TE Connectivity Ltd

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, Sujul 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 are Chief Executive Officer Terrence Curtin, and Chief Financial Officer Heath Mitz. 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, we're 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, Sujal, 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've 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've made will see that a paying 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 need it. We're also benefiting from strength in 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 percent. 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 percent year over year, as well as 5 percent 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 quarter. 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 share growth year over year. With that as an overview, now let me get into order trends, and I'd appreciate it if you could turn to slide four. In the quarter, we saw orders grow to $4.5 billion. In transportation, orders increased 5% 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 strength in 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 end 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 drive 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 3% 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 in 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. We now expect our revenue from artificial intelligence applications to be above $800 million 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 5% organically, and we are seeing signs of recovery in factory automation applications, as markets have begun to improve. In our energy business, our sales grew 70 percent, and this includes the Richards 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 percent, driven by continued momentum in grid hardening and renewable applications. In our AD&M 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 this segment. And for the segment, adjusted operating margins expanded nearly 400 basis points to over 20%, driven by strong operational performance and benefits of higher volume. I am pleased with the progress our team has made at balancing our footprint consolidation efforts with supporting the strong growth that we've had in the 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 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%. GAAP operating income was 857 million and included 30 million of acquisition-related charges and 14 million of restructuring and other charges. For the full year, we continue 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 13 cents. 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 now 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 5 cents in adjusted EPS. Our Q4 guidance assumes foreign exchange contribution of $111 million in sales and $0.03 to adjusted EPSU every 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 withdraw 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 Milius Research.

Hey, good morning, Terrence and Heath. Hey, Scott. 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? What 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 applicate about $300 million of revenue, and, you know, 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, 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, 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 operations side, our team's executing very well to really make sure we can deliver the technology at the pace that the hyperscalers expect. 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 taking my question. Hi, Amit. Hi, Terrence. Terrence, hi. In June quarter, something that really stands out, I think to everyone, is just the broadening in both growth and the margin performance across your portfolio. The double-digit 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%, 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 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 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 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 AI, to Scott's question, 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 benefited from in transportation, but also in places like factory automation. You have data speeds that are needed, and it's why we like our position there, and to your question, broadening out. The other big trend is its connectivity around power. And 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. 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, do you want to talk about the margin side of his question?

Sure, and I appreciate the question. 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% margin. 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, you know, 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 that we would have that level of expectation. Now, 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, Ahmed. Can we have the next question, please?

Your next question comes from Mark Helaney with Goldman Sachs.

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 strength, 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. And, you know, We don't see any meaningful impact of pull-ins. You know, in our product set, you know, 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 sort of see something that looks very stable. But as I said, Asia's 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 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 North America is very strong in orders in the energy space. So that's going to continue and will benefit from what we did with Carter and Richards from an M&A perspective. And then the aerospace business continues to be strong. We do see supply chains improving. And 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 in orders. And we're going to continue to 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 more upward potential there than what we've been talking about over the past two years. So durability feels good. Clearly, it's reflected in our guide. And some of these are real secular trend-driven. When you think about electricity growth, you think about what's happening with AI, which gives us even more confidence because around those trends.

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

Your next question comes in from Luke Junk with Bayard.

Good morning. Thanks for taking the question. Terrence, I'm hoping 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, I'd be especially interested in anything above and beyond this continued acceleration in like-for-like growth that you're seeing, maybe relative to both the hyperscaler opportunity and chip makers as we step into 26. Thank you.

Yeah, so let me take the second part first. You know, 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 that put the 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 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, that in some areas that have been down, we see signs of life, and areas that have been strong continue to stay strong.

Okay, thank you, Luke. We have 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, it 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 of years? Margin target, sorry.

Marginalize. I'm going to let Heath take that.

You know, Joe, I appreciate the question. It's something that, you know, internally that we work through as well, but looking at where the growth is, certainly we are focused on a total company margin. 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, uh 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 uh 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 uh 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 what success looks like as we move forward. That will have the natural impact as we hit those targets over a cycle, the natural impact of gradually moving that margin up. And then we obviously layer on the inorganic side on top of that, and those come in all forms and fashions.

Okay, thank you, Joe. Can we have the next question, please?

Your next question comes from Christopher Glenn with Oppenheimer.

Hi, good morning. I had a question on the energy segment. I'm wondering, you know, the renewable energy and the grid hardening, the degree of codependence of those two versus maybe some independent drivers supporting the two call-outs there. And if you're starting to see Richards kind of cross-sell or, you know, bilateral pull creeping in there, and if the run rates you're seeing here are just really structural lift or some particular periodic strength.

No, great question. I think just let me peel that apart a little bit here. First off being, I think when you look at both, trend that we position around it that 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 Richard 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 Richard's, which was around $600 million, probably only a million of it was in grid hardening. Richard's is all grid hardening. So we get much more exposure to grid hardening with Richard's. We do view down the line we could repurpose some of the Richard's 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 in the growth that we had this quarter of 20% organically, even without the M&A, North America was much stronger than that. The trend around renewables, we are continuously 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. Thank you, Chris. Can we have the next question, please?

Your next question comes from Samik Shattery with J.P. Morgan.

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 are in the early innings in terms of the AI opportunity. There's also an investor perception that maybe you're a bit 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 between that you have between hyposcalers versus the chip companies, and where do you see more opportunity on that front as we look forward? Thank you.

Well, to your question, and I said it earlier, Shamik, 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 leader's chips. 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 that can create market share opportunities in the future. And we also have to make sure we ramp the programs that we want. You know, 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 to $800 million, and we expect to grow even more. more as we go into next year. So thanks for your question.

Thank you, Sammy. 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 to all 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. Can 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 4% to 6% over market. I thought you were trending at the low end. I think S&P is up 2% 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. 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 3% of outperformance. Where we are running a little bit below our 4 to 6 really has to do with the unevenness of the world. In Asia, we're growing 11% on a 4% production growth of cars. So we really are seeing that content outperformance. With the West being down 5% 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 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 Giordano with TD Cowens.

Hey, guys. Good morning. Hey, Joe. Hey, can you talk about price? a little bit, and how was that in the quarter? And just curious how you think about that going forward. I believe that most of your price was surcharges related to tariffs, and if we're going into a de-escalation phase here, can price turn into a modest headwind, maybe on the top line with better margins coming through?

Yeah, let me talk about price a little bit, and 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 3% 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, it had no earnings impact. So our teams mitigated it 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, 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 would be similar to what 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. And as we've talked about just overall pricing without surcharges, because they are the tariff surcharges, as we've talked historically, the bigger driver of where pricing goes from here will be material costs. We're continuing to watch that closely. I think you're going to continue to see areas where we have that. We'll be positive in price in our industrial segment, and 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. Can we have the next question, please?

Your next question comes from Wamsi Mohan with Bank of America.

Yes, thank you so much. Hey, Wamsi. Hey, Terrence. You're going to be exiting this fiscal year with very strong momentum. Any thoughts on early put and takes on fiscal 26 and just sort of this momentum of high-teens EPS growth? Is that something that we should be underwriting? And I know you just noted that. the impact of rising, let's say copper rising at least. And so if you could sort of frame that in that talk process around 26, that would be great.

Yeah, I think when you look at 26, and I just think some of the things we talked about, and let's face it, Sujal talked about it yesterday in November, Wamsi, so we have to make you come to that. So I think what you see is the growth 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, and 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 have proved 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. Cash conversion this year will be over 100% again, and that provides the optionality that Heath 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. Certainly we need to continue to execute, but I also think, like I said in the pre-comment, the investments we made and how we got deeper into some trends 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 Isaiah Merchant with Citigroup.

Great, thank you for taking my question. Just some early thoughts, if you may, on the passage of this one big, beautiful bill and perhaps offsetting some macro pressures that may be a function of tariff. Any early thoughts on that? And one, if I may, again, on the cash flow, you guys have talked about optionality here with strong free cash flow generation. Just some thoughts on where you would like to use that optionality as it relates to the acquisition front, and how's the pipeline looking for those acquisitions? Thank you.

Yeah, let me talk about the first one, and then I'll let Heath talk about the pipeline there. First off being, we're a global company, 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 I think are evident in our results. And there are some areas, like when you think about energy, that will certainly help us and continue to help us. But 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 TE is a global company and how we deploy our innovation and our manufacturing is all over the world. So, you know, there will 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 Heath, why don't you talk 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 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 It's bolt-on in nature, so the types of things, that doesn't mean they're small, just like the Richards 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 business is that it's a fairly fragmented industry. 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. So, you know, we're pleased with what we've done to date. We're always working the pipeline and the cultivation efforts. It's nice to have the strength of the balance sheet behind us and the cash flow that we generate to be able to look at things of all different sizes and 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, Asya. Can we have the next question, please?

Your next question comes from Stephen 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?

Thanks. So first off, we have been investing ahead. And even if you look this year, Steve, and 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 you make 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. To scale from $300 million to $800 million, 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 what we did and learned back when we had the cloud boom about four years ago. We did it then, and we've just continued to expand to make sure these type of opportunities around high speed we can capitalize on.

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

Our final question comes from Sheraz 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 Terrence 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 invest certainly in some of these areas like around AI. that have shorter cycle times that 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 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 all this, though, 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 think about 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.