TE Connectivity plc 2026 Q4 Earnings Call

Please go ahead. Good morning, and thank you for joining our conference call to discuss TE Connectivity's fourth quarter and full-year results for fiscal 2026, along with the outlook for our first quarter of fiscal 2027.

With me today are Chief Executive Officer, Terrence Curtin, and Chief Financial Officer, Heath Mitts. During this call, we'll be providing certain forward-looking information, and we ask you to review the forward-looking cautionary statements included in today's press release. In addition, we will use certain non-GAAP measures in our discussion this morning, and we ask you to review the sections of our press release and the accompanying slide presentation that address the use of these items. The press release and related tables, along with the slide presentation, can be found on the investor relations portion of our website at te.com.

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, and you may rejoin the queue if you have a second question. Now let me turn the call over to Terrence for opening comments.

Good morning, and thank you everyone for joining us. Before I get into the slides and the details of our results and expectations going forward, I do want to make some overall comments. TE is positioned around the accelerating data and power trends that are driving significant growth for us today and creating opportunities for strong growth in the years ahead. As I mentioned last quarter, our products and technology are at the intersection of some of the largest technology and infrastructure investments taking place around the world, and you'll see the benefits in our results and our outlook during this call.

Our fourth quarter performance above guidance was a good finish to the year, and full 2026 fiscal financial results demonstrate strong execution by our team in delivering $2.6 billion of sales growth, which is an increase of 15% year-over-year, along with adjusted earnings per share growth of 24%. The sales and earnings performance was coupled with another year of strong cash generation while continuing to invest in expanding capacity and engineering resources to support future growth. We also made bolt-on acquisitions that expand our addressable market in both optics as well as power filtering. Let me click down on the trends and how these are showing up in our results. You are all familiar with the investments taking place in AI infrastructure. Our Digital Data Networks business is benefiting from increasing data and power connectivity requirements, including growing networking demand as AI architectures evolve.

At the same time, our energy business supports the electrical infrastructure needed to power these data centers. At TE, our opportunity extends from the grid all the way to the chip. Together, DDN and energy accounted for approximately half of our organic sales growth in fiscal 2026. But AI is also moving beyond the data center into physical AI applications. As intelligence moves to the edge of the network, more machines and devices need increased computing. That, in turn, leads to more connectivity, so information can be processed and decisions can be made in real time. We're seeing this in factory automation, intelligent vehicles, battery electric storage, and industrial and humanoid robots, and TE is well-positioned to benefit from these emerging applications. Just as importantly, the breadth of our growth extends well beyond AI.

We're driving strong content growth in automotive and commercial transportation and benefiting from continued strength in commercial aerospace and defense, as well as our other businesses. Across all of our markets, the need for increasing data and power requirements is creating opportunities for additional connectivity content, reinforcing growth across the portfolio. While I'm excited about our positioning and opportunities tied directly to AI, we're also benefiting from broader trends outside of AI as they contributed the other half of our sales growth this past year. With that as a quick backdrop around trends, let's get into the presentation, and I'd ask you to go to slide three, and I'll get into fiscal fourth quarter results, as well as the full year and our guidance for the first quarter of fiscal 2027.

In the fourth quarter, we delivered another quarter of double-digit sales growth that was ahead of our guidance. Sales were $5.3 billion, and this was an increase of 13% organically year-over-year, and both segments delivered strong growth. Orders were $6.1 billion, growing 29% versus the prior year. I'll get into more details on both the sales and the orders on the next few slides. Against the sales growth, we delivered 21% EPS growth with adjusted earnings per share of $3.14, and adjusted margins expanded 100 basis points over the prior year. We had strong free cash flow generation of $1.2 billion, with approximately $800 million returned to our shareholders. Now let me touch upon full-year fiscal results quickly. Across the board, we achieved record sales, orders, adjusted operating margins, EPS, and free cash flows. Just a really strong year.

For the full year, sales were nearly $20 billion, growing 15% on a reported basis and 12% on an organic basis. We achieved order levels of over $22 billion and are entering fiscal 2027 with record backlog levels. Adjusted earnings per share increased 24% to $11.52. Adjusted operating margins expanded 120 basis points year-over-year to 22%. We continue to demonstrate the strength of our cash generation model, and Heath will get more into this in his section. As we look ahead to fiscal 2027 and our outlook, for the first quarter of 2027, we are expecting sales of $5.35 billion, and this is an increase of 15% year-over-year on both a reported and an organic basis, and the growth, again, will be broad-based. We expect adjusted earnings per share to be around $3.30, and this will be growing 21% over last year's levels.

The other thing I want to highlight is that when we look at the trends in our markets and customer programs and backlog, we are expecting another year of double-digit organic sales growth in fiscal 2027, and we expect that will be similar to the 12% organic growth levels we had in 2026. At this point, I would like to talk about orders, and I would ask you to turn to slide 4, where you can see the details on the slide. Order momentum remained strong and increased 6% sequentially and nearly $1.4 billion year-over-year to $6.1 billion in the quarter, with orders increasing double digits in both segments. The Industrial segment continued its momentum, with orders increasing 47% versus the prior year. While the strongest growth was in DDN, every business had over 20% order growth year-over-year in the fourth quarter in the segment.

In our Transportation segment, orders increased 13% versus the prior year, and this reflects continued content growth in both automotive and commercial transportation, along with a continued improvement in the North American commercial transportation end market. Our book-to-bill of 1.14, along with our backlog position, are strong indicators of growth as we start our new fiscal year. Now let me get into the segment results, and I will start with the Industrial segment, which is on slide 5. In our fourth quarter, our Industrial Solutions sales grew 20% on both a reported and on an organic basis year-over-year, with ongoing momentum and broad-based growth across the segment. Sequentially, segment sales increased close to 10%, with growth in all of our businesses, including 17% sequential growth in DDN.

In Digital Data Networks, we delivered another strong year of performance in fiscal 2026, with orders growing by roughly 70% for the full year, driven by our strong position with our hyperscale customers. We expect this strong performance to continue into fiscal 2027, as well as longer term. In 2027, we expect to add over $1 billion of DDN revenue, with the vast majority of that from AI applications. Looking at our backlog aging and timing of customer program ramps, we expect that over half of that growth will be in the second half of our fiscal year. I do want to take a moment to talk about AI technology and architecture evolution and how we think about our DDN growth longer term. I can say with confidence that this business will be significantly larger in the next four to five years and beyond than it is today.

Our DDN business more than doubled in size the past couple of years. Based upon our momentum that we have with our customers, our product and technology roadmaps, and our design and manufacturing capabilities, we expect to grow well over $1 billion per year over an extended time horizon, implying that this business will double again in the next few years. We have been increasing our capacity in engineering as well as manufacturing to support the design wins and our expected growth. We still believe we are in the early stages of the AI infrastructure build-out, but it is clear that future architectures will require both copper and fiber connectivity. On data connectivity, the shift towards inference and agentic AI is expanding demand for CPUs and networking connectivity.