Executive Summary / Key Takeaways

• TE Connectivity is strategically positioned to capitalize on powerful secular growth trends in artificial intelligence, vehicle electrification/electronification, and renewable energy, offsetting cyclical weakness in broader industrial markets.
• Strong operational execution has driven significant margin expansion and record free cash flow generation, demonstrating the company's ability to deliver robust financial performance even in dynamic or lower-growth environments.
• Accelerating momentum in AI applications, with revenue expected to more than double in fiscal 2025 to over $700 million, highlights the company's technological leadership and design win success in high-speed, high-power connectivity.
• A disciplined capital deployment strategy balances significant returns to shareholders (including a recent dividend increase and buyback authorization) with strategic bolt-on acquisitions like Richards Manufacturing, enhancing the portfolio in attractive growth areas.
• While facing risks from market cyclicality, trade dynamics, and tax changes, TE's localized manufacturing footprint and proactive mitigation strategies are designed to navigate these challenges and support a return to overall growth in fiscal 2025.

Connecting the Future: TE Connectivity's Strategic Foundation

TE Connectivity stands as a global industrial technology leader, providing the essential connectivity and sensor solutions that enable the distribution of power, signal, and data across a vast array of critical applications. From the complex architectures of next-generation vehicles to the demanding environments of automated factories, data centers, and renewable energy grids, TE's components form the backbone of modern technological infrastructure. The company's strategic journey has been marked by a consistent focus on aligning its portfolio with powerful, long-term secular growth trends and relentlessly pursuing operational excellence to drive financial performance through various economic cycles. This approach, honed through periods of market volatility and strategic restructuring, positions TE to capture opportunities in the evolving industrial landscape. Effective fiscal year 2025, the company streamlined its reporting structure into two core segments: Transportation Solutions and Industrial Solutions, reflecting its strategic alignment.

A cornerstone of TE's value proposition lies in its differentiated technology in connectivity and sensors. The company develops solutions capable of handling increasing data speeds, higher power demands, and miniaturization requirements across diverse applications. For instance, in the automotive sector, TE's technology is crucial for enabling the transition to software-defined vehicle architectures and zonal computing. While these shifts may simplify wiring harnesses, they necessitate more complex, higher-contact-count, and engineered connectors, driving content increase per vehicle. Similarly, in high-performance computing and AI data centers, TE's high-speed, low-latency connectivity solutions are vital for managing the massive data flows and power distribution required by hyperscale platforms. The company's R&D efforts are focused on supporting these next-generation architectures, with stated goals around enhancing performance metrics like speed and power efficiency, contributing directly to its competitive moat and ability to secure design wins.

The competitive landscape for TE is diverse, encompassing large, diversified technology conglomerates, specialized component manufacturers, and regional players. Competitors like Broadcom (AVGO), with its strength in semiconductors and networking components, and Microsoft (MSFT), dominant in cloud infrastructure, represent different facets of the market where TE's connectivity and sensor solutions play a critical enabling role. While some rivals may offer advantages in specific areas like semiconductor processing speed or ecosystem integration, TE differentiates itself through the breadth of its portfolio, the ruggedness and reliability of its components, and its deep application engineering expertise. The company's localized manufacturing footprint, with over 70% of production within region, is a key operational advantage, particularly relevant in navigating complex global trade dynamics and potentially offering more flexibility than competitors with more centralized production. This localization strategy also supports close collaboration with customers at their design centers and aligns with evolving supply chain preferences, such as "China Plus One" strategies.

Performance and Operational Strength in a Mixed Environment

In the face of an uneven global economy, TE Connectivity has demonstrated notable financial resilience and operational strength. For the second quarter of fiscal 2025, net sales reached $4.14 billion, an increase of 4.4% year-over-year (5.3% organically), contributing to first six months fiscal 2025 net sales of $7.98 billion, up 2.3% (2.7% organically) compared to the prior year period. This growth was primarily fueled by robust performance in the Industrial Solutions segment, which saw net sales increase by a significant 17.2% in Q2 FY25 and 14.1% in 6M FY25. This segment benefited from strong organic growth in digital data networks (up nearly 80% organically in Q2 FY25), energy (up 7.6% organically in Q2 FY25), and aerospace, defense, and marine (up 10.8% organically in Q2 FY25).

Conversely, the Transportation Solutions segment experienced declines, with net sales decreasing by 3.9% in Q2 FY25 and 5.1% in 6M FY25. This was driven by softness across automotive (flat organically in Q2 FY25, with Asia growth offset by Western declines), commercial transportation (down 5.1% organically in Q2 FY25), and sensors (down 9.6% organically in Q2 FY25). Despite these top-line pressures in Transportation, the company's focus on operational execution yielded margin expansion. The consolidated gross margin improved to 35.2% in Q2 FY25 and 35.3% in 6M FY25, up from 34.4% and 34.5% respectively in the prior year periods, primarily due to higher volume. Operating income rose to $748 million in Q2 FY25 and $1.44 billion in 6M FY25, resulting in operating margins of 18.1% and 18.0%, an expansion compared to the prior year.

Profitability improvements were particularly evident in the Industrial Solutions segment, where operating margin expanded significantly to 16.6% in Q2 FY25 and 16.0% in 6M FY25, driven by higher volume and strong operational performance. The Transportation Solutions segment, while facing volume headwinds, maintained strong adjusted operating margins above 20% in Q2 FY25, reflecting effective cost management and manufacturing productivity improvements that partially offset lower volume and price erosion.

Cash flow generation remains a significant strength. Net cash provided by operating activities increased to $1.53 billion in the first six months of fiscal 2025, up from $1.43 billion in the prior year period, primarily due to higher pre-tax income and reduced income tax payments. Capital expenditures were $435 million in 6M FY25, and the company expects fiscal 2025 capital spending to be approximately 5% of net sales, supporting new programs and infrastructure investments, including capacity for AI ramps.

Total debt increased to $5.61 billion at March 28, 2025, from $4.20 billion at September 27, 2024, reflecting recent financing activities, including the issuance of €750 million in senior notes and increased commercial paper outstanding, partly in anticipation of the Richards acquisition. The company maintains a healthy balance sheet and was in compliance with its debt covenants as of March 28, 2025.

Strategic Growth Drivers and Forward Outlook

TE Connectivity's outlook is anchored by its alignment with powerful secular growth trends and expectations for a return to overall growth in fiscal 2025. The company provided guidance for the third quarter of fiscal 2025, expecting net sales of approximately $4.3 billion, representing a 5% organic increase year-over-year. This is anticipated to be driven by continued growth in the Industrial Solutions segment, which will benefit from the recently completed $2.3 billion acquisition of Richards Manufacturing (closed April 1, 2025), partially offset by expected sales declines in the Transportation Solutions segment. Adjusted earnings per share for Q3 FY25 are projected to be approximately $2.06, an increase of 8% year-over-year. This guidance includes approximately two points of pricing related to tariff recovery and is based on current foreign currency exchange rates and commodity prices.

A key growth engine is the accelerating momentum in artificial intelligence applications within the digital data networks business. AI revenue is now expected to exceed $700 million in fiscal 2025, an increase from prior expectations and more than double the $300 million achieved in fiscal 2024. This growth is driven by strong program ramps and TE's leadership position across multiple hyperscale AI platforms, supported by significant design wins and investments in engineering and capacity. The company anticipates the $1 billion AI opportunity timeframe is likely moving closer.

In the Transportation segment, while global auto production is expected to decline slightly in fiscal 2025, TE anticipates achieving content growth at the low end of its long-term four to six-point range. This outperformance is driven by the continued growth of hybrid and electric vehicle production (with approximately 80% of this growth occurring in Asia, a key region for TE) and the increasing electronification of the vehicle across all powertrain types. The company recently secured over $1 billion in design wins with a leading Chinese OEM focused on data connectivity, highlighting the importance of electronification as a content driver alongside electrification. The commercial transportation market is expected to remain slow in the near term, with potential improvement later in the year or in fiscal 2026. The medical business is expected to show sequential growth throughout fiscal 2025 as inventory corrections normalize.

Operationally, the company continues its productivity initiatives, including a new restructuring program initiated in fiscal 2025 aimed at footprint consolidation and cost structure improvements. This program is expected to incur approximately $100 million in charges in fiscal 2025, with annualized cost savings of around $70 million expected to be fully realized by the end of fiscal 2026. The adjusted effective tax rate for fiscal 2025 is expected to be approximately 24%, an increase from the prior year primarily due to the impact of the Pillar Two global minimum tax implementation and jurisdictional mix of earnings, although the cash tax rate is expected to remain well below the adjusted ETR. TE's strong cash generation is projected to continue, with free cash flow conversion expected to exceed 100% in fiscal 2025, supporting a balanced capital deployment strategy that includes a recently authorized $2.5 billion increase to the share repurchase program and a 9% increase in the quarterly dividend, alongside pursuing bolt-on M&A opportunities.

Risks and Competitive Dynamics

Despite the positive outlook and operational strengths, TE Connectivity operates in an environment subject to various risks. Macroeconomic conditions, including potential recession, inflation, and higher interest rates, could impact demand across its end markets. Cyclical weakness in certain industrial sectors, particularly factory automation and commercial transportation, could persist longer than anticipated, acting as a headwind to growth. Geopolitical factors and trade dynamics, including the implementation of tariffs, add complexity to supply chains and could impact costs, although TE's localized manufacturing and mitigation strategies are designed to minimize the impact of currently enacted tariffs. Changes in tax laws, such as the global minimum tax rules, have already resulted in significant non-cash tax charges related to deferred tax assets and could continue to affect the effective tax rate and cash taxes.

Competition remains intense across all segments. While TE's technological differentiation in high-performance connectivity and sensors provides a competitive moat, rivals continue to innovate. In the AI space, cross-licensing with competitors is common to ensure supply certainty for customers, reflecting a collaborative yet competitive ecosystem. In automotive, competition from other global and regional players necessitates continuous innovation and operational efficiency to maintain content outperformance. Supply chain disruptions, raw material price fluctuations, and the ability to successfully integrate acquisitions also pose potential challenges. However, TE's established playbook for managing input costs, its ongoing supply chain recovery efforts, and its disciplined approach to M&A are intended to mitigate these risks. The company's strong balance sheet and liquidity position provide a buffer against unexpected downturns and support its strategic initiatives.

Conclusion

TE Connectivity is navigating a complex global market by leveraging its core strengths: a strategically aligned portfolio benefiting from secular growth trends, robust operational execution driving margin expansion, and a powerful cash generation model supporting disciplined capital allocation. While facing cyclical headwinds in certain industrial markets and navigating risks related to trade policy and tax changes, the company's accelerating momentum in high-growth areas like AI and vehicle electrification/electronification, coupled with its differentiated technology and localized manufacturing footprint, underpins its investment thesis. The recent Richards acquisition further strengthens its position in the attractive North American energy market. With a clear focus on executing its strategic pillars, TE is well-positioned to deliver a return to growth in fiscal 2025, continue expanding profitability, and create value for shareholders through a combination of organic growth, strategic M&A, and capital returns, making it a compelling consideration for discerning investors.