TE Connectivity (TEL) Q2 2025: Industrial Margin Expands 260bps as AI and Grid Orders Accelerate
Industrial outperformance and rapid AI ramp fueled TE Connectivity’s record margin expansion, offsetting persistent Western auto and medical softness. Management’s localization and supply chain strategy sharply limited tariff exposure, while new energy infrastructure demand and hyperscale data center wins set the stage for continued growth into the second half.
Summary
- AI and Grid Demand Surges: Industrial segment outperformed on hyperscale AI and energy infrastructure orders.
- Margin Expansion Outpaces Market Volatility: Localization and operational leverage drove record margins despite uneven auto and medical markets.
- Tariff Mitigation Intact: Regional manufacturing footprint sharply limited tariff risk, supporting stable guidance into Q3.
Performance Analysis
TE Connectivity’s Q2 2025 results showed broad-based industrial strength, with sales up organically and record adjusted EPS. The industrial solutions segment was the standout, delivering 17% growth driven by digital data networks (DDN, high-speed connectivity for data centers), energy, aerospace, and automation. Notably, DDN grew nearly 80% organically, with management now expecting over $700 million in AI-related revenue this year—up from $600 million just last quarter, a direct result of real order ramps from hyperscale customers.
The transportation segment remained mixed, with flat global auto sales masking strong 16% Asia growth and persistent double-digit declines in Europe and North America. Commercial transportation and sensors continued to lag, with management guiding for ongoing softness. Adjusted operating margins reached 19.4%, expanding 90bps year-over-year, led by a 260bps jump in industrial. Free cash flow conversion remained robust, with $1.1 billion generated year-to-date and a 9% dividend increase reinforcing confidence in the cash model.
- Industrial Margin Expansion: Operating margin in industrial hit 17.9%, up 260bps, as volume and mix improved.
- AI and Grid Outperformance: DDN and energy segments drove the bulk of organic growth, with AI-related sales and grid hardening in the U.S. both highlighted.
- Order Momentum Broad-Based: Orders rose 6% YoY and sequentially, with book-to-bill above 1.0 supporting Q3 outlook.
Despite soft patches in auto and medical, TE’s diversified portfolio and localization strategy allowed for stable performance and continued investment, including the $2.3 billion Richards acquisition in energy.
Executive Commentary
"We are hitting on all cylinders as a company. We're growing in line with our business model. Adjusted operating margins are running at the 19-plus percent range. We continue to demonstrate our cash generation model, and we have a strong balance sheet that enables us to continue our balanced capital deployment strategy."
Terrence Curtin, Chief Executive Officer
"We have, over the last several years, reduced our manufacturing footprint, and we have taken sites offline, and this is part of our localization strategy that is aligned with where our customers want us to be and in markets where we can also then get scale and get leverage. So I do feel good about our ability to continue to ramp margins. It is a huge focal point here."
Heath Mitts, Chief Financial Officer
Strategic Positioning
1. Localization as Tariff Shield
TE’s global manufacturing footprint—over 70% localized production— sharply limited direct tariff exposure. Management emphasized this as a durable advantage, especially as trade tensions rise. With three-quarters of sales outside the U.S., and most production regionalized, only a small portion of sales face tariff risk, primarily in industrial rather than transportation.
2. Industrial Segment Transformation
Industrial led both growth and margin expansion, propelled by AI data center infrastructure, energy grid modernization, and aerospace. The Richards acquisition further cements TE’s position in North American utilities, aligning with secular grid hardening and renewable trends. Management expects this segment to be the engine for further margin and cash flow gains.
3. Transportation: Asia Strength Offsets Western Weakness
Asia auto production and electrification remain bright spots, with TE’s content outpacing regional car production growth, but Western markets drag on segment results. Content growth for the year is guided to the low end of the 4–6% range, with data connectivity in vehicles (Ethernet, software-defined architectures) as a long-term growth lever.
4. Pricing and Supply Chain Flexibility
TE’s ability to pass through input cost and tariff surcharges, especially in industrial, supports margin stability. The company is working closely with customers on sourcing changes and mitigation, and expects to recover most tariff-related costs via price actions in Q3.
5. Capital Allocation and M&A Discipline
Balanced capital deployment continues, with $1 billion returned to shareholders and a focus on bolt-on M&A following the Richards deal. Management signaled ongoing appetite for accretive acquisitions, while maintaining daily share buybacks and a disciplined approach to leverage.
Key Considerations
TE’s Q2 results reflect a company executing on multiple fronts, with industrial momentum and localization strategy offsetting cyclical headwinds. The quarter’s context is shaped by:
Key Considerations:
- AI and Data Center Ramp: Hyperscale customer orders for AI infrastructure are accelerating faster than expected, with TE on track for $700 million in revenue from these applications this year.
- Energy Infrastructure Tailwinds: Grid hardening and renewables, especially in North America, are driving double-digit growth and are further supported by the Richards acquisition.
- Localization Limits Tariff Risk: Regional manufacturing shields TE from the worst of recent tariff actions, providing a competitive edge versus less localized peers.
- Auto and Medical Softness Persist: Western auto production and medical channel destocking remain drags, with only gradual recovery expected in the second half.
- Margin Expansion Self-Help: Ongoing plant rationalization and supply chain optimization are driving sustainable margin gains, particularly in industrial.
Risks
Macro and geopolitical volatility remain key risks, especially if tariffs escalate or localization becomes less effective as a shield. Western auto and medical markets are structurally soft, and a protracted downturn could challenge the pace of margin expansion. While AI and grid demand are robust, customer CapEx cycles and policy shifts could introduce volatility, and input cost inflation or aggressive competitor pricing may pressure future profitability.
Forward Outlook
For Q3 2025, TE Connectivity guided to:
- Sales of $4.3 billion, including Richards and two points of pricing from tariff recovery.
- Adjusted EPS of approximately $2.06, up 8% YoY, with a higher tax rate as a headwind.
For full-year 2025, management reaffirmed:
- Free cash flow conversion above 100%
- Adjusted tax rate of approximately 24%
Management highlighted:
- Continued AI and grid demand as primary growth drivers
- Stable order patterns and book-to-bill above one supporting sequential growth
Takeaways
TE’s Q2 highlights the strength of its diversified, localized model in navigating a complex macro and trade environment.
- Industrial Momentum Outpaces Cyclical Weakness: AI, grid, and aerospace demand are offsetting auto and medical softness, with broad-based industrial order growth.
- Margin Expansion Is Self-Help Driven: Localization, supply chain optimization, and pricing discipline are delivering record margins, particularly in industrial.
- Future Watchpoint Is AI and Grid Sustainability: Investors should monitor the durability of AI and grid demand, as well as the pace of recovery in auto and medical, for continued outperformance.
Conclusion
TE Connectivity delivered a quarter defined by industrial strength, margin expansion, and effective tariff mitigation, with strategic bets on AI and grid modernization paying off. The company’s regionalized model and operational discipline position it to weather ongoing volatility, though pockets of softness and macro risks remain.
Industry Read-Through
TE’s results underscore a clear bifurcation in industrial technology demand: AI infrastructure and grid modernization are accelerating, while legacy auto and medical segments remain pressured. The company’s ability to localize production and pass through costs offers a blueprint for peers facing similar trade headwinds. AI hardware suppliers, grid infrastructure players, and diversified industrials should note the strategic advantage of regionalized supply chains and the outsized impact of data center and energy investment cycles on near-term growth and margin expansion.