Avantor, Inc. 2023 Q2 Form 10-Q Summary
Business context and reporting period
Avantor is a global manufacturer and distributor serving the biopharmaceutical, healthcare, education and government, and advanced technologies and applied materials industries. The filing covers the three and six months ended June 30, 2023. Results are presented for the Americas, Europe, and Asia, Middle-East and Africa (AMEA) segments.
Key financial metrics
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net sales | $1,743.9 million | $1,910.5 million | $3,524.2 million | $3,860.9 million |
| Gross profit | $590.0 million | $647.7 million | $1,214.8 million | $1,337.6 million |
| Gross margin | 33.8% | 33.9% | 34.5% | 34.6% |
| Operating income | $71.7 million | $295.6 million | $302.9 million | $602.6 million |
| Net income attributable to common stockholders | $(7.3) million | $179.3 million | $114.2 million | $353.6 million |
| Adjusted EBITDA | $343.0 million | $404.1 million | $689.2 million | $827.2 million |
| Adjusted EBITDA margin | 19.7% | 21.2% | 19.6% | 21.4% |
| Operating cash flow | $168.2 million | Not clearly provided in the filing text | $387.7 million | $379.7 million |
| Free cash flow | Not provided | Not provided | $329.6 million | $318.9 million |
Q2 diluted loss per share was $(0.01), compared with diluted earnings per share of $0.28 in the prior-year quarter. Six-month diluted earnings per share were $0.17, compared with $0.55 in the prior-year period.
At June 30, 2023, cash and cash equivalents were $236.4 million, compared with $372.9 million at December 31, 2022. Total liquidity, including unused credit availability, was $1,240.3 million. Gross debt was $5,936.2 million and debt, net of unamortized financing costs, was $5,884.3 million, compared with $6,349.1 million and $6,287.5 million, respectively, at year-end 2022.
Debt reduction included $170.0 million of prepayments on the U.S. dollar term loan B-5 during the quarter. Interest expense increased to $73.4 million in Q2 from $63.9 million, primarily because of higher interest rates on variable-rate debt.
Material changes versus the prior comparable period
- Q2 net sales declined 8.7% to $1,743.9 million; organic sales declined 9.1%, including a 6.5% decline excluding COVID-19-related products.
- Six-month net sales declined 8.7% to $3,524.2 million; organic sales declined 7.8%, including a 4.1% decline excluding COVID-19-related products.
- Sales declined in all three geographic segments. Q2 declines were 11.3% in the Americas, 2.7% in Europe, and 14.4% in AMEA on a reported basis.
- Lower sales volumes, customer destocking, reduced research activity, the roll-off of COVID-19 demand, and weakness in semiconductor and electronic-device markets reduced profitability.
- Adjusted EBITDA declined 15.1% in Q2 and 16.7% for the six-month period. Adjusted EBITDA margin contracted 150 basis points in Q2 and 180 basis points year to date.
- Operating income included $160.8 million of impairment charges in Q2 related to the Ritter asset group, comprising $106.4 million for finite-lived intangible assets and $54.4 million for property, plant and equipment.
- Six-month operating cash flow increased $8.0 million, while free cash flow increased $10.7 million, primarily because of improved working capital and lower capital spending.
- Financing activities used $471.2 million during the first six months, including $460.3 million of debt repayments, versus $347.7 million used in the prior-year period.
- In June 2023, the revolving credit facility was amended to increase the funding limit to $975.0 million and extend maturity to June 29, 2028.
Outlook, management commentary, risks, and unusual items
Management attributed the quarter’s performance to normalization of customer demand and inventory levels following the COVID-19 pandemic, customer destocking, supply-chain disruptions, inflation, unfavorable product mix, and softness in certain end markets. Pricing and productivity actions are being used to offset inflationary pressures, but management stated that inflation and supply-chain conditions may continue to adversely affect results.
The filing does not provide a clear quantitative full-year earnings or revenue guidance figure. Management stated that it believes available capital resources are sufficient to meet liquidity needs. Required debt payments over the next twelve months were identified as $33.2 million of term-loan payments and $275.9 million of receivables-facility borrowings.
Ritter’s impairment reflected persistently high customer inventory and an overall slowdown in research activity. The impairment test used projected cash flows, margins, expenses, capital expenditures, working capital assumptions, and current discount-rate assumptions, making the valuation sensitive to future operating performance.
Key risks include further customer destocking or adverse spending trends, dependence on suppliers and essential materials, inflation, foreign-currency movements, rising interest rates, substantial indebtedness, access to sufficient cash flow and capital, supply-chain disruption, cybersecurity and information-system risks, regulatory and environmental obligations, product liability, intellectual-property claims, acquisition integration, and potential impairment of goodwill or intangible assets.
Environmental liabilities included a $2.5 million accrued obligation for groundwater remediation in New Jersey and a $1.1 million liability for remediation and monitoring at a site in Poland. Management reported no outstanding litigation expected to result in material losses if decided adversely. The financial covenant tied to revolving-credit usage was not applicable at June 30, 2023 because the applicable borrowing threshold had not been exceeded.
Management concluded that disclosure controls and procedures were effective as of June 30, 2023, and reported no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales and customer inventories stabilize after the COVID-19 demand roll-off and destocking cycle.
- Whether the Ritter business meets the projected cash flows used in the $160.8 million impairment analysis.
- The effect of higher SOFR and EURIBOR rates on interest expense and debt-service capacity.
- Cash generation relative to required debt repayments and the availability of the receivables facility, which depends on eligible accounts receivable.
- Progress in restoring Adjusted EBITDA margins, particularly in the Americas and AMEA segments.
- The company’s ability to maintain pricing and productivity benefits amid inflation and unfavorable product mix.
- Potential tax effects of the $221.9 million of cash held by non-U.S. subsidiaries and any future repatriation.
- Future environmental, product-liability, regulatory, cybersecurity, foreign-currency, and acquisition-related exposures.