TE Connectivity plc (TEL) Earnings Call Transcript & Summary

Everyone, thank you for standing by, and welcome to the TE Connectivity Third Quarter Earnings Call for Fiscal Year 2026. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Sujal Shah. Please go ahead.

Good morning, and thank you for joining our conference call to discuss TE Connectivity's third quarter results and outlook for our fourth quarter of fiscal 2026. With me today are Chief Executive Officer, Terrence Curtin; and Chief Financial Officer, Heath Mitts. During this call, we'll be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the Investor Relations portion [Audio Gap]. You may rejoin the queue if you have a second question. Now let me turn the call over to Terrence for opening comments.

Good morning, everyone, and thank you for joining us. And before I get into the details on the slides, I do want to frame today's call around a couple of key takeaways. Our strategic positioning around the accelerating data and power trend continues to drive broad-based outperformance. And we are at the intersection of the largest technology and infrastructure investment cycle that's taking place around the world. We also continue to benefit from continued market momentum, driven by both secular growth trends as well as positive cyclical market inflections and we'll click down on these during today's call. As we outlined at our Investor Day earlier this year, we expect our strategy to deliver broad-based growth while driving sustained margin expansion and double-digit earnings growth. As we progress through this year, we have continued to execute against this strategy and our third quarter results and outlook provide further evidence that our strategy is working. Our positioning is creating opportunities across multiple long-term growth drivers as increasing data and power requirements are reshaping our customers' architectures and this is where our interconnect technologies are essential. Investments in AI infrastructure continue to drive strong growth in both our digital data networks and energy businesses. Further secular trends, including electrification, automation and increase in compute at the edge applications are driving growth across our aerospace and defense, automation and connected living, automotive and commercial transportation businesses. These investments are expanding our opportunities across both our segments and reinforce our confidence in TE's long-term growth outlook. The strength of these trends is reflected in our record order performance with double-digit order growth in every business across both segments. For the full fiscal year, we now expect sales to grow approximately 15% representing more than $2.5 billion of incremental revenue in 2026, while delivering margin expansion and earnings per share growth above 20%. Importantly, our record order momentum and growing backlog provides increasing visibility into continued broad-based growth as we move into next year, reinforcing our strategy and our ability to compound earnings that create long-term value for our owners. So with that as a quick overview, I'd ask you to turn to Slide 3 to review our third quarter results and our outlook for the fourth quarter. In the third quarter, sales were $5.2 billion, and they increased 14% on a reported basis and 12% organically over last year. Our order momentum continues to increase, which resulted in record order levels of $5.7 billion, growing 27% versus the prior year as well as 7% on a sequential basis. And as I normally provide more details on sales and orders in the next few slides. We delivered 22% earnings per share growth to a record adjusted earnings per share of $2.94 and adjusted margins expanded 90 basis points, reflecting the continued execution of our teams while also delivering for our customers. In this growth environment, the other thing that we're proud of, we continue to demonstrate the strength of our cash generation model. Year-to-date, we've generated approximately $2.2 billion of free cash flow while continuing to make investments to support future growth in both engineering as well as manufacturing capacity. In addition to the organic investments, Today, we signed an agreement to acquire Astrodyne TDI, which is a bolt-on acquisition that broadens our portfolio of power and filter products for mission-critical applications that will be part of our Industrial segment. And Heath will click down with some additional details about this acquisition that we're excited about in his section. Looking forward, we expect our fourth quarter sales of approximately $5.25 billion, which will increase 11% versus the prior year, and we expect to deliver adjusted earnings per share of approximately $3.05. For the full year, we expect to deliver growth of 15% in sales and 23% in adjusted EPS year-over-year. So let's get into orders. And if you could please turn to Slide 4, I'll click down into the order trends we're seeing. Orders increased over $1 billion year-over-year to a record of $5.7 billion in the quarter, and the order momentum was in both segments, which reinforces the breadth of our growth. The Industrial segment continues its strong momentum with orders increasing 36% versus the prior year. These record industrial orders were driven by increasing momentum in AI along with strong growth in every business. And just to give you the flavor of the momentum in our digital data networks business, year-to-date, our orders are up over 70% versus last year. And in our Energy, Aerospace and Defense and Automation & Connected Living, all have 20% order growth year-to-date. Turning to Transportation. Segment orders increased 19% versus the prior year, reflecting continued content growth in both automotive and commercial transportation. We saw double-digit year-over-year order growth across all 3 of the transportation businesses, supporting our confidence in continued market outperformance driven by where we positioned ourselves on content. We are running a book-to-bill of 1.1, both in the quarter as well as year-to-date. Our orders have not only translated into strong growth this year, but also have resulted in a record backlog position. And this backlog position is a strong growth indicator as we move into our fiscal 2027. Now let me click down into the segment results, and I'll start with the Industrial segment. That is on your Slide 5. In the third quarter, our Industrial Solutions sales grew 22% on a reported basis and 21% organically year-over-year. With broad-based growth, as you see on the slide, across the segment, led by over 30% organic growth in both our DDN and Energy businesses. We are uniquely positioned at the intersection of the accelerating data and power investment cycle. What differentiates our industrial segment is the breadth of our participation across the AI infrastructure with AI driving demand, not only for high speed and power connectivity in and around the rack, but also for the energy infrastructure required to bring power to the data center. This positions both our DDN and Energy businesses to benefit as AI infrastructure continues to scale, while the rest of our industrial portfolio continues to benefit from broader secular growth trends. In digital data networks, our teams delivered another very strong quarter ago, with sales increasing 34% year-over-year and up $100 million sequentially, which was in line with our expectations, and we expect DDN to deliver the full year growth we talked about last quarter. In data connectivity, we continue to see increasing demand as AI architectures evolve towards ingenic workloads driving greater deployment of CPUs and networking, which increases the addressable market for high-speed copper connectivity. In optical, we see additional long-term growth opportunities beyond what we have outlined at Investor Day. Through the Ram Photonics acquisition, we strengthened our optical road map with fiber attached connectivity, and we are encouraged by our customer engagements around this future growth opportunity. In our DDN business, we also see growing opportunities in power connectivity as our customers evolve their architecture. We have deep expertise in material science, thermal management, safety and reliability challenges associated moving to higher voltage connectivity. As the industry moves towards higher-voltage architectures, we are well positioned to support our customers' evolving connectivity requirements. Turning to energy. We saw a very strong sales growth and our organic sales increased a very strong 33% and driven by continued investment across grid hardening, where utilities continue to modernize aging infrastructure for increased power needs as well as data center build-outs. Our AI opportunity extends beyond the rack data center build-outs are driving significant investment across the power infrastructure, and we provide the connectivity solution that enable generation, transmission and distribution infrastructure which gives us the unique position I highlighted earlier. Turning to our Automation and Connected Living business. Sales increased 16% and 14% on an organic basis with growth across every region. Versus 90 days ago, we are seeing additional indicators of both cyclical growth as well as content outperformance. We now expect this market to grow high single digits this year and with our strong position in automation, we expect to outperform the end market. In Aerospace and Defense, our business grew 12% and which reflects the continued strength in both the commercial aerospace as well as what we're seeing in the defense markets, where our data connectivity and power products are essential to next-generation platforms. In our medical business, our team delivered sales as we expected and at the segment level, turning to margins. Industrial segment adjusted operating margins expanded 70 basis points to nearly 23% and reflecting continued strong execution by our teams. Now let me turn to our Transportation Solutions segment, and that will be on Slide 6. In the third quarter, our Transportation Solutions segment grew 7% on a reported basis and 5% organically year-over-year. Growth was driven by content outperformance in our end markets, particularly in Asia our leading global position as well as our customer co-creation model. In Automotive, sales increased 5% on a reported basis and 3% organically. We continue to deliver growth above the market due to content drivers despite a decline in vehicle production. Data connectivity in the vehicle continues to be a significant driver along with electrification of the powertrain where we benefit largely in Asia and software-defined vehicle architectures. We expect our full year content outperformance to be in our 4- to 6-point range for both this year as well as longer term. Turning to our commercial transportation business. Sales increased 20% on a reported base as well as 18% on an organic basis. We continue to see improving cycle trends across regions and market verticals while delivering significant growth above the market through new program wins, further electrification of trucks in Asia and strong execution across all regions. In our Sensors business, our performance was as we expected. And at the segment level and looking at margins, the transportation team delivered adjusted operating margins of 21%, demonstrating the resiliency of the execution by our transportation team. So with that as a click down on the segment performance, let me turn it over to Heath, who will get into more details on the financials and our expectations going forward.

Thank you, Terrence, and good morning, everyone. Please turn to Slide 7. For the quarter, we achieved adjusted operating income of over $1.1 billion and adjusted operating margins of 21.9%. The GAAP operating income was $981 million and included $9 million of acquisition-related charges, $83 million of restructuring and other charges and $56 million of amortization expense. I continue to expect restructuring charges in fiscal '26 to be roughly $100 million. Adjusted EPS was $2.94. GAAP EPS was $2.55 for the quarter. and included restructuring, acquisition and other charges of $0.23 and amortization expense of $0.15. The adjusted effective tax rate was 23% in Q3 and we expect Q4's rate to be between 22% and 23%. Importantly, as always, we expect our cash tax rate to remain well below our adjusted effective tax rate. Please turn to Slide 8. This slide reinforces the themes Terrence discussed, which are ongoing broad-based growth across the segments, strong operational execution by our teams and continued earnings growth. Sales of $5.2 billion were evenly split between the Industrial and Transportation segments. Given the order strength that Terrence mentioned earlier, we will exit this year with a strong backlog position in both segments. Certainly, this is influenced by AI program wins within the DDN business. The order momentum and backlog growth give us confidence that our strong performance will continue into next year. Adjusted operating margins were 21.9%, expanding 90 basis points year-over-year. Adjusted earnings per share were $2.94, up 22% year-over-year, driven by sales growth and margin expansion. The teams are doing a very good job of meeting customer demands while continuing to manage inflationary pressures through both price as well as cost actions. Turning to cash flow. Cash from operations was $1.2 billion and free cash flow was $883 million during the quarter. Year-to-date, free cash flow was roughly $2.2 billion and we returned approximately $2 billion to shareholders through dividends and share buybacks so far this year. We continue to expect our free cash flow conversion to be roughly 100% this year. Now let me talk about the acquisition that Terrence mentioned earlier. Astrodyne TDI will generate more than $250 million in annual sales and had a purchase price of approximately $1.4 billion. We expect to close the transaction by the end of this calendar year, subject to customary closing conditions. Our cash generation model, coupled with our strong balance sheet supports our capital deployment strategy and Astrodyne is a good example of a strategic bolt-on acquisition while we're still returning capital to our shareholders. And before I turn it over to questions, let me reinforce that our performance reflects our positioning to benefit from the largest technology and infrastructure investments taking place globally. We are delivering well ahead of our through-cycle business model generating strong margins, earnings growth and cash flow. And just as important, our record order momentum provides heightened confidence as we ramp up fiscal '26 and jump into fiscal '27 which starts in October. With that, let's open it up for questions.

Thank you, Heath. Pascal, can you please give the instructions for the Q&A?

We will now begin the Q&A portion of the call. [Operator Instructions] Your first question comes from the line of Scott Davis from Melius Research.

Terrence and Heath and Sujal. I'm going to switch directions a little bit. And can you talk a little bit about the ramp you expect in your FAU optical business. I mean, my understanding is it's a hard business to scale up and scale out, but you guys seem to have some capabilities here. It could be pretty important to kind of comment that debate of copper versus optical. So just kind of curious to see where you're at there.

No. Thanks, Scott. Let me start with the second half, and then I'll talk about the FAU. I think the first thing is that, as we said, it's copper and optical. I'm going to come back to that again because you're going to have different needs, and we see in the architectures where within the rack, in what you're doing in the rack, it's going to be copper is going to be the heavy workload. But with what we've done with the RAM Photonics acquisition, it really is something that we opened up incremental market access to as optics come into the things that are going to be the scale out and also probably moving off the switch in the architecture. And as you know, there's a lot of customers that are working on this. What really makes this exciting for us is the engagement that we have with our customers. on the FAU technology. It's early days. I think this is the type of thing. You won't really see revenue until -- meaningful revenue until we get to '28 and beyond that. But it's an incremental TAM, Scott. And it builds on the copper position, and it's going to add incremental revenue in TAM for us as we go forward. So near term, we're investing in it. Certainly, you all know the acquisition that we did. Certainly, we are investing in the scale -- scaling of the manufacturing as well as the engineering teams of that acquisition to really make sure we can meet the intercept point that our customers expect us to meet, which will be more in the '28 and beyond time frame. And that's what we get excited about and how we rounded out the portfolio with that, and we'll continue to look for opportunities that strengthen it based upon where we're co-creating with our customers.

Next question, please?

Your next question comes from the line of Mark Delaney with Goldman Sachs.

I'm hoping you can give more color on how the record orders in backlog are setting the company up for revenue growth, not only for this year, but any early thoughts on 2027. And as a part of the order commentary, can you speak specifically the DDN orders relative to your outlook for sales growth? Because you said it -- improving momentum in AI orders, but then you also said that revenue is tracking in line with your prior expectation within the DDN segment. So I'm trying to reconcile the comments on why DDN revenue for this year isn't tracking to be better than you previously thought and with the AI order momentum.

Yes. Sure, Mark. Thanks for the question. And like you said, the orders I talked about in the call are up about $1.2 billion and the bigger jump was in our Industrial segment. So about $800 million increase in Industrial. And half of that order growth came from DDN. So it ties right into the trends that you see that relate to AI and that's going to just continue AI as a percentage of that, it's just going to continue to increase. And I did mention that we had 70% order growth year-over-year or year-to-date in DDN. And let's face it. That's building backlog as we're ramping programs. So just with where we are in the year with 3 months left these are program ramps and we have multiple program ramps going on at any time. So really, this momentum is really going to deliver more into next year than increases to this year. And we do expect DDN to be up in our fourth quarter sequentially over the third quarter. But just as importantly, when you think about that industrial segment order, and I know I mentioned some of these energy business, AD&M business as well as the ACL business are all up 20% year-to-date. And when you look at Energy and AD&M, they're really, really strong secular growth trends that we don't see that momentum slowing down. It's broad-based. It's certainly -- you can look at the investments that are happening that, that traction is going to continue and carry into '27 to your '27 question. And then the last piece that I think is the big piece in our Industrial segment is ACL is a little bit more -- have more cyclicality to it. And it's nice that we're having that cyclical uptick, but those orders are up. And then in transportation, our orders were up $400 million year-over-year. And we're seeing benefit of ICT. But the orders that we're seeing are really just reinforcing our content position in automotive. And vehicle production is down slightly. It really hasn't moved from when we talked to you back early in the year, and we think it will stay around this, slightly decline, but our team is doing a great job delivering the performance of content above production. And that's what our orders are reinforcing. The programs that are coming in to really make sure continues to have that 4 to 6 points outperformance.

Thank you, Mark. Can we have the next question, please?

Your next question comes from the line of Wamsi Mohan from Bank of America.

It's Ruplu filling in for Wamsi. Terrence, the question is on the transport segment. You said global vehicle production is expected to be slightly down this year. There's some concern on the China market. How do you see the China domestic market evolving versus the export market? And how do you see TE positioned here?

Ruplu, thanks for the question, and thanks for coming for Wamsi. It's a great question. So let me frame it a little bit because when you think about TE, we need to think of production. And production is slightly down. And certainly, there's headlines that are out there that, hey, what's happening in China, domestically. But China auto production is down similar to the global picture. And our Asian China position is very strong, and we had 8 points of outperformance over production in China or actually, our China business grew 6% against 2% down in production. So and exports are the element that I think people miss in that narrative. So right now, the exports are sort of out of our China OEMs are offsetting a weak China local market. But you have to think about those exports that's really driving it, what they're doing in Southeast Asia, Central and South America where they have 100% exports to Africa as well as Europe. So I do think some of the narrative is around the car sales in China, but the exports are clearly benefiting from that and offsetting that. The other thing I would just highlight, while production hasn't changed, our European business had 4 points of outperformance in the quarter. Their square back in there after last year was sluggish due to some of the EVs. And really Asia and Europe are offsetting a weak North American market still. So net-net, we feel very good about the 4% to 6%. Production is staying exactly where we thought, and we would expect production to be similar next year, maybe down a little bit. So feel good about the team momentum and also the content outperformance that we have this year and then into the fourth quarter, that will roll into '27.

All right. Thank you, Ruplu. Can we have the next question, please.

Your next question is from Christopher Glynn at Oppenheimer.

Just wanted to go a little more into the energy segment. So the organic had pretty meaningful acceleration in organic growth versus a tougher comp that spell exceptional sequential to. Are you seeing a particular build in just kind of baseline run rates there? In other words, is that new key program and design-ins layering in? Or was there something peculiar about the growth in this quarter for energy?

No. Chris, thanks for the question. And let me frame it a little bit for you. One of the things that was really nice, and we've been talking about energy and how we get excited about it, certainly ties into the power trends, but it was well over $100 million of growth this quarter of our $600 million of total growth. So it's very meaningful. And when you look at it, we think of our energy business in 3 basic verticals below it that you should think about it. About 60% of it or 2/3 is really around where we source the utilities. And we talked to you about grid hardening, there's the investment that's happening around the aging infrastructure. Clearly, that is on an upward inflection point that you all know about. There's about 20% of it that we call industrial, but this is also where you could power into a data center, you bring power into buildings. And that is clearly growing very fast, and we're benefiting from it and even reflected in some of this quarter's numbers. And then the remainder is around clean energy. That had been and is a growth driver, been stronger in the past. But certainly, what we're seeing in the data center as well as the grid hardening is just accelerating. And if you look at energy, this year, we're probably expecting it -- you should think about it more as a mid-teens type grower this quarter. There is a project nature to some of our programs because you're selling into infrastructure. But I really think, as you look at it this year and into next year, think about it more of a mid-teens grower is the right way to think about it. And just the last thing I would tie back to is -- and when we look at this market, yes, there is energy CapEx, but we do think about 1/3 of the energy market growth where we're positioned is driven by data center buildouts. So it ties back into yes, we have a great position in DDN, but you also -- where we're going to benefit from the power infrastructure build-out is just as important.

Can we have the next question, please?

Your next question is from Amit Daryanani from Evercore.

There's been a lot of focus on AI revenues and maybe I missed this part, but could you just touch on how are you tracking in the June quarter versus your target? Is it still 70% of DDN, it would be good to get that clarified. And then really more broadly, as I think investors focus in on this copper versus fiber debate, can you just help frame teas opportunity across copper, optical and power? And how do you see these businesses complementing each of them over time. And if the scale-up architectures really migrate more aggressively towards optics. Do you think that's a tailwind, a headwind a neutral thing for your content story?

Yes, fair. So that's -- the first question is pretty straightforward. When you think about what we think about DDN and where AI is we're on track to what we said last quarter for DDN, DDN will be exactly where we thought we were going to be. And when you look at it, because of the AI momentum and the orders that we see, all you're going to continue to see is the percentage of AI of DDN is just continuing to increase. It goes up -- so I know a few quarters ago, we talked about at 70%. Every quarter, it goes up as AI continues to accelerate, and that trend is going to continue. So that's the first part. On the second part, on copper, and it goes back to Scott's question, on the copper and the inflection point, a couple of things. When you're in the scale up versus scale out, let's say, scale out already is very optical because you have longer lengths and things like that. Optics are [ good ]. When you're getting into -- getting to more ingenic workloads, that's where you're introducing more CPUs. That's all going to be copper on it. So when you look at it, as architectures are evolving and that's why you hear at the global merchant chip makers say, copper is going to be the workhorse within the rack and in that scale up is going to continue. I think where you get the inflection point, which is incremental benefit for us is when you would get opticals like CPU coming in at the switch level, it's sort of in between. And in that regard, that's where I think with what we've done with RAM on the FAU side really plays into the connectivity suite and that's incremental TAM. And that doesn't even get into. And that's just on the data side when we're talking about it. Like I said in the prepared remarks, power just continues to move up. The power connectivity as they're moving to higher-voltage architectures, you introduce optics that creates more power need. And if you look at that, in some cases, we can get content increases, that will be 1.5 what traditional power content would be. So all this in collection, we like it. We think it is all positive for us. And we have to realize, when you play with technology and play where we want to play, architectures evolve and you need data, you need power, and we do both. So we get excited about it. We think it's going to continue to benefit us as we move forward. And clearly, our orders also represent that.

We have next question, please.

Your next question comes from the line of Joe Giordano with TD Cowen.

I wanted to touch on the other parts of DDN. So like if you're tracking towards your AI cloud number of like around $2.4 billion, it suggests that like the rest of DDN, that $800 million of more traditional stuff isn't growing that fast this year. And I'm just curious what the -- can you frame that piece for us? And when you talk about the Agentic/CPU-type incremental demand that you see, where would that fall? Would that fall within that billion that you're currently calling AI cloud? Or would that fall into that other like $800-ish million of like more traditional? And how should we think about the kind step up there?

Well, a couple of things. When you see that content step up, this is where in this space, it blurs a lot, and it depends on where the customer is that's doing it, Joe. And I'm not trying to be cute but when you actually sit there, if the hyperscaler is doing it, we would put it more in the AI cloud number. If it was just somebody buying a server, it might be an enterprise type number. So we continue to get clouding on that due to how these architectures evolve. And it's another reason why you're going to hear us talk much more at the DDN level as we go forward. But when you look at it, I talked about it just on the prior question, the growth in AI and cloud is the big momentum and growth driver. What you look at in the other areas, you do see people prioritizing to the AI workload. So while you do see some increase elsewhere, it's not as big of an increase as AI and cloud. In some cases, we actually see down a little bit as you have a shift of investment. But net-net, long term, both will be benefited as these architectures go forward. I just think we're in really early days to see it outside of the AI and cloud space.

Your next question comes from the line of Asiya Merchant with Citi.