Avantor, Inc. — 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 quarter and six months ended June 30, 2019. The company completed its initial public offering of common stock and mandatory convertible preferred stock on May 17, 2019.
Key financial metrics
| Metric | Three months ended June 30, 2019 | Three months ended June 30, 2018 | Six months ended June 30, 2019 | Six months ended June 30, 2018 |
|---|---|---|---|---|
| Net sales | $1,532.4 million | $1,477.9 million | $3,012.5 million | $2,896.2 million |
| Gross profit | $491.1 million | $468.0 million | $966.3 million | $908.3 million |
| Gross margin | 32.1% | 31.7% | 32.1% | 31.4% |
| Operating income | $119.1 million | $94.4 million | $256.7 million | $182.0 million |
| Net loss | $(48.7) million | $(26.9) million | $(54.9) million | $(68.1) million |
| Net loss available to common stockholders | $(317.3) million | $(93.1) million | $(395.3) million | $(197.6) million |
| Loss per share | $(0.98) | $(0.70) | $(1.73) | $(1.49) |
| Adjusted EBITDA | $268.8 million | $237.8 million | $516.8 million | $454.7 million |
| Management EBITDA | $286.9 million | $250.1 million | $552.3 million | $474.8 million |
Calculated operating margin was approximately 7.8% for the second quarter and 8.5% for the first six months. Calculated net margin was approximately negative 3.2% and negative 1.8%, respectively.
- Operating cash flow was $69.1 million in the first six months, compared with $22.4 million in the prior-year period.
- Capital expenditures were $26.4 million, compared with $23.1 million.
- Cash and cash equivalents were $164.6 million at June 30, 2019, compared with $184.7 million at December 31, 2018.
- Total debt, net of deferred financing costs, was $5.32 billion, versus $6.92 billion at December 31, 2018. Gross debt was $5.47 billion.
- Unused credit-facility availability was $319.1 million, producing reported total liquidity of $483.7 million including cash.
- Accounts receivable and inventory increased to $1.00 billion and $727.7 million, respectively, from $931.2 million and $671.1 million at year-end.
Material changes versus the prior comparable period
- Second-quarter sales increased 3.7%; reported growth included a 2.4% unfavorable foreign-currency impact, with the balance reflecting volume growth and improved pricing. Six-month sales increased 4.0%.
- Second-quarter gross margin expanded 40 basis points to 32.1%; six-month gross margin expanded 70 basis points. Management attributed improvement to pricing relative to materials inflation, restructuring benefits, and the absence of certain prior-year purchase-accounting effects, partly offset by product mix.
- Second-quarter operating income increased $24.7 million, while six-month operating income increased $74.7 million. SG&A was broadly flat for the quarter and declined for the six-month period.
- Second-quarter net loss worsened primarily because of a $70.2 million loss on debt extinguishment related to term-loan repayments and write-offs of deferred financing costs. Six-month net loss improved by $13.2 million despite that charge.
- IPO proceeds totaled $4.24 billion after offering costs, including $3.23 billion from common stock and $1.00 billion from mandatory convertible preferred stock. The proceeds funded redemption of $2.63 billion of Series A preferred stock and repayment of approximately $1.71 billion of term loans.
- All junior convertible preferred stock converted into 194.5 million common shares. The Series A preferred stock was eliminated, and the company recorded $1.00 billion of mandatory convertible preferred stock.
- Interest expense declined by $15.1 million in the quarter and $14.8 million for the six months. June 2019 credit-facility amendments reduced annual interest-rate margins by 0.50 percentage points on euro term loans and 0.75 percentage points on U.S. dollar term loans.
- Share-based compensation increased materially, including $26.9 million recognized upon satisfaction of an IPO-related performance condition and $14.7 million related to remeasurement of NuSil appreciation rights.
- The company adopted the new lease standard on January 1, 2019, recognizing $155.0 million of operating lease assets and $162.5 million of operating lease liabilities, with a $3.1 million cumulative reduction to accumulated deficit.
Guidance, outlook, commentary, risks, and unusual items
- The filing does not provide a clear formal revenue, earnings, or cash-flow guidance range. Management stated that it expects debt reduction, lower interest rates, and elimination of Series A preferred-stock yield accumulation to benefit future net income.
- Management expects restructuring and cost-saving initiatives to be fully realized by 2021. The 2017 restructuring program has incurred $101.6 million of charges through June 30, 2019, with $23.4 million of expected remaining charges.
- Management reported growth across major regions, led by the Americas and AMEA, with biopharmaceutical demand a key driver. Currency translation remained a significant headwind, particularly in Europe.
- Working-capital changes used $171.6 million of operating cash during the first six months, primarily from increases in accounts receivable and inventory.
- At June 30, 2019, the company was in compliance with debt covenants and reported no default. A 100-basis-point increase in applicable variable interest rates would have increased annual interest expense by approximately $11.7 million.
- Most cash was held outside the United States; $131.5 million of cash and cash equivalents was held by foreign subsidiaries and may be subject to taxes upon repatriation.
- Key risks include substantial indebtedness, dependence on operating cash flow and credit availability, interest-rate and currency exposure, integration and restructuring execution, supply and raw-material availability, customer and distributor relationships, regulatory and environmental compliance, product liability, information systems, intellectual property, and impairment of goodwill or intangible assets.
- Environmental contingencies include a $3.7 million accrued obligation for groundwater remediation in New Jersey and a $3.6 million liability for remediation and monitoring at a Poland site. The filing states that no outstanding litigation was believed likely to result in material losses.
- A July 2019 intercompany recapitalization was intended to substantially mitigate future exposure to net foreign-currency-denominated debt and intercompany loans.
Facts investors should verify
- Reconcile the substantial reduction in debt with the IPO proceeds, preferred-stock redemption, term-loan repayments, and resulting interest savings.
- Assess recurring operating performance separately from the $70.2 million debt-extinguishment loss, IPO-triggered compensation, restructuring costs, foreign-currency gains, and other non-GAAP adjustments.
- Monitor working-capital requirements, particularly the growth in receivables and inventory relative to operating cash flow.
- Review the terms, dividend accrual, conversion mechanics, and potential dilution of the 6.250% mandatory convertible preferred stock.
- Evaluate whether reported sales growth and margin expansion persist after currency effects, nonrecurring projects, restructuring benefits, and pricing effects.
- Confirm future restructuring charges, environmental obligations, lease commitments, covenant compliance, and availability under the receivables facility.