Earnings Call Transcript
AMPHENOL CORP /DE/ (APH)
Earnings Call Transcript - APH Q2 2020
Operator, Operator
Hello, and welcome to the Second 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. If anyone has any objections, you may disconnect at this time. I would now like to introduce today’s conference host, Mr. Craig Lampo. Sir, you may begin.
Craig Lampo, CFO
Thank you very much. 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 second 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 second quarter with sales of $1.987 billion and with GAAP and adjusted diluted EPS of $0.85 and $0.81, respectively. Sales were down 1% in U.S. dollars and were flat in local currencies, compared to the second quarter of 2019. From an organic standpoint, excluding both acquisitions and currency impacts, sales in the second quarter decreased 3%. Sequentially, sales were up 7% in U.S. dollars and in local currencies inorganically. Breaking down sales into our two segments. The interconnect business, which comprised 96% of our sales, was down 1% in U.S. dollars and was flat in local currencies compared to last year. Our cable business, which comprised 4% of our sales, was down 1% in U.S. dollars and up 3% in local currencies compared to the second quarter of last year. Adam will comment further on trends by market in a few minutes. Operating income was $357 million in the second quarter of 2020 and operating margins were 18%, which was down 230 basis points, compared to the second quarter of 2019. Similar to last quarter, the year-over-year reduction in operating margin reflected a higher negative conversion rate than our typical 30% downside conversion, due to the continued negative impact of the COVID-19 pandemic on production and productivity, particularly due to various government restrictions that have limited our ability to adjust costs in certain geographies. Compared to the first quarter of 2020, operating margin increased 100 basis points and reflected a strong sequential conversion margin on the higher sales levels. From a segment standpoint, in the interconnect segment, margins were 20% in the second quarter of 2020, which was down compared to 22.2% in the second quarter of 2019, but up from 19.1% in the first quarter of 2020. In the cable segment, margins were 9.4%, which are down compared to 9.7% in the second quarter of 2019 but up from 7.6% for the first quarter of 2020. Given the continued unprecedented challenges created by the COVID-19 pandemic, we are proud of this quarter's performance. Our team's ongoing ability to minimize the negative margin impact resulting from the 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 thereby allows us to capitalize on opportunities and maximize profitability in an uncertain market environment. Interest expense for the quarter was $30 million, which was unchanged compared to the second quarter of last year. The company's adjusted effective tax rate was 24.5% for both the second quarter of 2020 and 2019. The adjusted effective tax rate for the second quarter of 2020 excludes an excess tax benefit of $12 million associated with the stock option exercises during the quarter. And the adjusted effective tax rate for the second quarter of 2019 excludes the impact of an excess tax benefit associated with stock option exercises during the quarter, partially offset by the tax impact of acquisition-related costs. The company's GAAP effective tax rate for the second quarter of 2020, including the items just mentioned, was 20.7% compared to 21.3% in the second quarter of 2019. Adjusted net income was 12% of sales in the second quarter of 2020, another confirmation of the strength of the company's financial performance. On a GAAP basis, diluted EPS declined by 9% in the second quarter to $0.85 compared to $0.93 in the second quarter of 2019. Adjusted diluted EPS declined 12% to $0.81 in the second quarter of 2020 from $0.92 in the second quarter of 2019. Orders for the quarter were $1.971 billion, which was down 2% compared to the second quarter of 2019 and resulted in a book-to-bill ratio of just under 1:1. Despite the unprecedented challenges in the current environment, the company continues to be an excellent generator of cash. Cash flow from operations was $368 million in the second quarter or 150% of adjusted net income. And net of capital spending of $67 million, our free cash flow was $301 million or 123% of adjusted net income. From a working capital standpoint, inventory, accounts receivable and accounts payable were $1.4 billion, $1.7 billion and $928 million, respectively at the end of June. In inventory days, days sales outstanding and payable days were 89, 74 and 60 days, respectively. While DSO and DPO were both within a normal range, DSI was slightly elevated. Due to the current crisis we expect inventory days to remain somewhat elevated but to come back down to more normal levels as business returns to a more typical pattern. During the second quarter, our cash flow from operations of $368 million, along with proceeds from our recently completed bond offering of $543 million, proceeds from the exercise of stock options of $123 million in cash, cash equivalents and short-term investments on hand of $1.1 billion net of translation were used primarily to fund repayments under our various credit facilities of $1.35 billion, fund repayments of senior notes of $400 million, fund net repayments under our commercial paper programs of $135 million, fund payment of contingent acquisition-related obligations of $75 million, fund dividend payments of $74 million, fund net capital expenditures of $67 million and fund new debt financing costs of $5 million. As communicated in our April earnings release, due to the significant economic uncertainty and volatility in the credit and capital markets created by the COVID-19 pandemic. In March, the company had proactively borrowed $1.25 billion under our revolving credit facility and reduced our reliance on commercial paper markets. As the credit and capital markets stabilized during the second quarter, we repaid the amounts borrowed under our revolving credit facility with cash on hand, as well as the proceeds from the $500 million and €500 million bond offering completed in May. As such, as of June 30, 2020, there are no balances outstanding under either our revolving credit facility or our commercial paper programs. As a result, at June 30, cash and short-term investments were $1.3 billion, the majority of which is held outside of the U.S. and total debt at June 30 was $3.8 billion with no maturities before the third quarter of 2021. Net debt at June 30 was $2.5 billion, which decreased from $2.7 billion as of March 31, 2020 and December 31, 2019. Total cash on hand, as well as the remaining availability under our credit facilities was $3.8 billion at the end of the quarter, which leaves the company in a very strong liquidity position. The second quarter of 2020 EBITDA was $444 million, and our pro forma net leverage ratio was 1.3 times. In summary, although this continues to be a challenging environment, we finished the quarter in a position of continued financial strength with a very strong balance sheet and liquidity position. We believe this financial strength, coupled with the company's broad market and geographic diversity, positions us well for the currently volatile environment, which is characterized by continued uncertainty across global markets. I will now turn it back over to Adam, who will provide some commentary on current market trends.
Adam Norwitt, CEO
Well, thank you very much, Craig, and allow me to extend my welcome to everybody here on the phone today. And first, I just want to also offer my hope and wishes that for all of you on the call here, that you, your family, your friends, as well as your colleagues have remained safe and healthy over the course of the last quarter. As Craig mentioned, I'm going to highlight some of our achievements in the second quarter. I'm also going to discuss the trends and progress across our sales markets. And then finally, I'll make some comments on our outlook for the third quarter. With respect to the second quarter, as Craig just detailed, our sales reached $1.987 billion, which was a reduction from the prior year of just 1% in U.S. dollars, it was actually flat in local currencies and down just 3% organically. And this was driven by reductions in the automotive, commercial air, mobile networks and military markets, which were offset by growth that we saw in the IT datacom, mobile devices and industrial markets. The declines that we saw in the quarter were largely related to the weakness in demand, disruptions and government-mandated factory shutdowns due to the COVID-19 pandemic. We're particularly pleased to have realized 7% sequential growth from the first quarter, which is substantially higher than our original expectations. The company booked $1.971 billion in orders, representing a book-to-bill of just under one to one. And very importantly, despite the significant disruptions to our operations in the quarter related to the pandemic, operating margins reached 18%, a very strong performance given this environment. As Craig just mentioned, Amphenol's financial position remains extremely strong, and that is reflected very well in our operating cash flow of $368 million in the quarter. I just want to say that I'm extremely proud of our team around the world. Our performance this quarter is a great reflection of the discipline and agility of Amphenol's entrepreneurial organization that has continued to perform well amidst the unprecedented challenges that have arisen throughout the COVID-19 pandemic. We're very pleased in the quarter to announce that we, just last week, closed the acquisition of Onanon, Inc. Onanon is based in California and has annual sales of approximately $20 million, and the company designs and manufactures a wide array of high-technology connectors and cable assemblies for customers in the industrial market, with a particular focus on medical-related applications. As we welcome this outstanding new team to Amphenol, I remain very confident that our acquisition program will continue to create great value for the company. In fact, it is our ability to identify and execute acquisitions and successfully bring these new companies into Amphenol that remains a core competitive advantage for the company. Now, turning to our progress across our served markets, I just want to comment that the value of the company's balanced and broad end-market diversification has become even more evident during the COVID-19 pandemic. While several of our end markets were negatively impacted by the pandemic in the second quarter, that impact was essentially offset by growth that we achieved in other markets. Our diversification continues to mitigate the impact of volatility that can be seen in individual end markets and geographies, while at the same time exposing us to new opportunities as well as important new technology developments wherever they may arise across the electronics industry. In a dynamic and unpredictable environment like we're experiencing today, this diversification is a truly great asset for the company. Now, first, the military market represented 10% of our sales in the quarter. Sales were down by 12% compared to last year as certain of our facilities faced production restrictions from government measures put in place to control the COVID-19 pandemic. Sequentially, our sales decreased as we expected by about 20%. Looking into the third quarter, we expect sales to increase back to our first-quarter levels as we look to recover to full production at most of our facilities that work in support of military customers. Our team focused on the military market has worked hard for many years to strengthen Amphenol's broad technology position while increasing our capacity to serve customers across all segments of this important market. Given the ongoing and favorable military spending environment, the Amphenol team continues to solidify our leadership position by ensuring that we can execute on this increased demand, even amidst the disruptions that we experienced here in the second quarter. This enables us to continue to support the many next-generation technologies that are required for modern military hardware. The commercial air market represented 3% of our sales in the quarter. Second-quarter sales declined by 41% from prior year, as the commercial aircraft market saw unprecedented declines in demand for new aircraft due to the disruptions in the global travel industry related to the COVID-19 pandemic. Sequentially, our sales decreased also by 41% from the first quarter. As we look ahead, we expect the commercial air market to continue to be negatively impacted by the significant reduction in demand for air travel that we are seeing across the world. Accordingly, we expect a further approximately 20% sequential reduction in our sales in this market in the third quarter. Regardless of the difficult environment in the commercial air market, our team remains committed to leveraging the company's strong technology position across a wide array of aircraft platforms and next-generation systems that are integrated into those aircraft and we remain well-positioned when this market ultimately returns to growth. In fact, it is in challenging times like this that our steadfast and reactive support for customers can create the most long-term value and thereby position us for long-term success. The industrial market represented 23% of our sales in the quarter and our performance in the second quarter was stronger than we had expected, with sales increasing by 12% in U.S. dollars and 8% organically. This growth was driven in particular by strength in the medical, instrumentation and heavy equipment segments, together with some contributions from our acquisitions that we completed last year. On a sequential basis, sales increased by a very strong 17% from the first quarter. I'd like to emphasize how proud I am of our team, in particular, working in support of medical applications within the industrial market. That team continues to work tirelessly to ramp up our production of sensors, connectors and interconnect assemblies to meet demand from a broad array of customers producing equipment that's used in support of medical treatment for COVID-19 patients. We're just very proud of them. This month's acquisition of Onanon further strengthens our broad high-technology offering for the medical equipment market. As we look into the third quarter, we expect a modest decline from these higher levels of sales. Nevertheless, we remain very pleased with the company's strong position in the worldwide industrial market. Through both our acquisition program as well as our organic innovations, we've developed a broad range of products across a diversified array of exciting industrial segments. We're proud of this success and look forward to realizing the benefits from our efforts in the industrial market for many years to come. The automotive market represented 11% of our sales in the quarter. Sales declined by a very significant 42% in U.S. dollars and 41% in local currency, as stay-at-home orders around the world reduced customer demand for new cars, and at the same time, government restrictions across many countries resulted in factory shutdowns by automakers and their suppliers. Sequentially, our automotive sales decreased by 35%. As we look towards the third quarter, we expect sales to the automotive market to substantially improve compared to the second quarter, as the industry begins to recover and as factories ramp up their production levels. However, we do not yet expect sales to reach last year's levels, as the global automotive industry continues to experience somewhat lower demand in the face of the COVID-19 pandemic. Regardless of this very challenging time period for the automotive market, we remain confident in Amphenol's long-term position. We've expanded our range of interconnect, sensor and antenna products both organically and through acquisitions to enable a wide array of onboard electronics across a diversified range of vehicles made by auto manufacturers around the world. This consistent strategy will continue to benefit us as the automotive market recovers. The mobile devices market represented 14% of our sales in the quarter. Our sales to mobile device customers increased by 20% from the prior year, as demand recovered after the three-week shutdown and subsequent month-long ramp-up of production that we saw in China during the first quarter. Sequentially, our sales in mobile devices increased by a very strong 47%, which was substantially better than our expectations had been coming into the quarter and which did reflect some catch-up of production after the first quarter shutdowns in China. Looking to the third quarter, we now expect a modest increase from these elevated second-quarter levels. While 2020 has thus far seen substantial impacts on the mobile devices market from the pandemic, our long-term position in this market remains very robust. Amphenol's leading array of antennas, interconnect products and mechanisms continues to enable a broad range of next-generation mobile devices. And while there's no doubt that this market will always remain one of our most volatile, our outstanding and agile team is poised as always to capture any opportunities for incremental sales that may arise in 2020 and beyond. The mobile networks market represented 7% of our sales in the quarter. Sales in this market decreased by 20% from the prior year and 23% organically, as we were impacted by reduced demand from wireless OEMs and particularly related to the U.S. government restrictions on certain Chinese entities that we discussed extensively in previous quarters. On a sequential basis, our sales increased by a stronger-than-expected 9% from the first quarter, driven essentially by higher sales to equipment manufacturers. For the third quarter, we expect sales in the mobile networks market to moderate from these levels on lower demand from both OEMs and service providers. Regardless of any 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 their investments for 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 27% of our sales in the quarter, and sales in the second quarter for this market were much better than expected, rising from prior year by a very strong 37% in U.S. dollars and 32% organically, as increased data traffic drove both our OEM and service provider customers to significantly increase their demand across virtually all segments of the IT datacomm market. Sequentially, our sales increased by a very strong 43% from the first quarter. I just can't tell you enough how proud I am of our team working in the IT datacom market, who, despite facing production restrictions related to the COVID-19 pandemic in certain geographies, were still able to react quickly to satisfy the significant increase in demand from our customers. As we look towards the third quarter, we now expect a roughly mid-teens sequential decline from the second quarter's very high levels. Our team's continued efforts at developing industry-leading products across a wide array of technologies, including, in particular, high-speed and power products, has positioned us to benefit from the continued demand for increased bandwidth that is likely to persist as individuals, companies, students and governments adjust interacting remotely. We remain encouraged by the company's strong technology position in the global IT datacom market, especially given this increased demand for bandwidth. Our customers around the world are driving their equipment to higher levels of performance, in order to manage these dramatic increases in demand. In turn, our team remains singularly focused on enabling this continuing revolution in IT datacom through their ongoing development of a wide range of next-generation products. The broadband market represented 5% of our sales in the quarter. Sales increased by 3% in U.S. dollars and 5% organically from prior year, driven by stronger demand for home installation-related equipment from broadband operators. On a sequential basis, sales increased by 12% from the first quarter. We expect sales in the third quarter to remain roughly at these levels as our operator customers continue to upgrade capacity in their networks to support the significant increase in demand for bandwidth, driven by online video and other remote school and work tools. We remain encouraged by the company's continually expanding range of products for the broadband market, together with our strong positions with customers around the world. And we continue to position ourselves as the most flexible supplier, thereby ensuring that the company can benefit as operators increase their network investments. Now turning for a moment to our outlook, the continued and significant economic and public health uncertainties created by the COVID-19 pandemic make it difficult to accurately forecast our performance in the second half of 2020. Accordingly, we will once again not be providing full-year guidance. However, considering the current demand environment and assuming no new material disruptions from the pandemic as well as constant exchange rates, for the third quarter, we now expect sales in the range of $1.960 billion to $2 billion, and we expect adjusted diluted EPS in the range of $0.84 to $0.86. This guidance represents a sales decline versus the prior year of 5% to 7% in U.S. dollars and a decrease versus prior year adjusted diluted EPS of 9% to 12%. Now let me just say, I'm extremely pleased by Amphenol's performance here in the second quarter, particularly in light of the many challenges our team has faced related to the COVID-19 pandemic. I remain very confident in the ability of our outstanding management team to meet these challenges and to navigate these challenges, while capitalizing on the many current and future opportunities to grow our market position and expand our profitability. The Amphenol team around the world remains committed to fighting hard to secure the company's financial performance, all while dedicating ourselves to protecting the safety and health of all of our employees during this pandemic. And I would just like to finish by taking this opportunity to thank each and every one of the Amphenolians around the world for their dedication and their outstanding efforts here in the second quarter. And with that, operator, we'd be very happy to take any questions that there may be.
Operator, Operator
Our first question is from Amit Daryanani from Evercore. Your line is open.
Amit Daryanani, Analyst
Thanks for taking my question. I have a question and a follow-up. First one here, if I think about the implied operating margins you guys are guiding for September quarter it's around 19%, slightly less than that I think, on about $2 billion of sales. I would love to understand because if I go back to the first half of ‘19 when revenues are in this $1.95 billion to $2 billion range, you guys are doing well over 20% operating margins. What's this 100 basis points delta attributed to? Is this just a cost to COVID going forward and more structural, or do you think it's transient as you go forward?
Adam Norwitt, CEO
Sure. Thanks, Amit. We're really pleased with the operating margins. In the second quarter of 2020, we reached 18% despite significant costs associated with the COVID-19 pandemic and the resulting government mandates and restrictions that affected our production and productivity. Looking ahead to the third quarter, we anticipate that some of those costs will continue to impact us, although to a lesser degree. There were improvements as we progressed through the second quarter, but we still face some challenges heading into the third quarter, which you can see in the sequential improvement we expect from the second to the third quarter. Your calculations regarding our implied margins for the third quarter are quite reasonable. When comparing to the first and fourth quarters of 2019, several factors are influencing our margins in the third quarter. One is the COVID-related costs we will still incur, though to a lesser extent. Additionally, when looking back to early 2019, we continue to experience some headwind on margins due to the acquisitions we made. In 2019, we completed nine acquisitions, most of which had margins below our average, and we are still working to elevate their performance to align with our company average. As you can imagine, during the pandemic, it has been challenging for these businesses to enhance profitability, especially considering the revenue declines, making some necessary actions difficult to implement right now. However, we remain optimistic about returning them to our average margins in the long term. This explains the difference when comparing earlier quarters of 2019 to the third quarter of 2020. That said, I am very proud of the team for achieving 18% in the second quarter and for taking the necessary actions to improve sequentially, as we expect to see higher results in the third quarter. We are very satisfied with these outcomes.
Operator, Operator
Thank you speakers. And just a reminder for the parties that queued up for the Q&A to limit asking to only one question. Thank you. We'll proceed to Mark Delaney from Goldman Sachs. Your line is open.
Mark Delaney, Analyst
Yes, good afternoon. Thanks very much for taking the question, and congratulations on the good results. I was hoping to better understand what the company has seen in the mobile devices end markets, and to what extent are there opportunities for the company to participate in more sophisticated designs, especially around 5G in the second half of this year in some of the past years when the company's had good participation in new program launches? You've seen a pretty big sequential increase in the third quarter. I realize there's a base effect of where you're coming in off the 2Q levels. But trying to understand to what extent you're able to participate in some of those opportunities in 3Q? Is there anything around just timing and maybe it's more 4Q this year, or what's the opportunity set that's maybe playing into the guidance there? Thank you.
Adam Norwitt, CEO
Thank you very much, Mark. I mentioned in my prepared remarks that in the second quarter, we experienced some level of recovery from the first quarter. I want to commend our team for their outstanding efforts in bouncing back from the shutdown. As you know, our mobile devices business relies heavily on manufacturing in China. The extensive shutdown during the first quarter significantly affected our mobile devices team and our customers' manufacturing processes as well. Our team excelled in getting the workforce back on track by early March and managed to meet the demand in the second quarter. Typically, we wouldn't see a 47% increase in the second quarter, which usually tends to slow down in the mobile device market. Excluding this anomaly in the first half, we still anticipate strong participation in many new programs in the second half. Whether related to 5G or not, devices are becoming increasingly complex, and our team remains effective in supporting a diverse range of customers. However, the pandemic has caused some delays in programs that might have launched earlier, contributing to the unusual second quarter we experienced. Overall, we expect a more typical sequential outlook for mobile devices moving forward, but we maintain a solid position in the market. We're enthusiastic about upcoming next-generation programs and the new features being introduced in phones. While we may not win every new program, each new opportunity is a chance for us to compete. Our team has consistently supported our customers during both favorable and challenging times, and we have stood by them during new launches when others may not have been able to provide the same level of support. During the chaotic first half of the pandemic, our team remained focused on ensuring we had the right resources and capabilities to meet customer needs. This focus has us well-positioned to capitalize on potential opportunities for additional volumes or programs in both the near and long term.
Operator, Operator
Thank you. Our next question comes from Craig Hettenbach from Morgan Stanley. Your line is open.
Craig Hettenbach, Analyst
Yes, thank you. Adam, I guess good to see kind of a thaw in the M&A environment after the first half of the year. So, just curious to get your take on that small tuck-in and just how you see things set up in terms of opportunity set and ability to execute on M&A as those opportunities arise?
Adam Norwitt, CEO
Yes. Well, thanks so much, Craig. I mean, we're really excited. It's not a big company on and on, but it's a great company. And I think it is a wonderful reflection of our approach to acquisitions. We have taken for a long time that very patient approach of incubating relationships with a wide array of companies around the industry and around the world, developing relationships, developing real mutual trust between us and the owners of these entrepreneurial companies, such that when it is appropriate and when they have crossed the canyon, if you will, of deciding that they want to sell their company, we don't have to build that trust from scratch. We've already established those wonderful relationships. Because in a pandemic, when we're all socially distancing, creating new relationships from scratch is much harder to do. This was not in the case of Onanon. A book that showed up from a banker, and we said, well, who are these people? Well, you can't meet them. None of that happened. We had long-standing interactions with the entrepreneurs who founded this company and who, by the way, stay on as now the general manager of that company going forward. We are very excited about that. The second thing is this is a company that has a really unique technology proposition, unique products that go into exciting areas of the industrial market, in particular, into medical technology. I talked earlier about the strength of our medical business in the quarter; it’s not that we saw that strength and thereby said, oh, let's go buy Onanon because it's a medical company; that’s more coincidental. They are a company that is present in next-generation electronics, used in a wide array of applications that are exciting and important. We are very proud to bring them into the Amphenol family. The overall M&A environment in a pandemic, it's different. As you can imagine, you're going to be more careful. You're going to make sure you know the people. You're going to make sure that the business has resilience to it in a time like this. But all that being said, we continue to have a strong pipeline and Craig mentioned before, we acquired nine companies last year; I don't know that we're going to do that this year with the pandemic so far in the first half, but we're very pleased that we were able to make this one and bring them into the Amphenol family, and we're very hopeful that there will be more to come in the future.
Operator, Operator
Thank you. Our next question comes from Matt Sheerin from Stifel. Your line is open.
Matt Sheerin, Analyst
Yes, thank you. Good afternoon. Question, Adam, regarding the industrial sector. You had very strong results there. You talked about some of the end markets, particularly medical. Did you see any signs of maybe some pull-in inventory building at customers? We're hearing that from some semiconductor companies and other component companies. So I'm wondering if you're seeing any of that. And then within the medical markets, are you beginning yet to see a shift from COVID-related demand and products versus elective surgeries? Thanks.
Adam Norwitt, CEO
Thanks so much, Matt. Great question. Look, I don't know that I would call the demand a pull-in. But I would call the demand that we saw for COVID-related medical equipment, in particular, things like ventilators, respiratory therapy devices, patient monitoring for new hospital construction, things like that, that was very, very significant demand. There's no doubt about it. Is that a pull-in? I mean, it didn't exist before, this demand. So it was all new demand. The world never built as many ventilators as the world is now building. And I don't know that pull-in would be necessarily the right term for that, but there was definitely a rush to build. From our perspective, our team just did such a great job of massively increasing their capacity to support that demand when oftentimes, our competitors could not do so. And I can't tell you the number of calls I've had with customers, letters of gratitude from customers, dozens, if not hundreds of programs in support of COVID, where our team just pulled out all the stops and made it happen. We worked with companies who never built medical equipment before. We've worked with long-term medical companies. We've worked directly with governments around the world, who are building strategically their medical infrastructure. These are all things that were not just a one-time situation, but rather an ongoing recognition that the world just didn't have enough of a certain type of medical equipment to deal with a respiratory-borne pathogen. I'm guessing that that is not a situation that people around the world want to face again. Now, are we seeing a shift from more COVID-focused medical equipment to the more elective surgical? I mean, there's no question that early in the quarter, we did see a little bit softer demand for products that are used in purely elective fashion. I wouldn't say that, that was material. And obviously, despite that, our medical business within industrial did really, really well. I mean, this is outstanding performance. Is that balancing a little bit more here coming into the third quarter? Yeah, I guess that would probably be a fair way to put it. I mean, we expect, as I said earlier, in the third quarter, we expect our sales to be at or a little bit below the levels that they were in the second quarter. These are very, very high levels of consumption. Our team continues to work hard to make sure that we can satisfy that demand. If there's a little bit of a more broad demand for some of those things that were earlier pushed back, that may be the case. But look, we're just really proud of what the team has done here in medical.
Operator, Operator
Thank you. Our next question comes from Samik Chatterjee from JPMorgan. Your line is open.
Samik Chatterjee, Analyst
Hi. Thanks for taking my question. I just wanted to see, given the order number that you had, which looks like for the first time in a while is below the $2 billion number. If you can give us a bit more visibility into what the cadence was through the quarter, particularly kind of exiting the quarter? What was the cadence like? And curious if you're seeing any big differences in terms of order activity between regions given that the different regions seem to be in different places relative to containment of COVID? Thank you.
Adam Norwitt, CEO
Yeah. Thanks so much, Samik. Look, I think that we came into the quarter, as you will recall, on the heels of very significant orders that we had in Q1. We had the highest book-to-bill in the history of the company and the third highest orders, absolute order volume in the history of the company. I think it was $2.150 billion. And so it's not surprising to me. It was not surprising to us that our orders would more level at or around our sales levels here in the second quarter. In fact, I would have told you that after such a big order number, it wouldn't have surprised me if the orders were actually a little bit lower than the sales levels. And that was probably our expectation coming into the quarter that orders would have been a little bit lower. So I'd say that the fact that we outperformed on sales and met – nearly met those sales levels with orders, is a good reflection of the demand from our customers. In terms of the cadence throughout the quarter, I wouldn't say that there's anything so notable. The middle of the quarter was probably a little lighter than the beginning and the end of the quarter. That's maybe the only thing I would say. And regionally, I don't think there was anything abnormal or anomalous from a regional perspective relative to orders.
Operator, Operator
Thank you. Our next question comes from Wamsi Mohan from Bank of America. Your line is open.
Wamsi Mohan, Analyst
Thank you. Your Q3 guidance is clearly in line with consensus and quite strong. However, when you factor in the $5 million in M&A and the additional foreign exchange benefit, the guidance appears somewhat below seasonal norms. Could you discuss the dynamics that are influencing this? Also, while you mentioned this in relation to industrial, more generally, was there any pull forward in demand in any of the end markets, and if so, how significant was that?
Adam Norwitt, CEO
Thank you, Wamsi. I'll highlight a few markets to clarify this. I previously mentioned mobile devices, where the demand we observed in the second quarter reflected a recovery from the disruptions we faced in China earlier in the year. Additionally, regarding IT datacom, we anticipate that market will see a decline in the mid-teens quarter-over-quarter, which indicates the exceptionally high level of demand we experienced in the second quarter. Although this demand remains robust in the third quarter, typically we would expect IT datacom to strengthen in the latter half of the year. However, the increase in demand isn't simply a matter of customers moving their plans forward; it's more about an unforeseen surge in bandwidth needs driven by the rise in video calls and remote working, education, and healthcare communications during the pandemic. This heightened demand was not anticipated prior to January 22, right before the lockdown in Wuhan. Hence, I consider this as significant incremental demand rather than a mere pull-in, and while we see some moderation in the third quarter, it still stands at a high demand level. These factors significantly influence our sequential guidance into the third quarter. Without these dynamics, we would likely see a more typical recovery, particularly since the military and automotive markets have shown a strong rebound in the second quarter following significant pandemic impacts. However, commercial air travel has not seen a similar recovery, which is fortunate for us as that segment constitutes a smaller portion of our sales and has lesser effects. In summary, while military and automotive markets experience robust recoveries, commercial air does not, and when evaluating all this, we arrive at a guidance that remains strong, consistent with the levels achieved in the second quarter.
Operator, Operator
Thank you. Our next question comes from Nikolay Todorov from Longbow. Your line is open.
Nikolay Todorov, Analyst
Hi everyone. Thank you for taking my question. Could you discuss your assessment of customer inventories? I'm specifically interested in the IT datacom, mobile devices, and industrial end markets. Looking at the mobile devices, the guidance for the third quarter suggests that sales will remain roughly flat while production has decreased by about 15%. I understand that part of this is due to content growth. Additionally, on the industrial side, if we consider that some of the medical demand may decline or stabilize in the second half, what observations do you have regarding the inventory situation for your non-medical industrial customers?
Adam Norwitt, CEO
Thank you, Nikolay. As I mentioned earlier, we lack complete visibility into our customers' warehouses and their inventory levels. We do receive some information from our distributors, who account for just over 15% of our sales. Regarding our distributors, their inventory levels appear very healthy and show no significant changes in the second quarter. For IT datacom, although I don’t have exact figures, I would be quite surprised if our customers were storing any products we supplied in their warehouses. There’s a strong demand for these products to be deployed so that users don't experience delays, such as buffering when using services like Netflix. If our products are just sitting in a warehouse, they won’t be improving bandwidth. It’s unlikely that any inventory accumulates in this sector. As for mobile devices, the entire channel has very little inventory, so I wouldn’t highlight that as an issue. In terms of the industrial sector, excluding medical, this is the area where we see a slightly higher proportion of distribution. Therefore, I have somewhat better visibility in this market, and I can confirm that the inventory levels seem healthy and stable with no unusual fluctuations as we entered or exited the quarter, at least in relation to the distribution aspect of our industrial business.
Operator, Operator
Thank you. Our next question comes from Deepa Raghavan from Wells Fargo Securities. Your line is open.
Deepa Raghavan, Analyst
Hi, good afternoon, everyone.
Adam Norwitt, CEO
Hello, Deepa.
Deepa Raghavan, Analyst
Are you able to discuss the trends in China specifically compared to the overall market? I'm interested in understanding how much the growth momentum in China depends on the recovery of the U.S. and Europe. Additionally, are there any sectors that are particularly vulnerable if these developed markets continue to face challenges? It seems like China is not completely independent from Europe or the U.S. Thank you.
Adam Norwitt, CEO
Thank you very much, Deepa. It shouldn't be surprising that after the first quarter, where our operations in China were shut down for three weeks due to the pandemic and then ramped up over the following month, we saw a significant increase in sales in Asia, particularly in China. This is a normal trend. Mobile devices serve as a prime example, which are mainly fulfilled in China and experienced a 47% sequential growth. As for the momentum being linked to the U.S. and Europe or more broadly worldwide, most mobile devices are produced in China. Thus, any change in phone purchases in the U.S. or Europe will affect demand. The IT datacom market also has production in China being distributed globally, indicating that it's not just about the Chinese domestic market. Regarding decoupling, while it's a different topic from just the recovery seen in the second quarter, I want to emphasize that we are very much aware of the current geopolitical climate. Our company operates as a global entity but relies on local management worldwide to execute effectively. We empower over 120 general managers globally to make decisions tailored to their local markets without relying on expatriates. We have local teams in each country, ensuring that our approach has been successful in both a globalized and a potentially decoupling world. Our personnel are seen as local supporters by customers, who also recognize the strength and resources of a global company behind them, putting us in a strong position. Regardless of the potential deterioration in international relations, Amphenol remains neutral. While I personally believe it's better if nations get along, I have no doubt that Amphenol can succeed regardless of the situation. Our company culture and organization are equipped for this. The current global environment may actually present long-term opportunities for us. We will continue to ensure that our customers in every location receive excellent service from our local teams. If decoupling occurs, we will adapt and find success regardless.
Operator, Operator
Thank you. Our next question comes from Steven Fox from Fox Advisors. Your line is open.
Steven Fox, Analyst
Thanks. Good afternoon.
Adam Norwitt, CEO
Hi Steve.
Steven Fox, Analyst
I was just wondering, you touched on some of the dynamics going on with IT datacom. I was wondering if you could do the same thing for the outdoor markets with wireless infrastructure and broadband. How would you sort of compare and contrast the need for bandwidth there and your content gains going forward for the rest of the year? Thank you.
Adam Norwitt, CEO
Thanks so much, Steve. Look I would say that if you compare broadband and mobile networks in the acute situation of the last, let's call it, four months, five, four and a half or so months where everybody has been working from home, the pressure has been more on the core Internet, more on the broadband service providers than it has been necessarily on the mobile service providers. And I say that because the fact is the real bandwidth constraints have come from people at home, where the vast majority of the people still today at home are not using wireless broadband as a means to deliver high-speed Internet to their house. Now that can change. I think maybe this whole situation is going to be a catalyst for that long-term to change because I can tell you, myself, and I won't name my cable operator. They are all wonderful, but it was not always easy over the last four months. When I had two or three kids in the house, all on Zoom calls, when I was on a Zoom Call, my wife was on a Zoom Call, I mean – or Teams or Google or whatever, I mean, we're all on video calls and that was not always perfect. And then my son decides to play a video game and all of a sudden, the whole thing just freezes up. The fact is there is a real rush to help that at-home capacity over the last quarter. I think that was reflected more in what we saw with broadband growing 12% quarter-to-quarter as opposed to mobile networks. In mobile networks, what we saw was really a growth from our OEM customers, and we grew 9% sequentially, which was very strong, given that. Some of that a little bit also coming out of China, where some of the equipment providers in China were, of course, shut down. But in terms of our work directly with service providers, the strength really came in broadband and IT datacom in the second quarter. What does that mean long term? I do believe that long term, the fact of this pandemic coming at the same time as 5G is really beginning to be constructed is probably a good thing. It's going to mean ultimately that we're going to have a variety of means to get broadband data to our homes. That is not just confined to cable systems, to telco operators, to mobile operators. But there's also satellite Internet being put up in a relatively big way by certain pretty famous operators. There’s a lot going on to make sure that our – that homes can have better bandwidth capacity than they may have in the past. Regardless of where it is, you know this well, you've covered us for a long time, Steve. Our approach has never been to bet on one of those ways of getting high speed. It's been to make sure we're present everywhere. We’re present with the broadband operators. We're present with mobile network operators. We're present with web service providers. We are present with satellite-based Internet. Whatever it may be, and I think as long as we maintain that high-technology partnership with customers across each of those areas, we're going to be well positioned as the world continues to build the infrastructure for bandwidth to homes, to offices, to governments, to hospitals and everywhere around the world.
Operator, Operator
Thank you. Our next question comes from William Stein from SunTrust. Your line is open.
William Stein, Analyst
Hi, good afternoon. Thanks for taking my question. I'm wondering if you can elaborate, Adam, on capacity. I think you mentioned that this was still somewhat of a constraint in the quarter. Did I miss here? I thought that as of the end of last quarter, these issues have been resolved at least internally, maybe it's more a matter of your customers' capacity. Any sort of clarification would be great? Thank you.
Adam Norwitt, CEO
Well, thanks, Will. No, I mean, I would tell you that as we came out of last quarter, you'll recall, the first quarter was really a story of China and the very significant kind of one-off of the factories there. It was without equal. There was no essential business. There was nothing. It was just – they were shut down for three weeks. And then you had to reopen through a very complex and cumbersome process to prove that you were protecting your people, and we did just a great job of that, and thereby were able to open maybe a little bit faster than some others. But as the virus spread around the world to the nearly 40 countries in which we operate, there was a whole range of restrictions that ultimately did impact our capacity and our productivity in a whole variety of countries and not just the nearly 40 countries, but even here in the U.S. We operate in dozens of states in the U.S., and every state had a slightly different approach. I remember very well the day that the very first restrictions were taken, and that was not even a state-level restriction. It was a county. Where Contra Costa and I think it was Alameda counties in California adopted the very first real significant business restrictions to enable better social distancing and to stop the spread of the virus. Our teams around the world in our more than 200 facilities, it's hard to find one where we didn’t, at one point, face something during the quarter where the team had to navigate a government restriction or actually just us taking measures to protect the people that were important and appropriate measures to protect our people. There’s no doubt about it, in the quarter, there were significant expenses that we incurred. Craig talked about those. There was also an impact on our capacity in a variety of ways. I talked about that in a few of our markets, but the one in particular that I mentioned was in military, where our sales were down 20%, and that had nothing to do with demand. That was all to do with navigating the variety of restrictions that were put in place in a variety of countries and our team just did a fabulous job of doing so. As we came out of the quarter, I would say that it's a much better situation. It's not totally done. There still are several places around the world that are still facing some restrictions. And who knows? To the extent that the later part of the year or the latter part of the year brings a further acceleration of the virus. Ultimately, we all know that the only way to control this virus is for people to wear masks and to have social distancing. That ultimately may require governments to implement, again, restrictive measures that can have an impact on our customers and can have an impact on us. That's one of the levels of uncertainty that, to be honest, makes it difficult for us to give a full-year guidance. So who knows what will come? I cross my fingers and my toes that it doesn't get worse, but I'm realistic enough to know that this is a virus that doesn't just kind of stop magically. It stops through social distancing. It stops through mask-wearing. That's what our people are doing. To the extent that governments around the world have problems that they face, where the virus gets out of control, it won't surprise me if ultimately there is an impact on the production of products, on businesses being able to operate. We're not necessarily immune to that. Regardless, there's no doubt about it that in this very unique world, a world where we've never had to deal with governments telling you, you can or cannot open your factories. Our team just did an amazing job of navigating those tricky shoals here in the quarter. If something else were to come, I'm sure they'll do the same great job.
Operator, Operator
Thank you. Our last question comes from Joseph Spak from RBC Capital Markets. Your line is open.
Joseph Spak, Analyst
Thank you. Good afternoon everyone.
Adam Norwitt, CEO
Good afternoon.
Joseph Spak, Analyst
I wanted to maybe just zoom out a little bit for a second because over the past couple of months, we've seen the market really dive in and pay a lot of attention, increasing attention, I'd say to alternative powertrains for transportation, be it for the lighter commercial vehicle markets, but also things like hydrogen for industrial uses, particularly with the news out of Europe. So these are clearly long-term trends, but maybe sometimes market enthusiasm can get out over its skis on the opportunity. So can you speak to what you're seeing from your customer on these sort of things and whether something like hydrogen is even an opportunity for Amphenol?
Adam Norwitt, CEO
These are all exciting developments. I remember years ago when we were working on our first electric cars, and I wondered if people would ever actually own and drive one. Now, I look out at our parking lot from my office window and see several electric cars, more than I ever did before. You've mentioned hydrogen and fuel cells, as well as alternative energy sources for vehicles. I believe that over the long term, we will see new drivetrains and new technologies emerge. Innovative technologies typically require a new type of interconnect, which means they need more robust and advanced solutions. This creates opportunities for our company and for the entire industry, which is a positive aspect. I thought you might ask about the impact of the pandemic and social distancing on these trends. There is certainly a possibility that it could affect things. I'm not the expert on predicting the direction of the auto market or drivetrains. The past six months have been truly unprecedented, leading people to reevaluate everything. I liken it to someone throwing a bag of flour into the air; you can't predict where it will land, but it will settle somewhere. People are indeed reassessing various aspects of their lives, which might accelerate some of these trends. I'm a strong supporter of public transport, but knowing that something like a virus can spread in dense public transport settings may deter people from using it as much, which isn't great for the environment. At the same time, the pandemic has heightened awareness of existential threats, with the environment being a significant concern. It would be a lost opportunity if people didn't become more conscious of environmental issues. The combination of wanting more privacy in personal vehicles and the realization of existential risks might lead more individuals to consider hydrogen fuel cells or electric vehicles. While I don't want to stray too far from the main topic, I believe this period can act as a catalyst for change, and much of that change is exciting. I am confident that our company is well-positioned to participate in and capitalize on these developments.
Operator, Operator
Thank you, speakers. At this time we don't have any further questions on queue, I'll hand the call over to you for closing remarks.
Adam Norwitt, CEO
Well, thank you very much and thanks to everybody for your attention to Amphenol today. I'd just like to take this opportunity to wish you all a good summer. I hope you get some well-deserved vacation time this summer. You'll need it to come back fully recharged for the second half and Craig and I look forward to speaking to you all 90 days from now. Thanks again.
Craig Lampo, CFO
Thank you.
Operator, Operator
Thank you for attending today's conference and have a nice day.