Southeast Asia, Europe, Africa, and the Americas, which TE supports. Outperformance in China and Europe offsets a sluggish North American market, keeping TE on track for its full-year 4-6 point content outperformance target.

• Q: What is the strategic rationale for the Astrodyne TDI acquisition, and does it signal more aggressive expansion in power solutions? /

  A: Astrodyne TDI adds power filter and custom power supply capabilities that expand TE's addressable market for power solutions, which complements TE's existing data connectivity portfolio. 40% of Astrodyne's business is power filtering, which expands TE's existing position built from the prior Schaffner acquisition, while its custom power solutions serve high-growth end markets including semiconductor equipment for AI, defense, and medical. The $1.4 billion acquisition is expected to close by end-2024, is accretive to growth and margins, and fits TE's ongoing strategy of strategic bolt-on acquisitions alongside shareholder capital returns.