TE Connectivity plc (TEL) Q3 2025 Earnings Call Transcript

Everyone, thank you for standing by, and welcome to the TE Connectivity Third Quarter Earnings Call for Fiscal Year 2025. At this time, all lines are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question during that time, simply press star 1 on your telephone keypad. 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 2025. With me today, our Chief Executive Officer Terrence Curtin and Chief Financial Officer Heath Mitts. During this call, we will 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 of our website at te.com I would also like to take this opportunity to announce that we are planning to hold an investor day on November 20th in Philadelphia with a product showcase the evening before we are excited to share more about our opportunities for growth and further value creation for our owners and we'll be sending out details of the event shortly finally during the Q&A portion of today's call due to the number of participants were asking everyone to limit themselves to one question then you may rejoin the queue if you have a second question now let me turn the call

over to Terrence for opening comments thanks usual and thank you everyone for joining the call today as I normally like to do I do want to take a moment before we get into the slides to frame our results for our third quarter as well as our guidance for our fourth fiscal quarter we are pleased that we delivered double digit increases in both sales and adjusted earnings per share in the third quarter that exceeded our guidance and demonstrate our team's ability to continue to execute in a dynamic global environment we delivered 14 sales growth and 19 adjusted earnings per share growth and both of these are quarterly records for our company a key driver of our success has been the strategic positioning of our portfolio and the investments that we've made to broaden our business to benefit from secular growth trends in both the transportation and industrial segments the investments that we made you will see that a pain off and are evident in our results as we're capitalizing on the strong demand for artificial intelligence as well as growth in energy applications where our products needed we're also benefiting from strength and Asia in our transportation segment where we see increased data connectivity trends and ongoing growth of the electrified powertrain. You not only see the benefit in the investments on the growth side, but you also see it in our operations. We achieved record adjusted operating margins of 20% and record free cash flow generation of $1 billion this quarter. This is the result of our global manufacturing strategy, where we've invested heavily to have over 70% of our production localized, and this is providing to be a differentiator with our customers. And finally, we do expect our strong performance to continue into the fourth quarter with both double-digit sales and double-digit adjusted earnings per share growth again in the fourth quarter. So with that as a backdrop, let's get into the presentation starting with slide three, and I will discuss some additional highlights and the guidance for the fourth quarter of fiscal 25. Our third quarter sales were above guidance at $4.5 billion, growing 14% on a reported basis and 9% organically year-over-year. We saw acceleration in our industrial segment with over 20% organic growth that was broad-based and driven by our digital data networks and energy businesses. We delivered record-adjusted earnings per share of $2.27 that was well above our guidance and increased 19% versus the prior year. Our adjusted operating margins were 20%, and they increased 60 basis points over last year, driven by strong operational performance by our teams. As you know, we've been on a journey to expand margins at the company level, and both segments are now essentially running at 20%. And importantly to highlight, and we'll get into it in more details, the industrial segment adjusted operating margins expanded nearly 400 basis points year over year. We also saw orders improve again this quarter to $4.5 billion, and this was an increase of 8% year over year, as well as 5% on a sequential basis. And these order levels support our outlook for the double-digit growth in our fourth fiscal quarter. We delivered record year-to-date free cash flow of approximately $2.1 billion, and we returned $1.5 billion to shareholders, and we deployed $2.6 billion of capital for acquisitions in the industrial segment, which includes the Richards acquisition that we closed this As we look forward into the next quarter, we do expect fourth quarter sales to increase to $4.55 billion, and this is growth of 12% on a reported basis and 6% on an organic basis year-over-year. Adjusted earnings per share is expected to be around $2.27, and this will be a 16% increase on a year-over-year basis. Our fourth quarter guidance implies strong performance in fiscal 2025 with high single-digit sales growth and double-digit adjusted earnings for share growth year over year with that as an overview now let me get into order trends and i'd appreciate if you could turn to slide four in the quarter we saw orders go to 4.5 billion dollars in transportation orders increased five percent versus the prior year with growth in asia of 17 partially offset by declines in europe and north america the global auto market remains uneven by region and we continue to see strengthen our Asia position in both our orders and our sales which is helping to offset the continued softness that we're seeing in Western markets looking at orders in the industrial segment we continue to see strong order momentum with 12% growth both year-over-year as well as sequentially and this reflects ongoing momentum in artificial intelligence applications and in our energy and aerospace and defense businesses. One key sign that we saw in the quarter and we're encouraged by is that we have improvement in orders that we're starting to see in the general industrial and markets. Now let me get into segment results and I'll start with transportation that's on slide five. Our auto business grew 2% organically in the third quarter with growth in Asia of 11% being offset by declines in western regions of 5%. While auto production on a global basis was down slightly in the third quarter it is expected to be roughly flat this year and we continue to generate growth over market and secure key wins around data connectivity and electrification that will drew drive for future content growth in addition to the leading-edge products and technologies we are also benefiting from our strong global position and localization strategy which enables us to serve our global customer base in this environment turning to our commercial transportation business we experienced three percent organic growth and this was driven by growth in Asia and in Europe, partially offset by declines in North America. We did see orders improve both year over year and sequentially indicating that there is some traction in the commercial transportation cycle. And in our sensors business we saw weakness and end markets in Western regions partially offset by growth in Asia. For the transportation segment adjusted operating margins were 19.4% and we expect margins to be above 20% for the full year. Now let me turn to the industrial solution segment and that starts on slide six. And at the segment level we grew 30% in the quarter with over 20% organic growth and the benefit of acquisitions in our energy business. The digital data networks business grew over 80% organically with increasing ramps from hyperscale platforms across our customer base you see the strong growth and i just want to remind you that ai revenues last year was 300 million dollars we now expect our revenue from artificial intelligence applications to be above 800 million dollars in this fiscal 2025 year and continues to reflect the strong momentum that we've been talking to you about in automation and connected living we grew five percent organically and we are seeing signs of recovery and factory automation applications as markets have begun to improve in our energy business our sales grew 70 percent and this includes the richard's acquisition which enables us to capitalize on strong growth opportunities in the north american utility market on an organic basis our energy business grew a strong 20 driven by continued momentum and grid hardening and and renewable applications. In our ADNN business, sales grew 6% organically, driven by growth across commercial airspace, defense, and space applications. And in these markets, we see favorable demand trends that continue to be coupled with ongoing supply chain improvement. And in our medical business, our sales were roughly flat sequentially as we expected. Now, let me turn to margins for the segment. And for the segment, adjusted operating margins expanded nearly 400 basis points to over 20 percent driven by strong operational performance and benefits of higher volume. I am pleased with the progress our team has made of balancing our footprint consolidation efforts with supporting the strong growth that we've had in this segment, and that's clearly evident in the growth as well as in the margins.

So with that as an overview of our segment results and orders, let me turn it over to Heath to get the more details on the financials and expectations going forward well thank you terrence and good morning everyone please turn to slide seven for the quarter adjusted operating income was 901 million with an adjusted operating margin of 19.9 percent gap operating income was 857 million and included 30 million of acquisition related charges and 14 million of restructure and other charges For the full year, we continued to expect restructuring charges to be around the $100 million level. Adjusted EPS was $2.27, and GAAP EPS was $2.14 for the quarter, and included restructuring, acquisition, and other charges of $0.13. The BEAT versus our guidance was driven by strong operational performance and higher volume. The adjusted effective tax rate was 24% in Q3, and we expect a similar tax rate for the fourth quarter. As a reminder, the increase versus the prior year is primarily related to the impact of the Pillar 2 global minimum tax and our jurisdictional mix of earnings. But as importantly and as always, we anticipate our cash tax rate to be well below our adjusted ETR. I'll discuss a couple of housekeeping items. During the quarter, we saw the U.S. dollar weaken against other currencies, resulting in a year-over-year benefit from foreign exchange of $68 million in sales and $0.05 in adjusted EPS. Our Q4 guidance assumes a foreign exchange contribution of $111 million in sales and $0.03 to adjusted EPS year-over-year. And these are part of the bridges in the back of the slide deck. The impact in tariffs in the third quarter was approximately 1.5% of sales with minimal earnings impact. Based upon what is currently enacted, we expect the impact from earnings in Q4 to be similar to Q3 levels. With our global footprint, we will continue our strategy of mitigating tariff impacts through both our sourcing changes by TE and our customers, as well as implementing pricing actions. Turning to slide eight, when you look at the graphs on the slide, we have set records in sales, adjusted operating margins, and adjusted earnings per share. I do want to focus on cash flow. Cash from operations was nearly $1.2 billion, and free cash flow was $962 million in the quarter. Year-to-date, we have delivered free cash flow of roughly $2.1 billion, and we expect to deliver another year of free cash flow conversion well above 100%. Our cash generation and healthy balance sheet position us well and provides us optionality with uses of capital. So far this year, we have returned approximately $1.5 billion to shareholders and deployed $2.6 billion for acquisitions. before I turn it over to questions let me reinforce that we are executing well to deliver record results and have positioned the company to continue to deliver strong performance and value for our owners I am pleased with the way our team is performing the results we are delivering and the opportunities ahead of us we are well positioned for a strong finish to the year setting us up for further growth and earnings expansion as we go forward into our next fiscal year. As a reminder, that starts October 1st. Now let's open it up for questions.

Okay, thank you. Can you please give the instructions for the Q&A session?

At this time, I would like to remind everyone in order to ask a question, press star 1 on your telephone keypad. If you would like to join your question, press star 1 again. In order to have time for all questions, Each participant is limited to one question. If you would like to ask a follow-up question, please press star 1 again to return to the queue. Your first question comes from Scott Davis with Melius Research.

Hey, good morning, Terrence and Heath and Sujal. Hey, Scott. Good morning. Congrats on positioning the company well this year, particularly around the AI stuff, which I need to ask about because it's topical, obviously. But is that business now, when you think about $800 million, which is just a big number, really, when you think about where you were just a couple years ago, but is that business now fully ramped and scaled, meaning, like, profitability at or above company levels? How do you think about that?

Yeah, no, thanks, Scott. And, you know, to your point, you know, I said it on the call. You know, last year we had just AI application about $300 million of revenue. And, you know, it's up, it'll be above $800 million this year. And when you look at where we're even run rating now at this quarter, it'll be above a billion dollars next year. So it has been something from the scaling side. Our teams have done an exceptional job trying to keep up with the demand. You know, when you look at the growth we have, it is on ramps. And, you know, when you look at the margin that we get in this business, you know, it's not surprisingly it is a little bit above where the industrial segment. plays, and I think you're going to continue to see nice conversion on that as that continues to ramp, and I still think we're sort of middle to early innings in this and what we're working on with next generation programs with our customers, and like we've always said, and as we've talked about AI, you know, we're playing against a broad slate of the hyperscalers. It isn't one customer here, and how our teams are bringing not only the technology that's needed on the product set but then to your question around the operation side you know our team's executing very well to really make sure we can deliver the technology at the pace that the hyperscalers expect so that momentum we feel good about certainly we see that not only being in 25 we see that continuing into 26 okay thank you Scott we have the next question please your next question comes from Amit Daryani with Evercore.

Good morning, everyone. Thanks for getting my question. Hi, Terrence. In June quarter, something that really stands out, I think everyone is just the broadening in both growth and the margin performance across your portfolio. The WG growth in industrials really stands out. So can you just talk on what's driving this diversification and growth that we're seeing in June, and it really relates to that, the industrial segment margins achieving 20 percent, I think, much faster than any one of us expected. Can you spend a little bit of time on kind of what factors contributed to this outperformance and how sustainable these margin levels are? Thank you.

Yeah, no, thanks, Ahmed. And, you know, let me break that into probably two pieces. I'll talk about the growth, and I'll ask Heath to talk about the margin journey that you've all been following with us. So first off, when you think about the growth and, you know, let's face it, we have an unbelievable position in transportation that we've always talked about. But really when we think about when we make investments and you think about what we do, which is across these markets, it's really connectivity, is, you know, a couple key trends that we've been investing in is around where do you need data? Where do you need higher speed data? And, you know, AI, to Scott's question, you know, is front of mind. but also realize when we deal with things and we talk about software-defined vehicles, it's around where we're strong and where those trends help us. So it does come to a big point of those data speeds, and you see that in industrial where you benefit it from in transportation, but also in places like factory automation. You have data speeds that are needed, and that's why we like our position there, and to your question, broadening out. The other big trend is its connectivity around power. And, you know, in energy, we've made investments around our go-to-market and our product set. You see it in the organic growth that we've had now for – goes back pre-COVID. And in this quarter in energy, it was 20% organic growth. And then we've deployed capital of an M&A there. So it does come around, you know, power connections, and no different than power connections we have where the architecture changes in the car for the electrified powertrain. So it's things we do good. Yes, we have to be target to create value with our customers, but you're seeing that throughout our results, and you see both segments contributing. And, you know, that's the broadening that we get excited about because it's things that we have been investing in, and certainly you see them in this quarter's results. Heath, you want to talk about the margin side of his question?

Sure, and I appreciate the question. And certainly we're pleased with the progress that we've made in the industrial segment margins as it's been a journey to work its way from the mid-teens into the high teens and now, you know, cross over the 20% threshold for that business. But we would expect these level of margins at these volumes, right? So we've done a lot of footprint work in the industrial segment, as you are aware, and we've been pretty transparent that this restructuring journey that the segment has been on to reduce some of the rooftops as we've undertaken. So as you get that combination of reduced fixed costs out of those fewer facilities and then the scale that we get and the volume leverage we get when we start to see these volumes, it's not a huge surprise to us and we would have that level of expectation. Now, you know, some of the things we're benefiting from around the energy sector, particularly North America, and the AI business within our TDN business unit certainly helps, but all pieces of the segment are contributing towards this journey and certainly aligned with what our internal expectations are. So we're happy to get there sooner, but certainly it's come as the top line has been supported. All right.

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

Your next question comes from Mark Helaney with Bowman-Fax.

Yes. Good morning. Thank you very much for taking my question. I'm hoping you can comment more on your view about the sustainability of the current fundamental strengths. and if you think any of the current demand is due to customers pre-buying in order to mitigate tariff risk?

Yeah, no, thanks, Mark, for the question. We don't see any meaningful impact in pull-ins. When our products, when we look at things and we talk to our channel partners, we don't see that. Certainly I think you may see that a little bit more in semiconductors, but we do not see any meaningful pull-ins. And I think that goes back to the orders that we talked about back when I covered slide, I think it was four. And when you look at it, both year-over-year and sequentially, we saw nice growth. And we also saw growth year-over-year in both segments. Now, it's evident when you look at the slide, you look at the transportation line, you just sort of see something that looks very stable. But as I said, Asia-strong, you know, Western car production is still weak. You know, it is down mid-single digits in the West between the U.S. and Europe. And then you're also getting into elements of what they're making. You know, there are less electrified vehicles just due to the trends there. So Asia is an area where we continue to see strength, and, you know, half of our revenue in automotive is Asia-driven. We also saw commercial transportation. We continue to see growth outside the United States in commercial transportation. So North America is the one area that continues to be soft in commercial transportation. But one of the things we were encouraged by is we saw a sequential improvement in global orders. So maybe we're seeing some traction there. And then in the industrial segment, Mark, it is, I think, the continuation of the AI momentum that we already talked about. Energy continues to have strong orders. and you know north america is very strong in orders in the energy space so that that's going to continue and will benefit from what we did with harder and richard from an emanate perspective and then the aerospace business continues to be strong we do see supply chains improving and you know what was nice in the industrial segment i talked about was in our automation and connected living we started to see encouraging signs about improvement and orders and you know we're going to continue watch those to see what shape they are but it's nice to finally see after a couple of years where it's been down there's some encouraging signs there and they're pretty broad around the world it isn't just one region it's broader than that so finally i think there's you know more upward potential there than what we've been talking about over the past two years so So durability feels good, you know, clearly it's reflected in our guide, and some of these are real trends, secular trend-driven. You know, when you think about electricity growth, you think about what's happening with AI, which gives us even more confidence because we're having those trends.

All right, thank you, Mark. We have the next question, please.

Your next question comes in from Luke Junk with Baird.

Good morning. Thanks for taking the question.

Hey, Bill.

I think we could maybe touch on the industrial book-to-bill, especially any timing related impacts we might be seeing there in terms of AI that could be causing some distortion plus or minus. And maybe if you just comment on AI awards specifically, be especially interested in anything above and beyond this continued acceleration in life-for-life growth that you're seeing, maybe relative to both the hyperscaler opportunity and chip makers as we step into 26.

Yeah, so let me take the second part first. You know, with when you look at where it's at, I would just say it's the momentum's continuing. I don't think there is, you know, an incremental platform or an incremental customer. It's really where we have been strong. We continue to see momentum there. And as we've always talked to you, Luke, and everybody else, you know, we have to play across the ecosystem to really win here. It has to be with the chip makers, with the hyperscalers, with, obviously, the contract manufacturers have put equipment together that really supports the growth on top of technology. So I think when you look at it, you're going to continue to see those that we've had traction and continue, and it's pretty broad, which gives us the confidence that I've talked about already. You know, in industrial, you know, the orders are broad-based improvement, like I just answered to Mark's question. And, you know, even if you look sequentially, essentially every business in the industrial business orders improve sequentially so it is broad-based momentum it isn't like there's one ai order in there that's taking uh the orders up it's broad-based across the markets and i think that reflects the tone that i just handled with mark so that's one of the things that's encouraging um that in some areas that have been down we see signs of life in areas that have been strong continue to stay strong okay thank you look we the next question, please.

Your next question comes from Joe's talk with UBS.

Oh, good morning. Thank you. I guess just maybe following along those lines, I mean, sounds like everything you think is at least sustainable. I think you and we would all sort of expect sort of, you know, continued growth.

So, I mean, how should we think about a new sort of aspirational target for the company as we think out here a couple years margin target sorry margin mods i'm going to let he take that you know joan i appreciate the question it's it's a um it's something that you know internally that we work through as well but looking at where the where the growth is um certainly we are focused on a total company margin uh but as we you know look at our businesses respectively both at the you know segment level that we report to here as well as as we you know run the business day to day and all of our business units we really look at incremental flow through and the incremental flow through on on that organic revenue growth and as we do that you know we do target businesses to be at 30 or better there's some that have a little bit of self-help work that you know we've spent more money on restructuring in and you know in those cases they owe us a little bit more flow through because we've got to pay for some of those that benefit of that restructuring but in aggregate that's kind of how we measure you know what success looks like as we move forward that will have the natural you know impact as we you know hit those targets over over cycle the natural impact of you know gradually moving that margin up uh and then you know we obviously later

on the inorganic side on top of that those come in all forms and fashions okay thank you joe can we have a next question please your next question comes from christopher glenn with oppenheimer uh hi good morning and a question on that and hey a question on the energy segment um i'm wondering in you know the renewable energy and the grid hardening uh the degree of uh co-dependence of those two versus maybe some independent drivers supporting the the two call-outs there and if you're starting to see richard's kind of cross cell or you know bilateral pull uh creeping

in there and if the run rates you're seeing here are just really structural lift or some particular periodic stream no great question i think just just let me peel that apart a little bit here first off being i think when you look at both trends that we position around it starts with electricity growth is is the the common trend when you deal with grid hardening and renewables they are independent they don't have to be it completely interlap because there can be things you're doing on the infrastructure to secure the infrastructure that doesn't mean it's a renewable energy source so they are separate as you click down now that being said you know Richards is much more aligned to what we do in grid hardening it has really broadened what we do in grid hardening in North America so if you look at our North American business before Richards which was around 600 million dollars probably only a million of it was in grid hardening Richards is all grid hardening so we get much more exposure to grid hardening with Richards we do view down line we could repurpose some of the Richards products for renewable applications but I would not say that's in the results because we are still in the middle of how do we increase the capacity to serve the current opportunity in the grid hardening side but I do think down the road that will create revenue opportunities and you know in the growth that we had this quarter of 20 organically even without the mna north america was much stronger than that the trend around renewables we are contingency strength there as well as in the grid hardening so you know we still think this is an area that will drive nice growth certainly we think we're positioned well and we'll also look for opportunities where we can strengthen it both organically and inorganically all right All right, thank you, Chris.

Can we have the next question, please?

Your next question comes from Sameek Shattery with JPMorgan.

Hi, thanks for taking my question and strong friend here. Terrence, maybe I'll go back to something you mentioned in the Q&A earlier, which is you still think we're in the early innings in terms of the AI opportunity. There's also an investor perception that maybe you're with early innings in terms of market share opportunity as well in terms of AI, particularly related to your peer company. Maybe if you can sort of highlight how do you think about market share that you have between hyperscalers versus the chip companies and where do you see more opportunity on that front as we look forward?

Well, to your question, and I said it earlier, Samik, thanks for that question, is we have to play with everybody here. When you sit there, let's face it, some people design their own chips and TPUs. In other cases, they leverage the leaderships, and to really win, you have to make sure you're playing with everybody in the ecosystem. I cannot stress that enough. I like our broadness, and I think that can create market share opportunities in the future. And we also have to make sure we ramp the programs that we want. To Scott's first question, these programs are ramping, and we've got to make sure we capitalize on it. So I think from a technology, we're extremely well positioned. I think there can be share opportunities in the future. But right now, it is, hey, we've got to capitalize on the growth. And you're seeing that growth, you know, went from that $300 million to $800 million. And we expect to grow even more as we go into next year. So thanks for your question.

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

Your next question comes from William Stein with Truist Securities.

Thanks, guys. Great quarter. I was going to focus on AI, but I feel like that's been covered pretty well already. I'd like to ask about a couple of, well, at least one weak spot anyway. Book to Bill was slightly below one, and it looks like that's driven by transportation. Can you talk about what's dragging that, and is it even an important metric for us to focus on? Thank you.

So a couple of things. I think it's a metric to look at. I would say when you look at our guide, I went over 12 on it. You know, what you do see is, you know, in transportation, you know, the automotive market typically declines sequentially going from our quarter three to quarter four. And we do expect that trend to continue. So that will impact, hey, we did see orders come down, but that's more with the seasonal trend. so you know auto production we believe was 21 million units in the third quarter we expect it to be closer to 20 in the fourth quarter so we do expect a sequential decline in production will and that's really driving the book to build when you have that type of trend but we would normally see that this time of year so it's not concerning to us and you know hey all of it's included in the guide that we just went out with for the double-digit growth at the company level.

Okay. Thank you, Will. We have the next question, please.

Your next question comes from Colin Langan with Wells Fargo.

Oh, great. Thanks for taking my question. And congrats on a good quarter. I just want to ask a little bit about the organic growth in transport and auto. I thought the long-term target was to be four to six percent over market. I thought you were trending at the low end. I think, you know, S&P is up two percent on light vehicles, so it looks like you're kind of in line with market growth in that segment. Any color there, and how should we think about that? Is that being impacted by all the EV pushouts in the U.S. and Europe?

No, it's a great question, and, you know, first off being we view that auto production declined about a point in the third quarter, and we grew two points, so we had about three percent of outperformance. you know where we are running a little bit below our four to six really has to do with the unevenness of the world in asia we're growing 11 you know on a four percent production growth of cars so we really are seeing that content out performance with the west being down five percent percent in production you know our content is a little bit higher in the west that does pressure the overall calc i think we're going to be around 400 basis points in the fourth quarter but the unevenness in production right now uh is impacting what you see in the overall content we still feel good about the four to six but right now we're getting a little bit of pressure due to western production levels being light and you know hey that will correct it sometime but you're seeing that in the growth over market okay thank you colin we have the next question please your next question comes from joe giodano with td cowan hey guys good morning hey joe hey can you talk about price uh a little bit and how is that in the quarter and just curious how you think about that going forward like i'm pretty i believe that most of your price was surcharges related to tariffs and if we're going into like a de-escalation phase here can price turn into like a modest headwind maybe on the top line with like better margins coming through yeah let me let me talk about price a little bit i'll talk about it there's the tariff impact versus you know normal pricing environment you know in the tariff side of things you know when we guided last quarter we thought that tariff costs would be about three percent of our sales due to all the policy changes it came in about half that number so about a point and a half and as he said in his pre-remarks we it had no earnings impact so our teams mitigated through the strategy that we talked about last quarter how can we do things from a supply chain perspective both ourselves and our customers and where we can't do that you know we implemented pricing and the bigger impacts in our industrial segment. So really where you see where we did do pricing, it's really in the industrial segment. But it wasn't as big of a number as we talked just due to the policy changes. And in our guide, we basically assumed with what was enacted, it'll be similar to what we just did in quarter three. So our guide for the fourth quarter sort of assumes that same impact that we had in quarter three. you know and as we've talked about just overall pricing without surcharges because they are the tariff surcharges you know as we've talked historically the bigger driver of where pricing goes from here will be material cost you know we're continuing to watch that closely i think you're going to continue to see areas where we have that you know we'll be positive in price in our industrial segment and you know that's just something we're going to keep in front of us because obviously some things are jumping around right now but we feel how we're managing

it and continuing to pull the levers we can pull to minimize the impact on earnings feel the teams are doing a good job all right thank you joe we have the next question please your next question comes from wamsi mohan with bank of america hi yes thank you so much um hey hey uh you're going to be exiting this fiscal year with very strong momentum uh any thoughts on early puts and takes on on fiscal 26 and just sort of this momentum of high teams EPS growth is that something that we should be underwriting and and I know you just noted the impact of rising let's say copper pricing at least and so

if you could if you could sort of frame that in that in that podcast around 26 yeah I think when you look at 26 and I just think some some of the things we talked about, and let's face it, Sujal talked about an investor day in November, WOMC, so you're, you know, we have to make you come to that. So I think what you see is the growth and momentum we have, I think, is clear and certainly will keep in front of us. And I do think it comes through the fall through on the volume from here. You know, we've done a lot of structural work. You've seen the benefits of it, certainly with what we put up here. But I think it's going to be the fall through on the growth that I think we You have proven the operations of TE, and you see it in many of the businesses and markets that we're in, which does create strong levers for, you know, fall through that gets to double-digit earnings. And the other thing is, while that's a P&L view, I don't want to lose sight of what we've done on the cash side. You know, cash conversion this year will be over 100% again, and that provides the optionality that he talked about, whether it is deployed to owners or as we did with a couple acquisitions this year to strengthen some of those secular trends that were around. So I do think the levers are there to continue this. You know, certainly we need to continue to execute, but I also think, like I said in the pre-comments, the investments we made and how we got deeper into some trends, you know, just broadened out some of the growth factors that we had versus historical.

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

Your next question comes from Azaya Merchant with Citigroup.

Great. Thank you for taking my question. You know, just some early thoughts, if you may, on the passage of this one big beautiful bill and perhaps, you know, offsetting some macro pressure that may be a function of tariff, like any early thoughts on that?

And one, if I may, again, on the cash flow, I mean, you guys have talked about, you know optionality here with strong free cash flow generation just some thoughts on you know where you would like to use that optionality as it relates to the acquisition front and where do you and how's the pipeline looking for those acquisitions thank you yeah let me let me talk about the first one um and then i'll let he talk about the pipeline there first off being you know we're a global company and we play all around the world and like we sort of said some of the things where we've invested to make sure we strengthen ourselves from a localization are things that you know i think are evident in our results and you know there are some areas like when you think about energy that will certainly help us and continue to help us but you know we're going to be focused more on our customers to really make sure how do we bring the innovation to them around the world where we can play and do we have the supply chain to capitalize it to make sure we can win our fair share and then gain share so you know the bill itself touches a lot of things but let's also realize tees a global company and how we deploy our innovation and our manufacturing all over the world so you know there'll be some things that i think we position ourselves well for that's in the bill but net net we also have to realize the trends we have are global and you know that's just sort of a factor of electronics and he you talked about the capital side of things?

Sure. You know, we have been obviously more active this year with a couple of deals, particularly in the energy space. One, a sizable deal with Richards. You know, as we look forward, not just for the remainder of our fiscal year, the next couple of months, but certainly into FY26, the pipeline does look good. Now, you know, It's bolt-on in nature, so the types of things, that doesn't mean they're small, just like Richard's was a sizable check we wrote, but was a bolt-on for our energy business. And so we see things coming kind of in all shapes and sizes that are out there. Some are more interesting than others. But, you know, the beauty particularly of our industrial businesses is that it's a fairly fragmented landscape of things out there where there, in some cases, has not been a ton of consolidation. And in those opportunities where it makes sense, we think we're in a good position to deploy capital to do that. um so you know we're pleased with what we've done to date or we're always working the pipeline and the cultivation efforts um it's nice to have the strength of the balance sheet behind us and the cash flow that we generate um to be able to look at things of all different sizes and and and uh be able to make multiple bets and that should be what you'll continue to see us do as we move through the near and medium term future. Okay, thank you, Asiya. Can we have the next question, please?

Your next question comes from Steven Fox with Fox Advisors.

Hi, good morning. I was just wondering on the AI growth that you talked about, the 80% growth, how successful you feel you are in just keeping up with demand and what kind of investments do you see yourselves making into next year, whether it's capacity or maybe you're being pushed to expand your product set with the customers?

So first off, you know, we have been investing ahead. And even if you look this year, Steve, and, you know, he can probably add more color. Our capital this year is up almost 30%, capex spending 30%. And the vast majority of that has gone into AI. So we have been investing ahead, and that's something that goes back to the first question of how are you making sure you have the capacity in place that can absorb the volume, what our customers are expecting as we get the program went. So I feel we have been investing. I feel we're continuing to look at how do we expand for even more flex capacity to make sure we're well positioned to continue to drive the growth. But I feel it's real-time investment that's going there. and you see it in the numbers you know to scale from 300 million dollars to 800 million you know that's massive and these are products that are new to world type products these are not just making things that we've made for 40 years this is cutting edge technology on the high speed and it's a real testament to what our ddn team's been ramping and in some ways you know what we did and learned back when we had the cloud boom about four years ago we did it then and we've Just continue to expand to make sure these type of opportunities are on high speed, we can capitalize on it.

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

Our final question comes from Shiraz Patel with Wolf Research.

Hey, thanks a lot for taking my question. So as we look at the company today, you're delivering 20% EBIT margins in both segments. I believe you have additional restructuring savings coming through in 2026 based on prior actions. And some of the higher margin segments appear to be turning a corner. So how should we think about the trajectory of margins from here? Are there strategic investments you think the organization needs to make that may offset the incremental margins you're getting from just the strong top line growth?

Sure. Listen, we've been making investments. So when you think about the run rate of our existing profile, whether that's on operating expense investments, which are primarily around engineering, or the capital investment that Terence just referenced that helped us build out the manufacturing capacity in different parts of the world. Largely, those are embedded in our run rate. So there will be things that we will have trade-offs on. We may, you know, invest certainly in some of these areas like around AI that have shorter cycle times and need quicker ramps and trade those off with other areas. But that's what we do every day in terms of managing to that. At times, we take the total number up or the total, you know, the total expense up, and other times we absorb it within there. But I don't think you're going to hear us come out and say, well, our margins would have been this if we didn't do this. That's not what we're all about. I do think as you go into next year, balancing with the growth opportunities that are in front of us, which are very broad-based, you know, I mentioned earlier probably a 30% incremental flow-through. And I think that's probably, for a modeling purpose, is a fair way. And listen, when you start getting volumes higher, you can see that tick up. And when you start to see volumes, you know, in low, mid-single digits, that gets pressured a little bit. But an aggregate relative to our business model, that's kind of how we do it.

Okay. Thank you, Shreyas. We want to thank everybody for joining us this morning, and if you have further questions, please contact Investor Relations at TE. Thank you, and have a nice day.

Today's conference call will be available to replay beginning at 11.30 a.m. Eastern Time today, July 23rd, on the Investor Relations portion of TE Connectivity's website. That will conclude the conference for today. Thank you for participating. You may now disconnect.