Avantor, Inc. 2019 Form 10-K Summary
Business context and reporting period
Avantor is a global manufacturer, distributor and service provider serving biopharmaceutical, healthcare, education and government, and advanced technologies and applied materials customers. Its offerings include materials and consumables, equipment and instrumentation, and services and specialty procurement. The filing covers the fiscal year ended December 31, 2019; fourth-quarter information is presented as unaudited quarterly data.
Approximately 85% of 2019 net sales were recurring in nature. The company reported through three geographic segments: Americas, Europe and AMEA. Avantor completed its initial public offering in May 2019 and used the proceeds to restructure equity and reduce debt.
Financial performance and key metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net sales | $6,040.3 million | $5,864.3 million | +$176.0 million; +3.0% |
| Organic net sales growth | 5.1% | Not clearly provided | Excludes acquisitions and currency |
| Gross profit | $1,920.7 million | $1,819.8 million | +$100.9 million |
| Gross margin | 31.8% | 31.0% | +80 basis points |
| Operating income | $551.8 million | $413.5 million | +$138.3 million |
| Net income (loss) | $37.8 million | $(86.9) million | Improved by $124.7 million |
| Adjusted EBITDA | $1,031.2 million | $945.3 million | +$85.9 million; +9.1% |
| Adjusted EBITDA margin | 17.1% | 16.1% | +100 basis points |
| Operating cash flow | $354.0 million | $200.5 million | +$153.5 million |
| Capital expenditures | $51.6 million | $37.7 million | +$13.9 million |
| Interest expense | $440.0 million | $523.8 million | $(83.8) million |
Fourth-quarter 2019 net sales were $1,524.0 million, gross profit was $480.4 million and net income was $70.6 million, compared with fourth-quarter 2018 net sales of $1,473.9 million, gross profit of $432.8 million and a net loss of $53.3 million.
At December 31, 2019, cash and cash equivalents were $186.7 million. Total debt was $5,249.4 million gross, or $5,116.5 million net of deferred financing costs. Unused credit-facility availability was $416.7 million, producing reported total liquidity of $603.4 million including cash. The company stated that it was in compliance with all debt covenants.
Material changes versus the prior comparable period
- Net sales growth was driven by volume and pricing, particularly in biopharma. Reported growth was reduced by a $123.3 million unfavorable foreign-currency impact.
- Americas sales increased 3.6%, Europe sales increased 0.3% as reported but grew 5.7% organically, and AMEA sales increased 14.7%.
- Gross margin benefited from pricing, product mix, productivity and the absence of 2018 inventory-related charges, partly offset by unfavorable manufacturing absorption and lower supplier rebates.
- Operating income improved from higher gross profit, lower restructuring charges, productivity gains and cost synergies, partly offset by IPO-related stock compensation, public-company costs and investments in AMEA.
- Interest expense declined following debt repayments and lower interest-rate margins. The company recorded a $73.7 million loss on debt extinguishment related primarily to write-offs of deferred financing costs.
- Operating cash flow increased substantially, although working capital used $134.9 million of cash, including higher accounts receivable and inventory.
- The 2017 restructuring program generated more than $180 million of annualized cost synergies through year-end 2019. Cumulative charges were $118.8 million, with $16.2 million of expected remaining charges.
Guidance, outlook, commentary and risks
Management expected cash generated from operations and available credit capacity to meet current and expected needs, but the filing does not provide formal 2020 revenue or earnings guidance. Management expected restructuring synergies, lower interest expense and AMEA investments to support future performance.
- Principal financial risk is leverage: debt principal and interest obligations totaled $6,998.0 million, excluding other contractual obligations. Approximately $3.0 billion of debt principal was scheduled for repayment in 2024.
- Variable-rate debt creates interest-rate exposure; a 100-basis-point increase in applicable variable rates would have increased annual interest expense by approximately $9.5 million at year-end.
- Foreign-currency exposure is significant: approximately 45% of 2019 net sales originated outside the United States. A 10% strengthening of the U.S. dollar would have reduced Adjusted EBITDA by approximately $38.0 million.
- The company depends on global supply chains, sole or limited sources for certain materials, supplier rebates, manufacturing reliability and regulatory compliance for chemicals, biopharmaceutical products and controlled exports.
- The filing identifies risks from competition, customer spending reductions, acquisitions and integration, cybersecurity, product quality, environmental liabilities, regulatory changes, intellectual property claims and retention of key personnel.
- The filing discusses the potential effects of the coronavirus outbreak beginning in 2020, particularly on AMEA operations, raw-material availability, labor stability and economic activity. Brexit-related trade, tax, currency and regulatory uncertainty was also identified.
- The EPA proposed $1.5 million of civil penalties concerning reporting issues at Phillipsburg, New Jersey, Paris, Kentucky and elemental-mercury export shipments; the final amount was uncertain.
- Goodwill and other intangible assets totaled approximately $7.0 billion, or 72% of total assets. No impairment was recorded in the 2019 annual test, but adverse changes in forecasts or market conditions could create future impairment risk.
- Avantor does not expect to pay common-stock dividends in the foreseeable future. The mandatory convertible preferred stock carries a 6.250% dividend rate and had $8.0 million of accrued dividends in arrears at year-end.
Most important facts for investors to verify
- Reconcile reported net income with Adjusted EBITDA and assess the recurring nature of restructuring, stock compensation, purchase-accounting and debt-extinguishment adjustments.
- Review debt maturities, refinancing requirements, variable-rate exposure and compliance with financial covenants.
- Assess whether organic growth and AMEA expansion offset foreign-currency pressure and weakness in selected healthcare, industrial and equipment markets.
- Monitor working-capital conversion, inventory levels, accounts receivable collections and operating cash flow relative to Adjusted EBITDA.
- Evaluate the sustainability of the restructuring program’s claimed annualized synergies and the remaining implementation costs.
- Review the EPA matter, environmental remediation liabilities, product-liability exposure and other regulatory contingencies.
- Consider dilution and seniority from the 20.7 million mandatory convertible preferred shares, stock options, restricted stock units and potential future common-stock issuance.