Avantor, Inc. annual report, FY2023

Avantor, Inc. 2023 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2023. The filing is an annual Form 10-K, not a standalone fourth-quarter filing; quarterly-specific results are not clearly provided in the supplied text.

Business context

Avantor is a global manufacturer, distributor and service provider serving biopharmaceutical, healthcare, education and government, and advanced technologies and applied materials customers. It operates across the Americas, Europe and AMEA, serves more than 300,000 customer locations in over 180 countries, and generates more than 85% of sales from offerings management considers recurring.

Effective January 1, 2024, Avantor transitioned from geographic reporting segments to two product-based segments: Laboratory Solutions and Bioscience Production.

Key financial metrics

Metric	2023	2022	Change
Net sales	$6,967.2 million	$7,512.4 million	Down 7.3%; organic sales down 7.8%
Gross profit	$2,363.8 million	$2,602.8 million	Down $239.0 million
Gross margin	33.9%	34.6%	Down 70 basis points
Operating income	$696.4 million	$1,130.2 million	Down $433.8 million
Net income	$321.1 million	$686.5 million	Down $365.4 million
Diluted EPS	$0.47	$1.01	Down $0.54
Adjusted EBITDA	$1,309.1 million	$1,570.7 million	Down 16.7%
Adjusted EBITDA margin	18.8%	20.9%	Down 210 basis points
Operating cash flow	$870.0 million	$843.6 million	Up $26.4 million
Free cash flow	$723.6 million	$710.2 million	Up $13.4 million

Sales declined in all three geographic regions, primarily due to customer destocking, normalized demand following the COVID-19 pandemic and weaker demand in semiconductor and electronic-device markets. Excluding COVID-19-related effects, organic sales declined 5.2%.

Americas: Sales of $4,071.6 million, down 8.9% organically. Biopharma and advanced technologies were the principal areas of weakness.
Europe: Sales of $2,420.4 million, down 5.8% organically, partly offset by favorable foreign-currency translation.
AMEA: Sales of $475.2 million, down 8.1% organically. Biopharma grew low single digits, while advanced technologies declined double digits.

Cash, liquidity and debt

Cash and cash equivalents were $262.9 million at December 31, 2023, compared with $372.9 million at year-end 2022. Total cash, cash equivalents and restricted cash were $287.7 million.
Total reported debt was $5,536.6 million net of deferred financing costs, versus $6,287.5 million in 2022. Gross debt was $5,580.0 million, including $221.0 million drawn under the receivables facility.
Available liquidity was $1,336.5 million, comprising $262.9 million of cash and $1,073.6 million of unused credit-facility availability.
The revolving credit facility was increased to $975.0 million and extended to June 29, 2028. The receivables facility had $98.6 million of unused availability at year-end.
Debt principal payments due by year are $259.9 million in 2024, $757.0 million in 2025, $377.0 million in 2026, $738.1 million in 2027, $2,601.1 million in 2028 and $846.9 million thereafter.
Interest expense increased to $284.8 million from $265.8 million, primarily because of higher rates on variable-rate debt. Interest-rate swaps covered $850.0 million of variable-rate borrowings at year-end.
The applicable leverage covenant was not triggered at December 31, 2023, and management stated that historical net leverage remained below the covenant requirement.

Material changes versus the prior period

Revenue, operating income, net income and Adjusted EBITDA declined materially as COVID-19-related sales rolled off, customers destocked inventory and end-market demand weakened.
Gross margin contracted 70 basis points because of unfavorable product mix and inflationary pressures, partly offset by lower distribution costs.
Adjusted EBITDA margin declined 210 basis points because of lower volumes and unfavorable mix.
Avantor recorded $160.8 million of impairment charges in the second quarter related to Ritter: $106.4 million for finite-lived intangible assets and $54.4 million for property, plant and equipment.
Operating expenses excluding impairment charges increased $34.0 million, reflecting inflation, business-growth investments, a long-term retention incentive and other costs, partly offset by lower incentive compensation accruals.
Operating cash flow and free cash flow increased modestly despite lower earnings, aided by improved working-capital movements and lower incentive-compensation payments.
Debt repayments totaled $846.0 million in 2023, including $680.0 million of U.S. dollar term-loan prepayments and $21.5 million of Euro term-loan prepayments.
Goodwill impairment testing at October 1, 2023 resulted in no additional impairment; however, goodwill and other intangible assets represented $9,492.0 million, or 73% of total assets, making valuation assumptions significant.

Outlook, commentary, risks and unusual items

Management expects demand and customer inventory levels to continue normalizing after the pandemic. The company is implementing a new two-segment operating model and a cost-optimization initiative while continuing investments in commercial capabilities, supply-chain capacity and innovation in areas such as cell and gene therapy.

Key operating risks include continued destocking, weak customer demand, supply-chain constraints, inflation, pricing pressure, competition and dependence on sole or limited sources for certain materials.
Avantor remains exposed to variable interest rates, foreign-currency movements and substantial leverage. A 100-basis-point increase in applicable variable rates, after hedging, would have increased annual interest expense by approximately $11.4 million at year-end 2023.
A 10% strengthening of the U.S. dollar against all other currencies would have decreased 2023 Adjusted EBITDA by approximately $51.6 million, according to the filing’s sensitivity analysis.
Environmental, product-liability, regulatory, cybersecurity, data-privacy, tax and intellectual-property contingencies could create additional costs. The filing states that no outstanding litigation was expected to result in material losses, but environmental outcomes remain subject to uncertainty.
Mallinckrodt entered Chapter 11 bankruptcy and sought to reject indemnification obligations relating to historical environmental liabilities. Avantor disputes the attempted rejection and is pursuing the obligations of Mallinckrodt and its guarantor.
Recorded environmental liabilities included $2.5 million for the Phillipsburg, New Jersey remediation order and $1.1 million for remediation and monitoring in Gliwice, Poland.
The company does not currently expect to pay dividends on common stock, and debt agreements restrict certain distributions.
No cybersecurity incident during 2023 had a material impact on Avantor’s strategy, financial condition or results of operations, according to management.

Important facts for investors to verify

Reconcile the annual results with the company’s separately reported fourth-quarter results, which are not clearly included in the supplied 10-K text.
Review the maturity schedule and terms of the $5.58 billion of gross debt, including the large 2028 maturities and exposure to variable rates and foreign currency.
Assess whether sales and margins recover as COVID-19 comparisons normalize and customer destocking subsides.
Monitor the Ritter business following the $160.8 million impairment and evaluate the risk of further impairment charges.
Evaluate the assumptions supporting the $9.49 billion carrying value of goodwill and other intangible assets.
Review cash conversion, capital expenditures and working-capital trends, particularly as the company funds debt repayment and growth-related investments.
Track the new Laboratory Solutions and Bioscience Production segment reporting beginning in 2024.
Review the Mallinckrodt indemnification dispute, environmental obligations and any related developments in bankruptcy or regulatory proceedings.
Confirm the effect of foreign-currency movements, interest-rate hedges and the concentration of cash held by non-U.S. subsidiaries.