Avantor, Inc. — Q3 2021 Form 10-Q Summary
Business context and reporting period
Avantor is a global manufacturer and distributor serving biopharmaceutical, healthcare, education and government, and advanced technologies and applied materials customers. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Net sales | $1,834.3 million | $1,605.0 million | $5,478.5 million | $4,602.7 million |
| Gross profit | $615.9 million | $506.4 million | $1,855.2 million | $1,498.9 million |
| Gross margin | 33.6% | 31.6% | 33.9% | 32.6% |
| Operating income | $237.2 million | $177.2 million | $758.2 million | $502.2 million |
| Net income | $156.8 million | $(42.2) million | $478.6 million | $65.0 million |
| Net income available to common stockholders | $140.7 million | $(58.3) million | $430.2 million | $16.6 million |
| Diluted EPS | $0.24 | $(0.10) | $0.73 | $0.03 |
| Adjusted EBITDA | $359.2 million | $285.6 million | $1,088.9 million | $821.7 million |
| Adjusted EBITDA margin | 19.6% | 17.8% | 19.9% | 17.9% |
Q3 net sales increased 14.3%, including 10.2% organic growth, a 0.9% favorable foreign-currency impact, and a 3.2% acquisition impact. Nine-month sales increased 19.0%, including 14.6% organic growth. Management attributed growth primarily to biopharmaceutical demand, proprietary materials and consumables, commercial excellence, productivity, and continuing COVID-19-related demand.
- Q3 sales by region: Americas $1,045.0 million, Europe $674.7 million, and AMEA $114.6 million.
- Q3 gross margin expanded 200 basis points, primarily from favorable product mix, commercial excellence, and productivity.
- Q3 operating income rose $60.0 million, while lower interest expense and the absence of the prior-year debt extinguishment loss supported the increase in net income.
- Cash provided by operating activities was $652.6 million for the first nine months; free cash flow was $606.1 million.
- Capital expenditures were $71.1 million, and cash paid for acquisitions was $1,168.9 million.
- September 30 cash and cash equivalents were $1,426.1 million, with total liquidity of $2,230.3 million, including $804.2 million of unused credit availability.
- Gross debt was $5,667.4 million, or $5,586.8 million net of deferred financing costs. Debt increased from $4,972.2 million gross at December 31, 2020, primarily due to financing the Ritter acquisition.
Material changes versus the prior comparable period
- Q3 net income improved by $199.0 million from a $42.2 million loss to $156.8 million of income. Nine-month net income increased by $413.6 million.
- Interest expense declined by $11.1 million in Q3 and $95.2 million year to date, reflecting debt repricing, refinancing, and lower net debt.
- The 2020 periods included a $226.4 million loss on extinguishment of debt; 2021 included $8.4 million year to date.
- Ritter GmbH was acquired in June 2021 for preliminary purchase consideration of $1,115.4 million, including $1,079.8 million of net cash consideration and $35.6 million of contingent consideration. Ritter contributed $49.2 million of Q3 revenue.
- RIM Bio was acquired in June 2021; its impact was not material to the consolidated financial statements.
- On September 15, 2021, Avantor issued 23.81 million common shares at $42.00 per share, generating $967.0 million of net proceeds.
- Cash increased to $1,426.1 million from $286.6 million at year-end 2020, largely due to the equity offering, debt financing, and operating cash flow.
- Accumulated other comprehensive income changed from $21.7 million at year-end to a $38.1 million loss, primarily from foreign-currency translation.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a specific quantitative full-year earnings or revenue guidance update. Management reported continued high-single-digit demand in the core business and expected strong biopharmaceutical demand, while noting modest growth in healthcare and advanced technologies and applied materials.
Avantor agreed to acquire the Masterflex bioprocessing business for a preliminary all-cash value of $2.9 billion, or approximately $2.7 billion net of anticipated tax benefits. Regulatory approvals had been received, and closing was expected on or about November 1, 2021. The transaction was expected to be funded through cash, equity proceeds, senior notes, and incremental term loans. The $800.0 million senior notes issued on October 26, 2021 contained special mandatory redemption provisions if the acquisition did not close.
- COVID-19 continued to affect demand, including PPE, diagnostic testing, and vaccine-production solutions, while certain COVID-related healthcare, government, and education purchases declined.
- Management reported increased supplier constraints and warned that supply-chain disruption could materially affect operations.
- Other risks include inflationary pressures, foreign-exchange volatility, variable-rate debt, dependence on suppliers and key customers, acquisition integration and valuation, regulatory and environmental compliance, product liability, cybersecurity, and the ability to generate sufficient cash flow to meet debt obligations.
- Acquisition-related expenses were $24.6 million for the first nine months and were excluded from Adjusted EBITDA. Other Adjusted EBITDA adjustments included integration costs, purchase-accounting adjustments, restructuring charges, and a $13.0 million disgorgement-related income item.
- Environmental liabilities included accrued obligations of $3.5 million for a New Jersey remediation matter and $3.2 million for Poland remediation and monitoring.
- The company stated that no outstanding litigation was expected to result in material losses if decided adversely. A separate EPA matter was expected to settle for less than $1 million.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2021, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Completion, financing, purchase accounting, and integration results of the Masterflex acquisition.
- Post-acquisition leverage, interest costs, covenant compliance, and the impact of planned incremental term loans.
- Whether organic growth and margin expansion persist after COVID-19-related demand normalizes.
- Supply-chain constraints, inflation, product availability, and their effects on gross margin and working capital.
- Ritter contingent consideration, with a maximum potential payout of $336.0 million over three years.
- Foreign-currency exposure, variable-rate debt exposure, and the potential effect of rising interest rates.
- Final purchase-price allocations and any material changes to goodwill, intangible assets, deferred taxes, or acquisition-related liabilities.