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 three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
Operations were materially influenced by the COVID-19 pandemic, including increased demand for personal protective equipment, diagnostic-testing products and vaccine-development solutions, while education, elective-procedure and certain industrial markets remained weaker.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Change |
|---|---|---|---|
| Net sales | $1,605.0 million | $1,503.8 million | +$101.2 million, or 6.7% |
| Gross profit | $506.4 million | $474.0 million | +$32.4 million |
| Gross margin | 31.6% | 31.5% | +10 basis points |
| Operating income | $177.2 million | $143.2 million | +$34.0 million |
| Net income (loss) | $(42.2) million | $22.1 million | $(64.3) million |
| Adjusted EBITDA | $285.6 million | $250.8 million | +$34.8 million, or 13.9% |
| Adjusted EBITDA margin | 17.8% | 16.7% | +110 basis points |
| Loss per diluted share | $(0.10) | $0.01 | Declined |
For the nine months ended September 30, 2020, net sales were $4,602.7 million versus $4,516.3 million in 2019; gross margin was 32.6% versus 31.9%; operating income was $502.2 million versus $399.9 million; net income was $65.0 million versus a $32.8 million loss; and Adjusted EBITDA was $821.7 million versus $767.6 million. Diluted earnings per share were $0.03 versus a $1.13 loss per share.
Q3 sales growth included 5.4% organic growth and a favorable $20.7 million foreign-currency impact. Proprietary materials and consumables increased to $562.2 million from $494.2 million, while equipment and instrumentation declined to $217.4 million from $221.1 million.
Cash flow, debt and liquidity
- Cash provided by operating activities was $281.5 million in Q3 and $623.8 million for the first nine months, compared with $267.0 million for the first nine months of 2019.
- Capital expenditures were $41.4 million for the first nine months, compared with $39.5 million in 2019.
- Cash and cash equivalents were $370.5 million at September 30, 2020, compared with $186.7 million at December 31, 2019.
- Total debt was $5,070.9 million net of deferred financing costs, compared with $5,116.5 million at year-end 2019. Gross debt was $5,155.5 million.
- Unused credit-facility availability was $801.1 million, consisting of $287.7 million under the receivables facility and $513.4 million under the revolving credit facility. Total reported liquidity was $1,171.6 million, including cash.
- Management stated that no debt repayments were due within the following 12 months other than required term-loan prepayments of $10.8 million. The company was in compliance with its debt covenants.
Material changes versus the prior comparable period
- Revenue growth accelerated in Q3, led by biopharma and healthcare demand, COVID-19-related products and strong proprietary-materials sales. Europe grew 12.2%, the Americas 3.5% and AMEA 9.3% on a reported basis.
- Gross and Adjusted EBITDA margins expanded due to commercial excellence, favorable product mix, productivity improvements, cost containment and restructuring benefits. These benefits were partly offset by inventory valuation adjustments.
- Interest expense declined to $65.2 million in Q3 from $98.3 million, and to $251.8 million for the nine-month period from $342.0 million, reflecting refinancing and lower debt balances.
- Net loss in Q3 was driven primarily by a $226.4 million loss on extinguishment of debt. The charge related mainly to refinancing the 9% senior unsecured notes, including premiums and the write-off of deferred financing costs.
- In July 2020, Avantor issued $1.55 billion of 4.625% senior unsecured notes and €400.0 million of 3.875% senior unsecured notes due 2028, using the proceeds and cash on hand to redeem the $2.0 billion of 9% notes due 2025.
- The revolving credit facility was refinanced in July and increased by $265.0 million to $515.0 million of available funding.
- Q3 income tax benefit included a $31.5 million release of previously recorded uncertain-tax-position reserves, primarily following completion of the IRS examination of amended 2016 tax returns.
Guidance, outlook, commentary and risks
The filing does not provide a specific quantitative full-year revenue or earnings guidance range. Management reported continued strong Q3 results but stated that COVID-19 effects remain uncertain and could materially affect future operations, cash flows and financial condition.
Management expects ongoing benefits from biopharma demand, COVID-19 testing and vaccine-related activity, proprietary products, productivity programs and cost containment. Offsetting pressures include weaker education and elective-procedure demand, industrial-market softness, potential supply-chain and logistics disruption, raw-material availability, customer order reductions and foreign-exchange volatility.
- COVID-19 may disrupt manufacturing, distribution, suppliers, employees and customer demand; unpredictable demand increases could exceed production capacity.
- High indebtedness may limit financial flexibility and increase exposure to interest-rate changes, refinancing requirements and cash-flow shortfalls.
- Environmental obligations remain subject to uncertainty. Accrued liabilities included $3.9 million for groundwater remediation near Phillipsburg, New Jersey, and $3.5 million for remediation and monitoring at the Gliwice, Poland site.
- The company expects to settle EPA reporting matters involving certain facilities and mercury shipments for less than $1 million.
- Known litigation was not expected to result in material losses at September 30, 2020, although product liability, patent, environmental and regulatory claims remain possible.
- The company expects at least a $20.3 million cash tax benefit for fiscal 2020 from CARES Act business-interest provisions.
Important facts for investors to verify
- Whether COVID-19-related demand for PPE, testing and vaccine-development products persists or normalizes, and whether weaker education, elective healthcare and industrial demand improves.
- The sustainability of the 17.8% Q3 Adjusted EBITDA margin and the contribution from restructuring, cost containment, product mix and inventory adjustments.
- The company’s ability to generate sufficient operating cash flow while carrying approximately $5.1 billion of debt.
- Future interest expense and refinancing risk following the 2020 debt restructuring, including exposure to LIBOR- and EURIBOR-based borrowings.
- The impact of the $226.4 million debt-extinguishment charge and the $31.5 million tax-reserve release when assessing recurring earnings.
- Environmental remediation costs, indemnification recoveries from Mallinckrodt, EPA settlement obligations and other contingencies.
- Foreign-currency movements, particularly in Europe and other non-U.S. operations, and the effect of the euro-denominated debt hedge on accumulated other comprehensive income.