Avantor, Inc. 2020 Form 10-K Summary
Business context and reporting period
Avantor is a global manufacturer, distributor and service provider serving biopharmaceutical, healthcare, education and government, and advanced technologies and applied materials customers. It operates through the Americas, Europe and AMEA segments and offers approximately six million products and services. The filing covers the fiscal year ended December 31, 2020, with comparative results for 2019. Approximately 85% of net sales were recurring in nature.
COVID-19 had a mixed effect: demand increased for biopharma production materials, personal protective equipment, diagnostic testing and vaccine-development solutions, while education, elective healthcare procedures, industrial activity, equipment demand and parts of the supply chain were adversely affected.
Financial performance and liquidity
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net sales | $6,393.6 million | $6,040.3 million | 5.8% |
| Organic net sales growth | 5.6% | Not clearly provided | |
| Gross profit | $2,080.5 million | $1,920.7 million | $159.8 million |
| Gross margin | 32.5% | 31.8% | +70 bps |
| Operating income | $706.8 million | $551.8 million | $155.0 million |
| Net income | $116.6 million | $37.8 million | $78.8 million |
| Adjusted EBITDA | $1,141.6 million | $1,031.2 million | 10.7% |
| Adjusted EBITDA margin | 17.9% | 17.1% | +80 bps |
| Net cash from operating activities | $929.8 million | $354.0 million | $575.8 million |
| Capital expenditures | $61.6 million | $51.6 million | $10.0 million increase |
Reported diluted earnings per share were $0.09, compared with a diluted loss of $0.84 in 2019. Net income available to common stockholders was $52.0 million after $64.6 million of MCPS dividend accumulation. The 2020 results included a $346.8 million loss on extinguishment of debt, substantially offsetting the benefit from lower interest expense.
Cash and cash equivalents were $286.6 million at year-end, while total liquidity was $1,087.4 million, consisting of cash and $800.8 million of unused availability under the receivables and revolving credit facilities. The company reported compliance with its debt covenants. Approximately $201.9 million, or 70% of cash, was held by non-U.S. subsidiaries.
Gross debt was $4,972.2 million, or $4,893.9 million net of deferred financing costs, compared with $5,249.4 million gross debt at December 31, 2019. Contractual obligations included $4,972.2 million of debt principal, $1,235.5 million of interest, $152.9 million of operating leases and $397.6 million of purchase obligations.
Material changes versus the prior comparable period
- Net sales increased 5.8%, including favorable foreign-currency impact of $16.5 million; organic growth was 5.6%.
- Americas sales increased 4.1%, Europe sales increased 8.8% and AMEA sales increased 6.2% on a reported basis.
- Biopharma sales grew strongly across regions. Education and government sales declined in areas affected by academic closures, while advanced technologies and applied materials were pressured by industrial softness.
- Gross margin improved primarily from favorable mix and higher proprietary-product sales.
- Operating expenses increased modestly because of inflation, public-company compliance costs and employee incentives, partly offset by COVID-related cost controls and lower restructuring charges.
- Interest expense declined to $307.6 million from $440.0 million following debt repricing, refinancing and debt reduction.
- The company refinanced high-cost debt, replacing 9% unsecured notes with 3.875% euro notes and 4.625% dollar notes, and replacing 4.75% euro and 6% dollar secured notes with lower-cost secured notes and a new term loan.
- Operating cash flow increased sharply, primarily because of higher operating income, lower working-capital use, and reduced cash interest and tax payments.
- The global restructuring program concluded in 2020. Cumulative charges were $129.8 million, and management reported more than $220 million of annualized cost synergies through year-end.
Guidance, outlook, risks and unusual items
The filing does not provide specific 2021 revenue, earnings or margin guidance. Management expects restructuring-related synergies to benefit 2021 and later periods and intends to pursue commercial excellence, operational efficiency, innovation, geographic expansion, digital-channel growth and selective acquisitions.
- COVID-19 could continue to cause unpredictable changes in demand, supply-chain disruptions, shipping delays, product-allocation requirements and operational restrictions.
- Substantial indebtedness creates refinancing, covenant, variable-interest-rate and liquidity risks. A 100-basis-point increase in applicable variable rates would have increased annual interest expense by approximately $18.8 million at year-end 2020.
- Foreign-currency exposure is significant. A 10% strengthening of the U.S. dollar against all other currencies would have reduced 2020 net income by approximately $4.7 million and Adjusted EBITDA by approximately $45.0 million.
- Goodwill and other intangible assets totaled $6,909.0 million, or 70% of total assets. No impairment was recorded in 2020, but impairment remains sensitive to sales growth, profitability, discount rates and valuation multiples.
- Environmental, product-liability, regulatory, cybersecurity, intellectual-property, supply-chain and customer-concentration risks could adversely affect results.
- An EPA matter involving reporting obligations at Phillipsburg, New Jersey, and other facilities was expected to settle for less than $1.0 million. The company also recorded environmental liabilities of $3.8 million for Phillipsburg groundwater remediation and $3.4 million for remediation and monitoring in Gliwice, Poland.
- The company had no current plans to pay dividends on common stock. MCPS carries a 6.250% cumulative dividend and automatically converts on May 15, 2022, subject to its terms.
- The fourth quarter of 2020 included a $120.4 million debt-extinguishment loss. Fourth-quarter net income was $51.6 million, with net income available to common stockholders of $35.4 million.
Deloitte & Touche LLP issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of December 31, 2020.
Most important facts for investors to verify
- Reconcile Adjusted EBITDA and organic sales growth to GAAP results and assess the sustainability of COVID-related demand and reported margin expansion.
- Review the maturity schedule, interest-rate terms, covenant requirements and refinancing needs for approximately $5.0 billion of gross debt.
- Evaluate whether reported cost synergies exceeding $220 million are recurring and whether restructuring benefits offset higher corporate and compliance costs.
- Assess goodwill and intangible-asset concentration, including the sensitivity of impairment testing to forecasts and discount rates.
- Monitor cash held outside the United States, repatriation taxes, working-capital requirements and availability under credit facilities.
- Review MCPS dividend obligations, conversion terms and potential dilution at the May 2022 mandatory conversion.
- Track the continuing financial and operational effects of COVID-19, supply-chain constraints, regulatory requirements and environmental contingencies.