Earnings Call Transcript - APH Q3 2020

Operator, Operator

Hello and welcome to the Third Quarter Earnings Conference Call for Amphenol Corporation. Following today's presentation, there will be a formal question-and-answer session. Until then, all lines will remain in a listen-only mode. At the request of the company, today's conference is being recorded. I would now like to introduce today's conference host, Mr. Craig Lampo. Sir, you may begin.

Craig Lampo, CFO

Thank you. Good afternoon, everyone. This is Craig Lampo, Amphenol's CFO, and I'm here together with Adam Norwitt, our CEO. We would like to welcome you to our third quarter 2020 conference call. As a reminder, during the call, we may refer to certain non-GAAP financial measures and may make certain forward-looking statements, so please refer to the relevant disclosures in our press release for further information. The company closed the third quarter with record sales of $2,323 million, and record GAAP and adjusted diluted EPS of $1.12 and $1.09 respectively. Sales were up 11% in U.S. dollars and up 10% in local currencies compared to the third quarter of 2019. Sales in the third quarter increased by 9% organically, and sequentially, sales were up 17% in U.S. dollars and 15% in local currencies inorganically. Breaking down sales into our two segments, the interconnect business which comprised 96% of our sales was up 11% in U.S. dollars and 10% in local currencies compared to the third quarter of last year. Our cable business which comprised 4% of our sales, was up 2% in U.S. dollars and 5% in local currencies compared to the third quarter of last year. Adam will comment further on trends by market in a few minutes. Operating income was $476 million in the third quarter of 2020. Operating margins were 20.5%, which was up a very strong 250 basis points sequentially, and up 80 basis points compared to the third quarter of 2019. The strong sequential improvement in margins reflected a healthy conversion on the higher sales levels, as well as an expected significant reduction in the impact of COVID-related costs. The year-over-year improvement in operating margin reflected a strong conversion on the higher sales levels. From a segment standpoint, in the interconnect segment, margins were 22.4% in the third quarter of 2020, which increased from 21.7% in the third quarter of 2019, and 20% in the second quarter of 2020. In the cable segment, margins were 10.7%, which increased from 10.2% in the third quarter of 2019, and 9.4% in the second quarter of 2020. Given the unprecedented challenges related to the COVID-19 pandemic, we are extremely proud of this quarter's performance. Our team's ability to manage through all the impacts of this crisis is a direct result of the strength and commitment of the company's entrepreneurial management team, which continues to foster a high performance, action-oriented culture and which has enabled us to capitalize on opportunities and maximize profitability in an uncertain market environment. Interest expense for the quarter was $28 million, which was down from $30 million in the third quarter of last year. The company's GAAP effective tax rate for the third quarter of 2020, including an excess tax benefit of $11 million associated with stock option exercises during the quarter, was 22.1% compared to 24.5% in the third quarter of 2019. Excluding the excess tax benefit just mentioned, the company's adjusted effective tax rate was 24.5% for both the third quarter of 2020 and 2019. Adjusted net income of $336 million was 14% of sales in the third quarter of 2020, another confirmation of the strength of the company's financial performance. On a GAAP basis, diluted EPS increased by 22% at $1.12 in the third quarter of 2020 compared to $0.92 in the third quarter of 2019. Adjusted diluted EPS increased by 15% to $1.09 in the third quarter of 2020 from $0.95 in the third quarter of 2019. Orders for the quarter were $2,275 million, which was up 9% compared to the third quarter of 2019, and up 15% sequentially, resulting in a book-to-bill ratio of 0.98 to 1. The company continues to be an excellent generator of cash. Cash flow from operations was a strong $398 million in the third quarter, or 119% of adjusted net income. Our free cash flow was $330 million or 98% of adjusted net income. From a working capital standpoint, inventory and accounts receivable and accounts payable were $1.4 billion, $1.9 billion, and $1.1 billion, respectively at the end of September. Inventory days, days sales outstanding and payable days were 79, 72 and 61 days, respectively. All improved from the second quarter levels and all within our normal range. During the third quarter, our cash flow from operations of $398 million, along with proceeds from the exercise of stock options of $104 million, were used primarily to repurchase 1.9 million shares of the company's stock for $202 million or an average price of $108, fund dividend payments of $75 million, fund net capital expenditures of $68 million, fund acquisitions of $50 million and fund net purchases of short-term investments of $9 million. As mentioned in today's earnings release, the company's Board of Directors has approved a 16% increase in the quarterly dividend on the company's common stock from $0.25 to $0.29 per share. This increase is effective for payments beginning in January of 2021. At September 30, cash and short-term investments were $1.5 billion, the majority of which is held outside of the U.S. Total debt at September 30 was $3.8 billion with no maturities before the third quarter of 2021 and net debt at September 30 was $2.4 billion. Total cash on hand, plus the remaining availability under our credit facilities was $4 billion at the end of the quarter. Third quarter EBITDA was $568 million and our pro forma net leverage ratio was 1.2 times. I will now turn it back to Adam who will provide some commentary on current trends.

Adam Norwitt, CEO

Well, Craig, thank you very much, and I'd like to extend my welcome to everybody here today at the time of our third quarter earnings release. And first and foremost, I hope that all of you on the call here today, together with your family, your friends and your colleagues, are staying safe and healthy throughout the pandemic. As Craig mentioned, I'm going to highlight some of our achievements in the third quarter, and most importantly, discuss the trends and progress across our served markets. I'll then make a few comments on our outlook for the fourth quarter as well as for the full year of 2020. With respect to the third quarter, and amidst what has been clearly an unprecedented and volatile year, I'm truly proud that we at Amphenol achieved record sales and adjusted earnings per share in the third quarter, realizing levels significantly above our guidance that we issued just 90 days ago. Sales reached $2,323 million, an increase from prior year of 11% in U.S. dollars, 10% in local currencies, and 9% organically. The strong growth was driven by increases in mobile devices, IT datacom, industrial, military, broadband and the automotive markets, and was offset partially by declines in the commercial air and mobile networks markets. We are particularly proud to have achieved a very robust 17% sequential growth from the second quarter which was significantly higher than our original expectations. As Craig mentioned, the company booked $2,275 million in orders and that represented a book-to-bill of 0.98 to 1. Now despite experiencing some continued operational challenges related to the pandemic, we generated excellent operating margins of 20.5% in the third quarter, and this was a full 250 basis point increase from our second quarter levels. Just want to say that the company's financial position remains extremely strong, with our operating cash flow of $398 million, and that was particularly notable given the stronger than expected sequential growth from the second quarter. And we continue to leverage that financial strength to return capital to our shareholders, both through our repurchase last quarter of 1.9 million shares of the company's stock, as well as the Board of Directors' approval of a 16% increase in our quarterly dividend that we are announcing today. I'm extremely proud of the Amphenol team. No question in my mind that the record results this quarter clearly demonstrate the true value of the agility, the discipline, and the drive of our entrepreneurial organization. Now turning to the trends across our served markets, I would just comment that as we've seen this year so far, Amphenol's balanced and broad end market diversification is a uniquely valuable asset, especially in times of heightened economic uncertainty. As many of our markets began to recover in the third quarter, we were able to quickly capitalize on the growth opportunities in those markets, while still retaining our broad exposure to new opportunities and new technology developments across all areas of the electronics industry. The military market represented 12% of our sales in the third quarter. Sales in this market increased by 6% from prior year, driven in particular by growth in military vehicles, naval, space, communications and airframe applications. Sequentially, our sales increased by a strong 30% as we recovered from the impact of production restrictions that hit certain of our facilities related to government measures implemented in the second quarter to control the COVID-19 pandemic. Looking into the fourth quarter, we expect sales to increase slightly from these levels, and for the full year of 2020, we expect a low single-digit increase in sales from prior year. This full year performance reflects our leading market position and strong execution, offset in part by the impact of the pandemic-related production restrictions we experienced in the first half of 2020. I'm very proud of our team working in the military market around the world. They have maintained a singular focus on ensuring that our defense industry customers have uninterrupted access to our leading high technology interconnect products which are critical to our customers' equipment. We are encouraged both by the accelerating adoption of electronics in these systems together with the overall favorable defense spending environment. The investments that we've made over the last several years in both new technologies and the capabilities to produce them at volume have positioned us very strongly to be able to capitalize on these trends for many years to come. The commercial aerospace market represented 2% of our sales in the third quarter. Sales were down by 40%, a very significant level, as the commercial aircraft market once again experienced unprecedented declines in demand for new aircraft due to the pandemic-related disruptions to the global travel industry. Sequentially, our sales were a bit better than expected, rising 4% from the second quarter. As we look ahead though, we expect the commercial air market to continue to be negatively impacted by the significant reduction in demand for air travel, which is occurring around the world. Accordingly, we expect an approximately 20% sequential reduction in our sales to this market in the fourth quarter. And for the full year 2020, we expect a roughly 35% decline from prior year due to the unprecedented demand disruptions that our customers are experiencing. No question that these are difficult times for the entire travel industry and that that's having a serious impact on the market for commercial airplanes in the near term. Nevertheless, our team remains committed to leveraging the company's strong technology position across a wide array of aircraft platforms and next generation systems integrated into those airplanes, and we remain well positioned when this market eventually does return to growth. The industrial market represented 22% of our sales in the quarter, and our sales to the industrial market exceeded our expectations, increasing by 21% in U.S. dollars and 18% organically, a very strong performance. This robust growth was driven especially by the instrumentation, medical, industrial battery, heavy equipment, alternative energy and rail mass transit segments, really a broad base of growth that we saw in the industrial market. Although we had expected sales to be modestly lower than the second quarter, we actually realized 11% sequential growth during the third quarter, a very strong performance. Looking into the fourth quarter, we expect a modest decline from these third quarter sales levels. Nevertheless, for the full year 2020, we expect a low double-digit increase in sales from 2019 levels, an outstanding performance given the overall market environment. I'm truly proud of our team working in the industrial market, whether enabling the growth in volumes of a wide array of medical equipment, managing through significant increases in demand for semiconductor capital equipment or executing on unprecedented demand for next generation batteries, our global organization has reacted quickly to ensure that our customers around the world are fully supported regardless of the many operational challenges that have arisen throughout the COVID-19 pandemic. As we look towards the long-term, I'm confident that our performance through this crisis has positioned us very strongly for the future. And importantly, we continue to drive our leading development of next generation interconnect sensor and antenna products in support of our customers in the industrial market, who in turn are accelerating their adoption of next generation technologies. The automotive market represented 17% of our sales in the third quarter. After a truly challenging second quarter during which the global automotive industry was deeply impacted by the COVID-19 pandemic, we were very pleased to have seen a very strong recovery here in the third quarter, with results much better than we had originally anticipated coming into the quarter. Our team's outstanding execution led to an increase in sales from prior year by 4% in U.S. dollars and 1% organically, well ahead of our expectations. Sequentially, our sales increased by a truly significant 78% from the second quarter, as our team was able to execute quickly on a recovery in demand from automotive customers in all regions. Looking now into the fourth quarter, we expect automotive sales to further increase in the mid-single digits from these levels. For the full year 2020, we expect a low double-digit reduction in sales, which does reflect the severe and sudden pandemic-related downturn in demand from automotive OEMs that we saw in the first half. I'm extremely proud of our team working in the automotive market, who has clearly demonstrated both agility and resiliency in realizing the strong sequential growth levels. In fact, our performance through this crisis makes me even more confident in our long-term prospects in the automotive market. We've continued to expand our range of interconnect sensor and antenna products, both organically and through acquisitions, all with the goal of enabling a wide array of onboard electronics across a diversified range of vehicles made by auto manufacturers around the world. This consistent strategy will no doubt continue to benefit us as the automotive market recovers. The mobile devices market represented 16% of our sales in the quarter and our sales to mobile device customers increased by a stronger than expected 25% from prior year, driven in particular by increased sales of products incorporated into laptops, tablets and wearables, and this was offset in part by slightly lower year-over-year sales to smartphones. Sequentially, our sales increased by a much stronger than expected 37%, and this was driven by higher sales across all the products that we serve. Looking to the fourth quarter, we expect a slight increase from these already strong third quarter levels, and for the full year, we anticipate sales to grow in the low double digits from 2019. And I would just note that this is well above our original expectations as we came into the year before we were hit with the pandemic. While mobile devices will always remain one of our most volatile markets, our outstanding agile team is poised as always to capture any opportunities for incremental sales that may arise here in the fourth quarter or beyond. Our leading array of antennas, interconnect products and mechanisms continue to enable a broad range of next generation mobile devices, and this positions us well for the long-term. The mobile networks market represented 6% of our sales in the quarter, and sales decreased as we had expected from prior year by 19% in U.S. dollars and 21% organically, driven by lower sales to wireless operators, as well as some continued impact from the U.S. government restrictions on certain Chinese entities that we have previously discussed. On a sequential basis, our sales reduced by 9% on overall lower spending by both operators and OEMs. Looking into the fourth quarter, we expect a further seasonal sales reduction of approximately 25% related to both OEMs and service providers. And for the full year, we expect a high teens reduction in sales, which reflects the impact of the U.S. government restrictions, as well as the COVID-19 pandemic. Regardless of the near-term challenges in the mobile networks market, we're confident in the company's long-term position in this important and exciting industry. Our team continues to work aggressively to expand our opportunity with next generation equipment and networks. As customers ramp up investment of these advanced systems, we look forward to benefiting from the increased potential that comes from our unique position with both equipment manufacturers and mobile service providers around the world. The information technology and data communications market represented 21% of our sales in the quarter. Sales in the third quarter once again much better than we had anticipated, rising from prior year by a very strong 24% in U.S. dollars and 21% organically. And this growth was really driven from increased demand for data traffic that continue to prompt both our OEM and service provider customers to increase their demand across virtually all segments of the IT datacom market. Sequentially, sales were down by less than expected 10% from our extremely strong second quarter. As we look towards the fourth quarter, we expect a mid-teens sequential decline from these very strong third quarter levels, and for the full year 2020, we expect sales to increase in the low teens, reflecting the significant upside in demand we experienced in both the second and third quarters, offset in part by the pandemic-related disruptions we saw in the first quarter. Our team working in support of the IT datacom market has clearly distinguished themselves this year, reacting quickly to capitalize on unprecedented demand for our industry-leading high-speed and power products. At the same time, we've not slowed down our efforts to further develop our broad range of industry-leading interconnect products in support of data communications networks around the world. Indeed, we remain very encouraged by the company's strong technology position in the global IT datacom market. Our customers continue to drive their equipment to ever higher levels of performance in order to manage the dramatic increases in demand for bandwidth and processor power. In turn, our team remains singularly focused on enabling this continuing revolution in IT datacom. The broadband market represented 4% of our sales in the quarter. Sales increased by 5% from prior year, driven by stronger demand for home installation related equipment from broadband operators. On a sequential basis, sales increased by a stronger than expected 13%, as our customers continue to upgrade their networks in support of the increased demand for high-speed data. We expect sales in the fourth quarter to moderate from these levels on typical end of the year seasonality. And for the full year 2020, we expect sales to be roughly flat with prior year, and this reflects the pandemic-related disruptions we experienced in certain geographies, offset by increased investments by our customers in support of higher bandwidth demand. Now turning to our outlook for the future. While our performance in the third quarter was very strong, there still remain significant uncertainties in the global market related to the COVID-19 pandemic, which does appear to be worsening in some regions of the world. Assuming no new material disruptions from the pandemic, as well as constant exchange rates, for the fourth quarter, we expect sales in the range of $2,160 million to $2,200 million, and adjusted diluted EPS in the range of $0.98 to $1. This represents both sales and adjusted diluted EPS growth versus prior year of flat to up 2%. Our fourth quarter guidance also represents an expectation for full year sales of $8,333 million to $8,373 million, and full year adjusted diluted EPS of $3.59 to $3.61. This outlook represents sales growth versus prior year of 1% to 2%, and an adjusted diluted EPS decline of 3% to 4%. The expected decline in our earnings relates directly to the significant costs and disruptions associated with the COVID-19 pandemic that the company faced particularly during the first half of 2020. Now let me just say that I'm extremely pleased by Amphenol's performance in the third quarter, especially our team's achievement of these new quarterly records in both sales and earnings. Most importantly, I remain very confident in the ability of our outstanding management team to adapt to the continued challenges in the marketplace, and to capitalize on the many future opportunities to grow our market position and expand our profitability. I just want to assure you that our entire organization remains committed to fighting hard to secure the company's financial performance, all while dedicating ourselves wholeheartedly to protecting the safety and health of each of our employees around the world. And as a final note, I would just like to take this opportunity here today to thank every one of our Amphenolians around the world for their outstanding efforts here in the third quarter. And with that, operator, we'd be very happy to take any questions.

Operator, Operator

Our first question is from Amit Daryanani from Evercore. Your line is open.

Amit Daryanani, Analyst, Evercore

Thank you and congrats on the strong execution you guys. I guess, my question is really, when I look at the strength we saw in the September quarter, I think it was one of the largest B2C ins out of you guys in a few years. Adam, could you just touch upon what surprised you and drove the upside versus 90 days ago? Was it just better end demand or did you see inventory build at customers or perhaps more allocation shift that came your way since competition couldn't execute? It would be helpful to get some context on what drove this impressive 10% to 11% growth and how would you characterize that, because the question I keep getting asked is, why aren't we seeing a follow-through of this growth in the December quarter guide?

Adam Norwitt, CEO

Sure. Well, thank you very much, Amit. I think you listed a few factors, and I think there is a little bit of each of them in the third quarter with maybe the exception that I can't tell you that we saw any inventory build of significance that we had visibility to in the quarter. But no question, in several of our markets, demand was much stronger than we had anticipated. I think we outperformed maybe some of our peers in certain of those areas where we were able to capitalize on the demand in a faster fashion. So you take the example of mobile devices where we came into the quarter expecting a relatively modest sequential growth, and mobile devices is always the market that's very hard to anticipate, but our team drove 37% sequential growth in mobile devices and that came both from volume demands from our customers, but also from the fact that there were instances where our customers couldn't get everything they needed from other folks, and they could get it from us. And I think that's something that we've demonstrated in many years in the past. Our teams have the outstanding agility in reacting to unexpected levels of demand. We clearly did not anticipate coming into the quarter that we would have such significant sequential growth in automotive, and in fact, we have grown on a year-over-year basis in automotive after that just very, very challenging second quarter that we all saw was a real testament again to the agility of our team to satisfy what was unexpected levels of demand. But as you look at our guide for the fourth quarter, and I know you asked why does that guide look like it does, we do this as we always have done. We talk to our customers and this is a bottoms-up approach to how we forecast. There are certain markets where there were real surges in demand earlier in the year. IT datacom is another example of that, where we've guided IT datacom to be down in the mid-teens in the fourth quarter, it was down a lot less than we anticipated here in the third quarter. There was the real surge in demand for bandwidth upgrades and support of data traffic to support all of the work-from-home and study-from-home requirements around the world related to the pandemic. And that's normally not a market that would be down by so much in the fourth quarter, but it's also normally not a market that would have grown so much in the second and third quarters. So we've done our best here amidst this environment to take everything that our customers say. We add that up to the outlook that we've given you. And knowing full well that we are not out of the woods relative to the pandemic — it is in fact worsening in certain areas — our customers are sensitive to that, and our team is prepared if there is some further surprise or further operational challenges that will come, but we think this is actually a very, very strong outlook relative to the extraordinary strength that we saw in the third quarter.

Operator, Operator

Our next question is coming from Luke Junk from Baird. Your line is open.

Luke Junk, Analyst, Baird

My question is on the auto business, and I'm just curious in the wake of COVID, whether you're seeing a shift and focus in your auto customers, given your engineering labor relationships. Just wondering if anything has shifted in terms of focus related to electrification, autonomous driving or similar as far as you can see?

Adam Norwitt, CEO

Thanks, Luke. I think the shift toward new drivetrains, toward autonomous and other new technologies that are going into the car, we've continued to see that for many years. I wouldn't necessarily say that we've seen an acute change in the trajectory of that evolution here in 2020 due to COVID. I think what we saw in the third quarter was customers really scrambling to get back into their production levels, and customers probably buying more cars than people anticipated. There seems to have developed some degree of pent-up demand for automotive production. I have heard anecdotes about inventory levels being low, that it's difficult to get a pickup truck in Michigan and things like this. There's no question that there is real demand from customers and they continue to drive new programs that have been in the pipeline. But is the pandemic itself responsible for a distinct shift? I wouldn't say that it is. I would also add that our team around the world has done a fabulous job in positioning ourselves in these new platforms. While we haven't forsaken traditional drivetrains, we continue to support our customers who are manufacturing internal combustion engine vehicles, which still represent the vast majority of vehicles being produced around the world. Our team has done a great job developing new products and expanding our relationships with customers in all geographies such that to the extent there is an acceleration of that shift, Amphenol is well positioned to benefit from it.

Operator, Operator

Next question is coming from Mark Delaney from Goldman Sachs. Your line is open.

Mark Delaney, Analyst, Goldman Sachs

Yes, good afternoon, and thanks for taking the question, and congratulations on the very strong 3Q results. To better understand the EBIT margins, there have been some constraints the company was facing, acquired companies that came in initially at lower margins, and some extra costs around COVID that have been weighing on margins earlier this year, but the company had very strong EBIT margins in the third quarter. So I'm trying to better understand to what extent there are still headwinds that the company is trying to contend with? Clearly on an overall basis you were able to overcome those, but are there still any challenges around integrating those new assets or COVID costs that are still a drag to EBIT margins? Perhaps you could talk about it with some perspective on how to think about that going forward? And you mentioned there is still some increase in COVID cases. Is there anything we need to be thinking about around COVID weighing on margins either in 4Q or potentially into next year? Thank you.

Adam Norwitt, CEO

Thanks, Mark. We're really proud of our ability to achieve these strong operating margins of 20.5% in the third quarter and the 250 basis point improvement over Q2 and 80 basis points over the prior year. We had strong conversion on higher sales levels which benefited profitability, and sequentially we saw an expected reduction in COVID-related costs in the quarter. We certainly still experience some turbulence and costs related to COVID, but they are at a much lower level than in the first and second quarters. The team is doing an outstanding job of navigating that and minimizing it, but there are puts and takes within the P&L, such as reductions in travel and entertainment that offset some of the COVID-related costs. From a net impact perspective in the third quarter, COVID-related puts and takes didn't have a meaningful impact on our margin. Regarding acquisitions, we continue to spend time on integrations, but this year, because of the pandemic, we haven't made as much progress as we'd like on some of the 2019 acquisitions, so acquisition impact wasn't a major driver in the third quarter either. Year-over-year, the margin improvement was largely leverage from higher sales. Going forward, I would expect our normal conversion dynamics on upside and downside, and that assumes we don't see a significant resurgence of the pandemic. If we do have additional costs, we'll work to mitigate them, but the team has done a fantastic job so far.

Operator, Operator

Next question comes from Wamsi Mohan of Bank of America. Your line is open.

Wamsi Mohan, Analyst, Bank of America

If you step back to pre-COVID at the beginning of the year, your thought was that you would do about $8.3 billion in revenue and $3.80 in EPS. Now you expect fairly similar revenue, EPS is about $0.40 lower for the year. Is all the differential just incremental costs associated with COVID, and if so, should we expect that next year we should see faster EPS growth as your conversion margins now overcome the COVID headwinds as you did in the third quarter? And if I could, in the fourth quarter, mobile devices, Adam, you had mentioned in 3Q that you were slightly down on smartphones and laptops, tablets and wearables drove the growth. I was wondering if those similar comments also hold for the fourth quarter guidance? Thank you.

Adam Norwitt, CEO

Yes, Wamsi. All that differential is essentially the COVID-related costs we incurred in the first half. If you look at the first half year-over-year from an EPS perspective and conversion on those sales differentials, that explains the difference. As we go into 2021, while we're not providing guidance now, based on the Q4 guidance we expect those costs not to be in the base, assuming no further significant pandemic disruptions. But we must acknowledge the risk of resurgences worldwide. We are happy to be back at pre-COVID profitability levels in the third quarter, and proud of the team's work.

Craig Lampo, CFO

And Wamsi, just a short answer to your second question on mobile devices. It's hard to forecast mobile devices based on the individual components. I wouldn't think anything is categorically different in the fourth quarter than the third quarter, but it's a hard market to forecast in general. I wouldn't get too far out ahead of myself saying which individual segments will be strong in the fourth quarter.

Operator, Operator

Next question is from Samik Chatterjee from JPMorgan. Your line is open.

Samik Chatterjee, Analyst, JPMorgan

Adam, I wanted to ask on a broader level, you touched on this a couple of times: how are customers responding to the risk of a second wave of the pandemic and what are you baking into your guidance for the fourth quarter related to that? We've seen volatility in order trends this year and what looks like a strong 1Q order trend moderating in 2Q. Should we expect something similar to repeat if we have a second wave in 3Q and 4Q?

Adam Norwitt, CEO

Samik, nobody is handicapping precisely what a second wave will look like or how consumers and governments will react. We are not trying to guess those variables. Instead, we focus on remaining nimble, agile, reactive and prepared physically and psychologically for whatever comes. That's where Amphenol has excelled this year. We didn't predict the exact trajectory, but we were ready to flex. How customers are integrating a second wave into their expectations varies; some may, some may not. We take what customers tell us and prepare accordingly. The third quarter showed our readiness — we didn't anticipate 37% sequential growth in mobile devices or 78% in automotive, but we were able to satisfy that demand. We continue to prioritize the health of our people, which has enabled us to support our customers and drive strong results. If more demand comes, we will satisfy it; if less comes, we will react.

Operator, Operator

Next question is from Nick Todorov from Longbow Research. Your line is open.

Nick Todorov, Analyst, Longbow Research

Just wanted to go back to the mobile markets. Adam, I think you mentioned last quarter that you were poised to capture any incremental opportunities in 2020. What I'm hearing is you're not necessarily seeing contribution toward this year's low double-digit growth from the smartphone space specifically. Has anything changed heading into the fourth quarter and we know some of the builds have been delayed? Has anything changed in your position or view of the smartphone market and how you play in that role?

Adam Norwitt, CEO

Nick, mobile is a hard market to forecast. If demand is higher than we anticipate, our team is poised to capture it, and that's what we did in Q3. While year-over-year growth came more from laptops, tablets and wearables, we did see strong sequential growth across all products, including products that go into smartphones. It's possible the fourth quarter will look different; we'll see. Our team is focused on capturing incremental smartphone demand when it appears. Some of the upside this quarter did come from smartphones, even if that didn't show as a year-over-year increase.

Operator, Operator

Next question is from Jim Suva from Citigroup Investment Research. Your line is open.

Jim Suva, Analyst, Citigroup

Thank you, very much and good job at really adjusting to a dynamic world.

Adam Norwitt, CEO

Thank you, Jim.

Jim Suva, Analyst, Citigroup

The question I had was about the book-to-bill. Normally, this quarter has been above 1. Normally, the company has seen above 1 book-to-bill. Obviously, you crushed your expectations in a positive way for revenues and EPS this quarter, so why would we see a book-to-bill below 1 given your results and outlook? Are you seeing inventory restocking that you don't feel comfortable will continue? I'm trying to triangulate the book-to-bill versus your strong results and outlook and all the commentary.

Adam Norwitt, CEO

Thanks, Jim. One thing to note is 0.98 to 1 is pretty close to 1. On a year-to-date basis, including a very strong book-to-bill in Q1, our year-to-date book-to-bill is 1.04 to 1, which is strong. I wouldn't read anything abnormal into the 0.98 number. Last year in Q3 our book-to-bill was about 1 to 1. Some customers placed very strong orders earlier in the year and there are markets with longer lead times, like military, where we have substantial order books. These were very strong bookings and our shipments were even stronger, which is why the book-to-bill came in slightly below 1.

Operator, Operator

Next question is from Matt Sheerin from Stifel. Your line is open.

Matt Sheerin, Analyst, Stifel

Hello, Adam and Craig. My question is on the defense and aerospace markets. On the military side, you talked about seeing a return to growth but it sounds like there are still some COVID-related constraints there. Would love some commentary. And on the aerospace segment where you're guiding down again, are you getting a sense at all that we're at a bottom there or any signs of stabilization?

Adam Norwitt, CEO

Thanks, Matt. On the military side, we clearly had constraints in Q2 because of shutdowns in places like the U.S., Mexico, India and parts of Europe, and getting production back rapidly is not easy when you were already running at high capacity. We supported our customers throughout and did not disappoint, but we are running at a high level of production relative to capacity and there is still significant demand out there. Our outlook for the full year to be low single-digit growth reflects that in part we lost production in one quarter. Regarding commercial air, I can't call a bottom. We came into the quarter thinking sales would be sequentially down; in fact, they were up slightly. For Q4, customers indicated to us that sales will be down about 20%. This market is uniquely impacted because end customers aren't using air travel right now, and how that filters through to aircraft unit demand is still uncertain. Our team continues to support customers, cut costs where necessary, and redeploy technologies to other markets until the recovery comes.

Operator, Operator

Next question is from Joseph Spak from RBC Capital Markets. Your line is open.

Joseph Spak, Analyst, RBC Capital Markets

I wanted to dive deeper into high-voltage connectors for electric vehicles, because you've mentioned that as a tailwind and now we're seeing more programs coming to market. Now that you have more experience, can you break down the source of that tailwind? Is it the number of connectors going up or is it the same number of connectors but higher dollar content, or is it both? Any additional color would be helpful.

Adam Norwitt, CEO

Joe, the interconnect architecture in EVs is very different from traditional internal combustion engine vehicles because you're moving power at much higher voltages, which requires different technology and higher reliability. That typically leads to higher value content per connector. There are more high-voltage connectors and those connectors often have more technology embedded in them. EV designs vary, so you can't say a specific model will have X more content than another, but all things being equal, EV interconnect systems can have more value. The question is whether you have breadth of customers, the right technology, proven track record in high-voltage products (perhaps in industrial or military) and strong relationships to promote those products into automotive. Our team has done well on those fronts worldwide. This is a positive long-term trend for the company.

Operator, Operator

Next question is from Chris Snyder from UBS. Your line is open.

Chris Snyder, Analyst, UBS

Can you comment on the auto segment? You reported sales up nearly 80% sequentially. While auto production is recovering sharply, it seems like you guys outperformed production by a pretty wide margin during the quarter. Was this outgrowth a reflection of low OEM component inventories at the start of the quarter, share gains, or potential inventory building by the OEMs ahead of possible supply chain disruptions as we head into winter?

Adam Norwitt, CEO

Chris, I don't see evidence of massive inventory building. There was low dealer inventory coming into the quarter, and automakers are trying to ramp production quickly. Our team did a great job reacting to customer demand. How much gain came from end volumes, share gains, or readjusting normalized inventory is hard to precisely quantify. This is an industry that effectively shut down for a period and then restarted into an environment with apparent end demand for cars. The combination of pent-up demand and rapid ramp contributed to the strong sequential recovery.

Operator, Operator

Next question is from Craig Hettenbach from Morgan Stanley. Your line is open.

Craig Hettenbach, Analyst, Morgan Stanley

Adam, could you discuss the M&A environment? There have been external factors for potential targets to navigate around as well as internal factors. How are you seeing things today, and as business stabilizes, does that change in terms of what's actionable from an M&A perspective?

Adam Norwitt, CEO

Craig, we view M&A as a long-term process of developing and incubating relationships, keeping in touch, and building mutual trust with potential targets. We've been able to continue that even with travel limitations, so our pipeline remains strong. At the same time, entrepreneurs may think twice about selling in an uncertain environment, which helps explain why we've completed two relatively small acquisitions this year versus nine last year. As the world normalizes, I believe our acquisition program will remain a strong value creator. Our performance during the pandemic and our resilience make Amphenol an attractive home for potential targets. Over the long term, acquisitions have been roughly a third of our growth and we expect that to continue.

Operator, Operator

Next question is from Shawn Harrison from Loop Capital. Your line is open.

Shawn Harrison, Analyst, Loop Capital

Clarifications, if I may, and then just a question on bookings linearity. Does the guidance reflect any incremental entity list headwinds for Amphenol? And on bookings linearity, can you talk about the upside you saw — did it spike mid-quarter, end of quarter, then tail off into October? How linear was the quarter after you initially guided in July?

Craig Lampo, CFO

Relative to the entity list, it's not that on one day everything shut off. The impact can grow over time and we continue to see that relative to the linearity of the quarter. As we got farther from the acute phase of the pandemic in Q2, there was some strengthening over the course of Q3. Typically September is a strong month in the third quarter, and this year was not different in that the quarter finished a bit stronger than it started.

Operator, Operator

Next question is from Deepa Raghavan from Wells Fargo. Your line is open.

Deepa Raghavan, Analyst, Wells Fargo

My question is on buybacks. It looks like some deal potential is being pushed out, which could leave room for further buybacks above trend. Can you comment on that? Craig, you mentioned the majority of the $1.5 billion in cash is held outside the U.S. Can you help us understand how much is in the U.S. and how that can influence share buybacks? And how much cash do you need for operations?

Craig Lampo, CFO

Deepa, the cash held outside the U.S. doesn't impact our buybacks. We have plenty of liquidity in the U.S. and outside the U.S. so it really has no impact on our buyback rhythm. In terms of M&A versus buybacks, we have a very strong balance sheet and typically are able to do all three — M&A, dividends and buybacks — because of our cash flow generation. We've generated almost $1 billion of free cash flow this year. I wouldn't say doing less M&A necessarily leads to accelerated buybacks. We've repurchased $1.6 billion out of the $2 billion program so we're on track to finish the buyback program in the allotted time. M&A will continue to be a significant part of our strategy, timing is unpredictable, but we have a great pipeline and the capital to fund it.

Operator, Operator

Next question is from Steven Fox from Fox Advisors. Your line is open.

Steven Fox, Analyst, Fox Advisors

Adam, could you talk about the industrial market guidance? Q3 was really strong and better than expected and it was broad. Why the slight decline expected in Q4?

Adam Norwitt, CEO

Steve, Q3 for industrial was very strong, coming on the heels of an unexpectedly strong Q2 as well. In Q2, the driver was medical; in Q3 the strength was broader. We came into Q3 expecting a modest sequential decline, yet we saw 11% sequential growth. For Q4, there can be seasonal moderation in the industrial market, and the strong surge in demand, particularly medical in Q2 and Q3, could ease into Q4. Even with that outlook, on a year-over-year basis we expect to grow and for the full year to be up in the low double digits, which is a strong performance in a pandemic year. Our team redeployed resources to areas of industrial strength, and while some subsegments were down, the strong segments more than offset those declines.

Operator, Operator

Next question is from William Stein from Truist Securities. Your line is open.

William Stein, Analyst, Truist Securities

Thanks. Adam, a question on the mobile networks market. Amphenol usually finds growth even when end markets are weak, but this market is down double-digits this year despite 5G rollouts. Is something preventing the company from finding growth in this market — a change in who you can sell to or a change in technology? Any update would be helpful.

Adam Norwitt, CEO

Will, the simplest explanation is the Department of Commerce restrictions on certain entities in China. That's a key driver of the weakness in our mobile networks results this year. Also, as the pandemic hit, there was a rush to expand bandwidth which drove demand into IT datacom and related areas, which sometimes came at the expense of capacity and coverage investments that often help our mobile networks business. Despite these near-term challenges, we remain confident in our long-term position in the mobile networks market and our ability to benefit as customers invest in next generation equipment.

Operator, Operator

Next question is from David Kelley from Jefferies. Your line is open.

David Kelley, Analyst, Jefferies

Stepping back from end market specifics, can you talk about demand and order patterns in China? Are you fully back to pre-COVID levels across your exposures in the region today?

Adam Norwitt, CEO

David, our performance in Asia, led by China, was outstanding in Q3 on a year-over-year basis. I would say demand in China is back to pre-COVID levels and beyond in many cases. That includes industrial, automotive and communications, with the caveat on mobile networks due to the restricted entities list. In China, many aspects of normal life have returned and our local teams are operating without the same restrictions we face elsewhere. The speed and rigor of the reopening in China allowed a relatively rapid return to production and demand. We rely on local entrepreneurial management teams in each market and that has been critical this year given travel restrictions. Our ability to give local teams authority to act has been a key strength.

Operator, Operator

Our last question for today is from Joe Giordano from Cowen. Your line is open.

Joe Giordano, Analyst, Cowen

Most of what I want to ask has been covered, but I'm curious: understanding the nature of your military business and why the shift towards tactical and why you guys are able to grow so much faster than budgets, how does that process change or not change with a different administration? How do you think about sizing the business out a couple of years under different political scenarios?

Adam Norwitt, CEO

Joe, our strength in the military market comes from two things: the deepest and broadest array of technologies in the industry and our ability to execute. Last year we grew 23% in military which required capacity expansions. The broader military market has shifted from highly tactical focus on asymmetric conflicts to more strategic concerns involving peer and near-peer competition. Strategic military tension leads to adoption of technology and investment in advanced systems, which benefits a company like Amphenol that provides high technology interconnects. I'm not going to prognosticate about election outcomes, but the geopolitical environment today favors technology adoption in defense systems. That should be a favorable environment for our long-term prospects in the military market, and our team is well positioned to execute regardless of political changes. Thank you for your last question. I'd like to take this opportunity to thank everybody for your time and attention to Amphenol today. Most importantly, since we won't get a chance to talk to most of you until 2021, I do want to wish everybody to stay safe and continue to stay vigilant as we come into the fall. We need you all healthy, and I wish you, your family, your friends and your communities all the best as we come into the fall and winter season. We look forward to speaking to all of you again in the new year. Thanks so much to everybody.

Craig Lampo, CFO

Thank you.

Operator, Operator

Thank you, speakers. And thank you all for attending today's conference. Have a nice day.