Avantor, Inc. quarterly report, Q2 FY2022

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Avantor, Inc. — Q2 2022 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 six months ended June 30, 2022, compared with the corresponding 2021 periods.

Key financial metrics

  • Second-quarter net sales: $1,910.5 million, up 2.8% year over year; organic growth was 2.3%, including a $80.8 million unfavorable foreign-currency impact and a $90.5 million contribution from acquisitions.
  • Six-month net sales: $3,860.9 million, up 5.9%; organic growth was 3.7%.
  • Second-quarter gross profit and margin: $647.7 million and 33.9%, compared with 33.7% in the prior-year quarter.
  • Six-month gross margin: 34.6%, up from 34.0%.
  • Second-quarter operating income: $295.6 million, up from $254.7 million; operating margin was approximately 15.5% versus 13.7%.
  • Second-quarter net income: $187.4 million, compared with $157.8 million. Net income available to common stockholders was $179.3 million, or $0.28 diluted earnings per share.
  • Six-month net income: $377.8 million, compared with $321.8 million; diluted earnings per share was $0.55 versus $0.49.
  • Adjusted EBITDA: $404.1 million in the second quarter and $827.2 million for the first six months, up 10.2% and 13.4%, respectively. Adjusted EBITDA margins were 21.2% and 21.4%, compared with 19.7% and 20.0%.
  • Operating cash flow: $379.7 million for the first six months, down from $390.7 million. Free cash flow was $318.9 million, down from $376.8 million, primarily because of higher capital expenditures.
  • Capital expenditures: $60.8 million for the first six months, compared with $38.5 million.
  • Cash and liquidity: Cash and cash equivalents were $237.5 million at June 30, 2022. Unused credit-facility availability was $591.1 million, for total stated liquidity of $828.6 million.
  • Debt: Gross debt was $6,611.5 million and debt net of deferred financing costs was $6,539.1 million. Debt declined from $7,113.2 million gross at December 31, 2021.

Material changes versus the prior comparable period

  • Revenue growth reflected biopharma and advanced technologies demand, proprietary materials growth, and the 2021 acquisitions of Masterflex, Ritter GmbH, and RIM Bio. Growth was partially offset by foreign-currency translation and COVID-19-related headwinds.
  • Americas second-quarter sales increased 8.1%, while Europe declined 6.3% and AMEA increased 5.9%. Europe’s reported decline was substantially affected by a $71.3 million unfavorable currency impact.
  • Proprietary materials and consumables sales increased to $741.3 million in the quarter from $630.8 million. Third-party materials and consumables declined to $688.0 million from $739.4 million.
  • Gross-margin expansion was driven by commercial excellence, favorable product mix, and acquired businesses, partly offset by Masterflex purchase-accounting adjustments and higher freight costs.
  • Interest expense increased to $63.9 million from $51.0 million in the quarter and to $128.7 million from $102.5 million year to date, reflecting acquisition-related debt.
  • The effective tax rate decreased to 17.2% from 26.6% in the quarter and to 19.3% from 24.5% year to date, primarily due to prior-year European tax-rate changes and stock-based-compensation tax deductions.
  • All outstanding 6.250% Series A Mandatory Convertible Preferred Stock automatically converted in May 2022 into 62.9 million common shares. No preferred shares remained outstanding at June 30, 2022.
  • During the quarter, Avantor fully repaid its U.S. dollar term loan B-4 and Euro term loan B-3 and prepaid $150.0 million of its U.S. dollar term loan B-5. These actions generated a $6.1 million debt-extinguishment loss.
  • Foreign-currency translation reduced other comprehensive income by $98.0 million year to date, contributing to accumulated other comprehensive loss of $148.3 million at June 30, 2022.

Outlook, management commentary, risks, and unusual items

  • Management stated that pricing and productivity actions are intended to offset inflationary pressures, but supply-chain disruptions, raw-material availability, freight costs, and inflation may continue to adversely affect results.
  • COVID-19-related demand declined in several healthcare, education, government, and biopharma categories. China lockdowns and supply constraints affected AMEA performance.
  • Management believes existing capital resources are sufficient for liquidity needs. The company reported no debt repayments due within the next 12 months other than $30.5 million of required term-loan payments and $210.0 million of receivables-facility borrowings.
  • The financial covenant tied to revolver utilization was not applicable at June 30, 2022 because the relevant borrowing threshold had not been exceeded.
  • At June 30, 2022, 88.8% of cash and cash equivalents was held by non-U.S. subsidiaries and may be subject to taxes upon repatriation.
  • Adjusted EBITDA included $13.8 million of purchase-accounting adjustments, $3.3 million of integration costs, and $0.5 million of restructuring and severance charges in the second quarter. These non-GAAP adjustments should be considered when assessing underlying profitability.
  • Second-quarter 2021 included $13.0 million of other income related to a disgorgement payment from Goldman Sachs; no comparable amount was recorded in 2022.
  • Environmental liabilities included $2.9 million for a New Jersey groundwater remediation obligation and $2.1 million for remediation and monitoring in Poland. Management reported no outstanding litigation expected to result in material losses, although environmental and product-related contingencies remain subject to uncertainty.
  • Principal risks include acquisition integration, leverage and interest-rate exposure, foreign-currency volatility, COVID-19 and economic disruption, supply-chain constraints, inflation, regulatory and environmental matters, product liability, cybersecurity, and impairment of goodwill or intangible assets.

Most important facts for investors to verify

  • Verify that reported sales growth and margin expansion are sustainable after separating acquisition effects, currency movements, COVID-19-related demand, pricing, and purchase-accounting adjustments.
  • Monitor leverage, floating-rate debt exposure, required debt repayments, receivables-facility availability, and the potential effect of higher interest rates.
  • Assess whether operating cash flow and free cash flow can support capital spending, debt reduction, integration costs, and other liquidity requirements.
  • Review the final purchase accounting for Masterflex, including acquired intangible assets, goodwill, inventory adjustments, and related amortization.
  • Evaluate the effect of foreign-currency movements, particularly the euro, on reported revenue, earnings, accumulated other comprehensive income, and debt.
  • Track the resolution and potential cost of environmental obligations, product claims, regulatory matters, and other contingencies.