Avantor, Inc. 2019 Q3 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, 2019, with comparisons to the corresponding 2018 periods.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Net sales | $1,503.8 million | $1,494.2 million | $4,516.3 million | $4,390.4 million |
| Gross profit | $474.0 million | $478.7 million | $1,440.3 million | $1,387.0 million |
| Gross margin | 31.5% | 32.0% | 31.9% | 31.6% |
| Operating income | $143.2 million | $132.2 million | $399.9 million | $314.2 million |
| Net income (loss) | $22.1 million | $34.5 million | $(32.8) million | $(33.6) million |
| Net income (loss) available to common stockholders | $5.7 million | $(34.4) million | $(389.6) million | $(232.0) million |
| Adjusted EBITDA | $250.8 million | $254.9 million | $767.6 million | $709.6 million |
| Management EBITDA | $269.2 million | $268.2 million | $821.5 million | $743.0 million |
Q3 operating margin was approximately 9.5% and net margin was approximately 1.5%. Nine-month operating margin was approximately 8.9%; the nine-month net margin was negative.
Operating cash flow was $267.0 million for the first nine months, compared with $130.6 million in the prior-year period. Capital expenditures were $39.5 million, producing approximately $227.5 million of operating cash flow after capital expenditures.
At September 30, 2019, cash and cash equivalents were $173.9 million. Total debt was $5,130.1 million net of deferred financing costs, including $5,088.7 million of debt due after the current portion. Available credit-facility capacity was $472.2 million, resulting in reported total liquidity of $646.1 million. The company stated that it was in compliance with all debt covenants and had no defaults.
Material changes versus the prior comparable period
- Q3 sales increased 0.6%; excluding a $26.0 million unfavorable foreign-currency effect, sales increased 2.4% organically. Nine-month sales increased 2.9%, or 5.4% excluding currency.
- Q3 gross margin declined 50 basis points because of unfavorable product mix, manufacturing variances, and vendor-rebate timing. Nine-month gross margin improved 30 basis points, supported by pricing and the absence of certain 2018 VWR purchase-accounting costs.
- Q3 operating income increased $11.0 million as lower SG&A more than offset lower gross profit. Nine-month operating income increased $85.7 million.
- Q3 net income declined $12.4 million primarily because the prior-year period included a $48.8 million tax benefit related to 2017 U.S. tax reform. Lower interest expense partly offset the effect.
- Nine-month results included a $70.2 million loss on extinguishment of debt, substantially related to the write-off of deferred financing costs.
- Adjusted EBITDA declined 1.6% in Q3 but increased 8.2% for the first nine months. Management EBITDA increased 0.4% in Q3 and 10.6% for the first nine months.
Guidance, outlook, commentary, risks and unusual items
The filing does not provide a clear full-year financial guidance range. Management highlighted continued benefits from pricing, productivity, VWR integration synergies, and a global restructuring program, which is expected to deliver all planned synergies and cost savings by 2021. Management also described investments in sales and marketing, AMEA supply-chain facilities, research and development, and public-company infrastructure.
The May 2019 IPO generated $4,235.6 million of net proceeds. The company used the proceeds and operating cash flow to redeem all Series A preferred stock for $2,630.9 million and repay $1,721.7 million of U.S. dollar and euro term loans. The IPO also resulted in conversion of the junior convertible preferred stock into 194.5 million common shares and issuance of 20.7 million mandatory convertible preferred shares. The MCPS carries a 6.250% annual dividend and automatically converts on May 15, 2022, subject to its terms.
- Principal risks include substantial indebtedness, variable interest rates, foreign-currency exposure, reliance on key customers and suppliers, raw-material availability, acquisitions and integration, regulatory and environmental compliance, product liability, cybersecurity, and impairment of goodwill or intangible assets.
- The company completed an intercompany recapitalization intended to substantially mitigate net euro financing exposure, but remains exposed to other currencies.
- The 2017 restructuring program had incurred $114.9 million of charges through September 30, 2019, with estimated remaining charges of $20.1 million.
- The EPA proposed $1.5 million of civil penalties relating to alleged reporting violations at Phillipsburg, New Jersey and other facilities. The ultimate amount remains uncertain.
- Environmental liabilities include a $3.8 million accrued obligation for Phillipsburg groundwater remediation and a $3.6 million liability for remediation and monitoring at a site in Gliwice, Poland.
- Management concluded that disclosure controls were effective and reported no material changes to internal control over financial reporting during the quarter.
Investor verification checklist
- Verify the sustainability of organic sales growth after adjusting for foreign exchange, particularly in biopharma, healthcare, education and government, and advanced technologies.
- Track gross-margin recovery and whether pricing, restructuring savings, and productivity offset mix and manufacturing pressures.
- Reconcile Adjusted EBITDA and Management EBITDA to GAAP earnings and assess the recurring nature of excluded items.
- Monitor debt paydown, refinancing needs, variable-rate exposure, MCPS dividends and the May 2022 mandatory conversion.
- Evaluate working-capital requirements, foreign cash balances, tax impacts of repatriation, and the adequacy of the $646.1 million reported liquidity.
- Follow the EPA matter, environmental remediation obligations, restructuring execution, and any changes to disclosed litigation or contingencies.