TE Connectivity (NYSE: TEL) generated records for full-year fiscal 2025 sales, adjusted operating margin, free cash flow (FCF), and adjusted EPS. TE Connectivity’s full-year sales increased 9%, organic sales increased 6%, adjusted operating margins increased 80 basis points to 19.7%, and adjusted EPS grew nearly 16% to $8.76 year-over-year.
The company’s FCF increased 14% to $3.2 billion, which equates to an FCF margin of nearly 19% and FCF conversion of 123% on adjusted net income. The 14% growth in FCF is especially impressive because TE Connectivity increased its fiscal year 2025 CapEx by 37% to support growing demand in its industrial business (which is where its AI data center sales are reported). TE Connectivity’s CapEx/sales increased from 4.3% in F2024 to about 5.3% in F2025. TE expects to further increase the dollar amount of CapEx in F2026 to support surging demand for AI interconnects, but as revenue also grows it expects CapEx as a percentage of revenue to remain pretty stable around the 5.3% range.
TE also used its cash flow (and some new debt) to dramatically increase the amount it spent on acquisitions, increasing from about $340 million in F2024 to $2.6 billion in F2025. TE’s management team has a solid track record with acquisitions and on the call said it “can be a little bit more aggressive” with acquisitions going forward. The Richards acquisition that closed this year was larger than normal so I’m guessing this gave them confidence to make some other larger acquisitions going forward. This is something I’ll monitor.
Because of the increased capital allocated to acquisitions, TE dialed back share repurchase in F2025. It spent about $2 billion buying back stock in F2024 compared to about $1.35 billion in F2025.
TE Connectivity generated a return on equity (ROE) of 15%, but I think that’s a misleading number because of a larger-than-normal income tax charge (for an increase in the valuation allowance for deferred tax assets) which negatively impacted net income (the numerator in the ROE calculation). Importantly, TE’s GAAP operating income and pre-tax income both grew year-over-year. I think TE’s normalized return on equity is closer to 20%. And, in fact, I expect its returns to trend higher over time despite acquisitions. Currently both of its segments (transportation and industrial) are generating adjusted operating margins of right around 20%, and TE’s CFO Heath Mitts said on the call that the company expects “further margin expansion as volumes continue to grow.” TE Connectivity generated incremental operating margins of around 30% in F2025 and Mitts told analysts to assume a similar level of incremental margins in F2026. Thirty percent incremental operating margins is in-line with our other high-quality, profitable growth, industrial technology holdings.
TE Connectivity’s business is driven by multiple long-duration tailwinds including digitization and electronification of the economy, AI, and electrification of everything (grid hardening and buildout). For example, its digital data networks sales (which includes AI and falls under its industrial segment) increased 80% year-over-year in the fourth quarter and its AI sales tripled in the full year to over $900 million. On the call TE Connectivity CEO Terrance Curtin said that at this time they expect about $1.5 billion in AI sales in F2026, which would imply about 67% growth. I expect them to raise that guidance throughout the year.
Also, its non-AI (traditional cloud) data center revenue doubled in the year from $250 million in F2024 to $500 million in F2025 as enterprise customers continue to move workloads from on-premise into the cloud. This is another long-term trend that has gotten forgotten about somewhat as all the attention has shifted to AI mega-factory buildouts.
Its energy business grew 83% in the quarter, with the help of the Richard’s acquisition, and grew 24% on an organic basis. And, encouragingly, TE Connectivity management thinks the broader general industrial economy is gaining “stability” and “traction.”
TE Connectivity gets overshadowed by Amphenol, which is in my opinion a higher-quality, more diversified, faster-growing business with a unique entrepreneurial and decentralized corporate culture and stand-out acquisition machine. But, TE Connectivity is a high-quality, profitable growth, and very-well managed business in its own right. Under the leadership of Terrence Curtain TE Connectivity has repositioned the product portfolio (through organic investments, acquisitions, and divestitures) to be more exposed to long duration secular trends of AI and electrification. So Terrance and team have upgraded the quality of the business while also reliably growing per-share value. The capital allocation has also had the effect of diversifying the business to be a bit less reliant on the cyclical transportation segment. At the Bernstein SDC conference on May 29, 2025, TE Connectivity’s management pointed out that over half of its current business was not part of TE Connectivity a decade ago. Now, that’s adaptability. The Rogers acquisition is just the latest example of this, and I expect M&A, particularly in the industrial segment, will remain a priority for capital allocation going forward, especially now that we see a more favorable regulatory environment under the Trump administration.
TE Connectivity is a global leader in the interconnect and sensor market that has three main players (TE Connectivity, Amphenol, and Molex, owned by Koch Industries). As I wrote in my recent note on Amphenol, TE’s interconnect products are typically custom made and designed into various technology platforms for the life of the platform (could be an AI data center, an aircraft, an automobile, an automated industrial factory, etc.) where the cost of failure is high, but the cost of the TE product is only a small percentage of the overall project cost. These products are mission critical and expected to operate reliably and without failure in harsh environments (such as extreme heat, extreme cold, extreme speeds and vibrations, etc.). This combination of design build-in, high cost of failure, but low cost relative to overall project budget provides TE with high switching costs, predictable revenue streams, and pricing power. In other words, there is no incentive for customers to take on incremental risk of failure for small cost savings. At the end of the day, TE Connectivity is selling trust and reliability…that is TE’s value proposition, and that proposition becomes even more compelling as the world becomes more electronic and interconnected, technology becomes more complex to manufacture, and TE’s customers expect product delivery faster than ever to support high levels of demand in an increasingly digital world. This setup allows TE to price to the value proposition it is providing.
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Key quotes from the call…
(note: bold and underline are my own)
“I do want to reinforce a few key takeaways upfront. First off is that our strong momentum is continuing with quarterly and full year records for sales, earnings and free cash flow in what continues to be an uneven macro environment. We also continue to demonstrate the strategic positioning of our portfolio, benefiting from the secular growth trends in a number of our businesses, and we’ll talk about these as we go through the discussion of our results today. We also continue to demonstrate operational resilience with our global manufacturing strategy where we’ve invested heavily to ensure in-region support of our customers, and we are set up for this strong performance to continue into fiscal 2026.”
“So let me transition to full year results. Full year sales were a record at $17.3 billion, growing 9% on a reported basis and 6% on an organic basis. In our Industrial segment, we saw 24% reported growth, benefiting from bolt-on acquisitions that we made this year. On an organic basis, segment growth was 18% and capitalized on the strong demand for artificial intelligence and energy infrastructure applications.”
“We delivered free cash flow of over $3 billion with conversion levels of well over 100%. This strong cash generation gave us the flexibility for record capital deployment with over $2 billion returned to shareholders and $2.6 billion used for bolt-on acquisitions during the year.”
“In the quarter, we saw orders of $4.7 billion with growth year-over-year and sequentially in both segments. On a year-over-year basis, we saw organic order growth across all regions. And on a sequential basis, growth was driven by automotive, digital data networks and energy. Touching on the segment. Transportation orders increased 9% versus the prior year, driven by auto growth in all regions. In the Industrial segment, orders [in Q4] increased 39% year-over-year, reflecting ongoing momentum in DDN as well as our energy and AD&M businesses. Also, one thing to highlight in our orders, we did see order rates improve in the general industrial end markets, and we believe this indicates stability.”
“Let me turn to Industrial Solutions segment, which is on Slide six, and the segment grew 34% in the quarter overall, as well as 24% organically. Digital Data & Devices had another outstanding quarter where the business grew 80% year- over- year. We continue to benefit from increasing ramps from hyperscaler platforms, and for the full year we generated over $900 million in AI revenue, tripling our AI sales versus the prior year. This reflects our increased momentum.”
“The other thing I want to highlight is while we talk about AI, we also have a lot of growth that’s happening outside of AI in our DDN business. And there is business we have that is cloud business that is not AI. That business is running about $500 million right now this year. That doubled versus last year. And then we also — that’s also a real momentum.”
“In our energy business, sales grew 83% and included the Richards acquisition, which enables us to capitalize on strong growth opportunities in the North American utility market. On an organic basis, our sales increased a strong 24% driven by continued increased investments by our customers in grid hardening as well as renewable applications. In our aerospace, defense and marine business, sales grew 7% organically, driven by growth across commercial aerospace as well as defense applications.”
“For fiscal 2025 performance, we set records in sales, operating, adjusted operating margins, adjusted earnings per share and free cash flow. Relative to our business model, we are delivering on our targets for sales growth, margin performance, EPS growth and cash generation. Sales of $17.3 billion were up 9% on a reported basis and 6% on an organic basis year over year with both organic and inorganic growth driven by our industrial segment. Adjusted operating margins were essentially 20% for fiscal 2025 with margin expansion of 80 basis points year- over- year driven by strong operational performance. Both of our segments are running at the 20% level for adjusted operating margins. We would expect further margin expansion as volumes continue to grow. Adjusted earnings per share were $8.76, up 16% year- over- year driven by sales growth and margin expansion. Now turning to cash, we increased our free cash flow to $3.2 billion in fiscal 2025, which was up 14% or $400 million year- over- year. Our free cash flow reflects over 100% conversion to adjusted net income and we remain committed to this going forward. Keep in mind that our strong cash flow generation and cash conversion in fiscal 2025 also included us investing a couple hundred million of increased capital investments to support the growth in our industrial segment.”
“In many cases, our customers on the [AI] programs that we win continue to want more and they want it faster, which is a key element of how you win in this market. You are right. We generated over $900 million of AI sales in 2025, and remember in 2024 that was $300 million. This is really the products that we do that go into AI with the GPUs and so forth. We tripled our revenue in this product set, which I actually think shows the job the team has done to ramp to your question. As we look into 2026, the estimates out there are for hyperscale CapEx to grow about 20%. Let’s face it, we have strong orders, we have the momentum, and we have the design win traction. We grew $600 million this year alone in AI in dollars. I think that’s probably the baseline you have going into next year from a level of dollar growth that you should be thinking about right now. The other thing I want to highlight is while we talk about AI, we also have a lot of growth that’s happening outside of AI in our DDN business, and there is business we have that is cloud business that is not AI. That business is running about $500 million right now this year, that doubled versus last year. That’s also real momentum.”
“Clearly, the bigger driver [of AI data center business] is what you get around high speed [interconnect]. But we have — our growth has also been happening around what happens on the power interconnects, certainly, what we do in helping that power be more efficient from liquid busbars and things like that, that we do with our customers. And then also where we do cable connectivity that goes between racks and so forth. So the numbers I quoted to Scott include all of that in those categories, Joe. And we have momentum across all of them because all of them are key building blocks of how this architecture comes together, where you need lower power, no latency, higher speeds, all happening at once.”
“Our capital was up a couple of hundred million from FY ’24 to FY ’25, and that growth was entirely for some of these AI and cloud programs that we’ve won both in the past as we’re expanding and/or, in some cases, adding new capacity altogether for very program-specific reasons. There will be some pressure to increase that a little bit as we move from ’25 into fiscal ’26. We don’t guide that number specifically, but I would expect it to be kind of in line, maybe just a little bit less than the dollar increase we saw in the prior year. So I still think with the revenue growth and the growth that comes out of these programs, we’d still be at the TE average still in the — a little over 5% range.”
“I think one of the things that is a positive is you saw the order growth both year-over-year and sequentially in both segments. So I do think the environment does feel better than 90 days ago. But let me click down a little bit by the segments. First of all, just taking Transportation, orders were up both year-over-year and sequentially in auto. And it is one of the things all in 2025, we dealt with a world where Asia production grew, Western production declined. We do actually think what we’re seeing is some stability that they’re probably going to be more even between regions, even though auto production is going to stay in that 87 million to 88 million unit range, which is flattish. We also think we’re going to continue to deliver content growth over [the global auto] market of 4% to 6% because when you think about what’s happening with data needed in the car, what’s happening with further comfort things that we all want that drives more electronification in the car as well as just the nonending growth of electrified powertrains in Asia, all of that continue to give us confidence on the 4% to 6%. When you look at industrial transportation versus 90 days ago, Mark, honestly, there hasn’t been much change, unfortunately. We continue to see Europe and Asia have growth and North America still having declines in the truck and bus and the agricultural area. So I would say that’s one that continues to be uneven that we’re actually really looking for signs when can we get a little bit of a North America pickup, but we are not seeing any trends that see that right now. So that’s one, unfortunately, probably still feels muddled. And then in the Industrial segment, I will jump over DDN like you asked. But you look across our end markets there, we’re seeing consistent growth across them. In Energy, we have — you saw the organic growth this quarter of 20% with where we position ourselves in North America and what’s happening in grid investment in the T&D side by utilities, the hardening, getting it up to current trends and everything, that continues to be very good order momentum there, and we’re also benefiting from utility scale renewables like solar. AD&M just continues, I would say, the market continues to move along. You’ve seen airframers talk about where they’re getting their build rates to, and it feels the supply chain continuing to show improvement, which is good signs. And then the one that I know we’ve been pretty hesitant on in our ACL business, which has general industrial, has a little bit of things that touch the consumer. What I could tell you, the factory automation side, which is the bigger piece of it, we are seeing growth in orders across all regions. The business grew sequentially. The areas where we see weakness is where we have things that go into HVAC, things that go into appliances, that’s where we see some weakness there. So it does feel the industrial piece of that, the business side has improved. Certainly, the residential or consumer side has gotten a little weaker. But we did have nice growth. You saw that, and we think the momentum on the more of the industrial side continues to get more traction.”
“Again, as we go into ’26, we’re going to be balanced with our investments. We think both of those segments will flow through on revenue growth at 30% or maybe a tad better depending upon the mix. So I think as you do your modeling, depending on what you want to put in there for the growth side, I think 30% is a good flow-through math on that piece of it for the organic growth.”
“We’ve had this outbalance of production this year [with more auto production in Asia and less in North America], and that has created a little bit of headwind because our mix — I mean, our content per vehicle is higher in the West. You all know that. So that has created a little bit of pressure where you’ve seen our content outperformance be a little bit lighter than our 4% to 6%. But as we look forward, as we work through these Western declines and they become more flattish, I do view you’re going to see content per growth in every region that contributes above that to get to the 4% to 6%. Certainly, there’s different opportunities in different regions. The electrified powertrain is driven out of Asia. Data connectivity is in every region. Certainly, feature sets are different that drive electronics in the vehicle are different by region. But the key thing you have to realize, in every region, all of them are increasing. It’s just the rate of increase. So net-net, we do think you’ll see content growth over market be more even this year.”
“I think, clearly, when you have EV adoption, the biggest driver of it is Asia, and that’s full steam ahead. You have less adoption elsewhere in the world. Where you have, you’re not going to full EVs. You might be going to a hybrid, which gives us a content increase, but not the total content increase you have in the full electric. The element that you have to remember is I need you to think about what’s happened to the content, not only in EV, but outside. Think about the Ethernet connectivity that you need in a car for autonomy, for the sensor suite, for everything else that needs to happen in the car, for software updates over the top. All of that’s being put in, and we benefited from that, had really nice growth this year on it, and that’s going to be a key driver, almost just as important as what we’ve gotten out of EV. And then the other thing that come into, the safety features, the comfort features, everything else that’s getting added to the vehicle also adds content.”
Disclosure: John Rotonti is an investor in and the portfolio manager of the Bastion Industrial and Infrastructure Portfolio, which owns shares of TE Connectivity, Amphenol, and Vertiv.
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