Avantor, Inc. — Q1 2023 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 report covers the three months ended March 31, 2023, compared with the same period in 2022.
Financial performance and condition
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $1,780.3 million | $1,950.4 million | Down 8.7% |
| Gross profit | $624.8 million | $689.9 million | Down $65.1 million |
| Gross margin | 35.1% | 35.4% | Down 30 bps |
| Operating income | $231.2 million | $307.0 million | Down $75.8 million |
| Net income | $121.5 million | $190.4 million | Down $68.9 million |
| Diluted EPS | $0.18 | $0.28 | Down $0.10 |
| Adjusted EBITDA | $346.2 million | $423.1 million | Down 18.2% |
| Adjusted EBITDA margin | 19.4% | 21.7% | Down 230 bps |
| Cash flow from operations | $219.5 million | $152.2 million | Up $67.3 million |
| Free cash flow | $191.5 million | $127.7 million | Up $63.8 million |
Interest expense increased to $73.7 million from $64.8 million, primarily because of higher interest rates on variable-rate term loans. The effective tax rate was 22.0%, compared with 21.3% in the prior-year quarter.
Cash and cash equivalents were $294.6 million at March 31, 2023, compared with $372.9 million at December 31, 2022. Total liquidity, including unused credit-facility availability, was $861.4 million. Total debt, net of deferred financing costs, was $6,061.2 million, compared with $6,287.5 million at year-end 2022. Gross debt was $6,117.7 million.
Operating cash flow benefited from improved working capital and lower incentive compensation payments. Investing cash outflow was $27.3 million, including $28.0 million of capital expenditures. Financing cash outflow was $275.0 million, driven primarily by $269.5 million of debt repayments.
Material changes versus the prior comparable period
- Reported sales declined 8.7%; organic sales declined 6.6% after a $41.9 million unfavorable foreign-currency impact. Organic sales declined 1.8% excluding COVID-19-related products in both periods.
- Sales declined in all regions: Americas decreased 9.7%, Europe decreased 7.4%, and AMEA decreased 6.7% on a reported basis.
- Sales declines primarily reflected the roll-off of COVID-19-related demand, customer inventory destocking, weaker demand in semiconductor and electronic-device markets, and foreign-currency pressure.
- Gross margin contracted 30 basis points because of unfavorable product mix and manufacturing variances, partly offset by lower freight costs and commercial-excellence initiatives.
- Operating expenses increased by $10.7 million, reflecting inflation, workforce and growth investments, and a long-term retention incentive, partly offset by lower amortization expense.
- Adjusted EBITDA declined $76.9 million. Americas and Europe declined, while AMEA increased $4.2 million; corporate costs increased.
- The company prepaid $220.0 million of its U.S. dollar term loan B-5 and recorded a $2.3 million loss on debt extinguishment for related deferred financing costs.
- Unlike Q1 2022, the company made no preferred-stock dividend payment because the mandatory convertible preferred-stock dividends concluded in May 2022.
Outlook, commentary, risks and unusual items
Management characterized customer demand and inventory levels as continuing to normalize following the COVID-19 pandemic. The filing does not provide a clear quantitative earnings, sales, or cash-flow guidance range.
- Supply-chain constraints, inflation, customer destocking, foreign-exchange movements, and changing demand remain important operating risks.
- Higher interest rates could increase borrowing costs; the company executed a $100.0 million interest-rate swap in April 2023 to convert SOFR-based floating-rate interest to fixed-rate interest. The company already had a $750.0 million interest-rate swap outstanding at March 31, 2023.
- Ritter’s revenues declined in 2022 after reduced demand for medical fluid-handling tips tied to lower COVID-19 testing. Failure to replace that revenue could require impairment of Ritter long-lived assets; the carrying value of those assets, excluding goodwill, was $248.9 million at March 31, 2023.
- Environmental liabilities included $2.6 million for groundwater remediation in Phillipsburg, New Jersey, and $1.0 million for remediation and monitoring in Gliwice, Poland.
- The company reported no litigation that it believed would result in material losses if decided adversely and stated that there were no material changes to previously disclosed risk factors.
- The financial covenant tied to revolver usage was not applicable at quarter-end because the relevant borrowing threshold had not been exceeded.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2023, with no material changes in internal control over financial reporting.
Important facts for investors to verify
- Whether COVID-19-related revenue normalization and customer destocking continue to pressure organic sales, particularly in biopharma, healthcare, and advanced technologies.
- Progress toward restoring Adjusted EBITDA margin after the 230-basis-point year-over-year decline.
- Exposure to variable interest rates, refinancing requirements, and the company’s ability to reduce its substantial debt balance.
- Whether operating cash flow remains strong as earnings decline and whether capital spending supports sustainable growth.
- Potential impairment risk related to Ritter’s long-lived assets.
- Availability of the receivables facility, which depends partly on eligible accounts receivable, and the concentration of cash held by non-U.S. subsidiaries.
- The effect of foreign-currency movements, inflation, supply-chain conditions, and semiconductor-market weakness on future results.