Avantor, Inc. — 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 markets. This unaudited Form 10-Q covers the three months ended March 31, 2020, compared with the three months ended March 31, 2019, and includes the early effects of the COVID-19 pandemic.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net sales | $1,519.0 million | $1,480.1 million | +2.6% |
| Gross profit | $501.9 million | $475.2 million | +$26.7 million |
| Gross margin | 33.0% | 32.1% | +90 bps |
| Operating income | $158.4 million | $137.6 million | +$20.8 million |
| Net income (loss) | $47.0 million | $(6.2) million | +$53.2 million |
| Net income (loss) available to common stockholders | $30.9 million | $(78.0) million | +$108.9 million |
| Diluted EPS | $0.05 | $(0.59) | +$0.64 |
| Adjusted EBITDA | $262.8 million | $248.0 million | +5.9% |
| Adjusted EBITDA margin | 17.3% | 16.8% | +50 bps |
| Cash provided by operating activities | $253.1 million | $75.0 million | +$178.1 million |
Organic net sales growth was 4.1%, including approximately equal contributions from volume and pricing, but reported growth was reduced by a $21.0 million unfavorable foreign-currency impact. Americas sales increased 4.9%, Europe sales increased 0.3%, and AMEA sales declined 5.9%.
As of March 31, 2020, cash and cash equivalents were $346.3 million, total debt net of deferred financing costs was $5.05 billion, and total unused credit availability was $535.5 million. Total liquidity, including cash, was $881.8 million. Required debt repayments during the next 12 months were limited to $14.3 million of term-loan repayments, according to management.
Capital expenditures were $12.6 million. Net cash used in financing activities was $73.1 million, including $63.8 million of debt repayments and $16.1 million of preferred-stock dividends. The company ended the quarter with $348.9 million of cash, cash equivalents and restricted cash.
Material changes versus the prior comparable period
- Net sales increased $38.9 million, while gross margin expanded 90 basis points, driven by favorable pricing relative to cost inflation and product mix, including higher sales of personal protective equipment and proprietary materials.
- Operating income increased $20.8 million. Higher gross profit more than offset increased operating expenses, including higher stock-based compensation and public-company compliance costs.
- Interest expense declined by $34.1 million to $94.5 million, primarily due to prior debt reductions, application of initial-public-offering proceeds and lower interest rates following term-loan repricing.
- Net income improved to $47.0 million from a $6.2 million loss. The prior-period result also reflected a substantially higher preferred-stock yield accumulation.
- Operating cash flow increased $178.1 million, reflecting higher operating income, lower interest and tax payments, and more favorable working-capital movements.
- Adjusted EBITDA increased in the Americas and Europe but declined in AMEA by $5.1 million because of lower sales and unfavorable working-capital adjustments. Corporate Adjusted EBITDA also declined because of higher stock compensation and compliance costs.
- The company entered into a new receivables facility maturing March 27, 2023, replacing the prior facility, and amended its senior secured credit facilities to reduce annual term-loan interest-rate margins by 0.75 percentage points.
- Foreign-currency translation produced a $68.8 million unrealized loss in other comprehensive income, contributing to a $67.4 million quarterly other comprehensive loss.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a clear quantitative full-year earnings or sales guidance range. Management stated that first-quarter results remained strong despite COVID-19, but the pandemic had mixed regional and end-market effects and its future impact remained uncertain.
- COVID-19 supported demand for personal protective equipment, chemicals and certain biopharmaceutical and healthcare products, while reducing equipment and instrumentation demand, disrupting logistics, and causing academic and school closures.
- AMEA was particularly affected by India-related shutdowns and logistics constraints. Management warned that future impacts could be material to operations, supply chains, customer demand, cash flows and financial condition.
- Potential pandemic risks include manufacturing or distribution interruptions, raw-material shortages, border and travel restrictions, customer credit deterioration, government-directed product allocation, excess demand beyond production capacity, and loss or reduction of customer orders.
- Adjusted EBITDA includes $1.2 million of restructuring and severance charges, $3.6 million of VWR transaction, integration and planning expenses, and other adjustments. These non-GAAP results should not be viewed as substitutes for GAAP measures.
- The company was in compliance with its debt covenants at March 31, 2020. Approximately 46.3% of cash was held by non-U.S. subsidiaries and may be subject to taxes upon repatriation.
- Environmental liabilities included accrued obligations of $4.1 million for Phillipsburg, New Jersey, and $3.3 million for remediation and monitoring at the Gliwice, Poland site. The company expects to settle certain EPA reporting matters for less than $1 million.
- Management stated that no outstanding litigation was expected to result in material losses, although environmental and other contingencies remain subject to uncertainty.
- The company adopted the current expected credit-loss standard on January 1, 2020, recording a $1.6 million cumulative reduction to accumulated deficit.
Investor verification priorities
- Verify the duration and financial consequences of COVID-19, including demand for protective equipment versus declines in equipment, education and certain international markets.
- Assess leverage, refinancing exposure, interest-rate sensitivity and the availability requirements associated with the receivables and revolving facilities.
- Reconcile Adjusted EBITDA and organic sales growth to GAAP results and evaluate the sustainability of margin gains from mix, pricing and restructuring actions.
- Monitor cash conversion, accounts receivable growth, inventory levels and the extent to which operating cash flow benefited from timing-related working-capital movements.
- Review foreign-exchange exposure, the substantial translation loss, and the portion of cash held outside the United States.
- Track environmental remediation obligations, EPA matters, indemnification recoveries and any subsequent litigation or regulatory developments.
- Confirm that management’s disclosure controls remained effective and review subsequent filings for changes to liquidity, covenants or pandemic-related assumptions.