Avantor, Inc. — Q3 2023 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, 2023, compared with the respective 2022 periods.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Net sales | $1,720.2 million | $1,856.5 million | Down 7.3%; organic sales down 9.6% |
| Gross profit | $578.6 million | $650.7 million | Down $72.1 million |
| Gross margin | 33.6% | 35.0% | Down 140 bps |
| Operating income | $210.2 million | $275.8 million | Down $65.6 million |
| Net income | $108.4 million | $167.0 million | Down $58.6 million |
| Diluted EPS | $0.16 | $0.25 | Down $0.09 |
| Adjusted EBITDA | $317.8 million | $384.0 million | Down 17.2% |
| Adjusted EBITDA margin | 18.5% | 20.7% | Down 220 bps |
For the nine months ended September 30, 2023, net sales were $5,244.4 million, down 8.3%; operating income was $513.1 million versus $878.4 million; net income was $222.6 million versus $544.8 million; and Adjusted EBITDA was $1,007.0 million versus $1,211.2 million. Nine-month gross margin was 34.2%, down 60 bps, and Adjusted EBITDA margin was 19.2%, down 200 bps.
Third-quarter sales declined in all regions: Americas sales fell 9.3%, Europe fell 2.6% as reported, and AMEA fell 12.3%. The reported European decline benefited from a $41.1 million foreign-currency tailwind. Sales declines reflected weaker customer demand, customer destocking, reduced COVID-19-related revenue, and softness in semiconductor and electronic-device markets.
Nine-month operating cash flow was $618.4 million versus $638.0 million in 2022. Free cash flow was $522.6 million versus $538.2 million. Capital expenditures were $95.8 million. Cash and cash equivalents were $236.9 million at September 30, 2023, while total cash, including restricted cash, was $260.7 million.
Total debt was $5,626.1 million net of deferred financing costs, compared with $6,287.5 million at December 31, 2022. The company had $987.7 million of unused credit-facility availability and reported total liquidity of $1,224.6 million, including cash. Required debt payments during the next 12 months included $32.8 million of term-loan payments and $297.7 million of receivables-facility borrowings.
Material changes versus the prior comparable period
- Revenue and profitability declined primarily because of lower volumes, customer destocking, COVID-19 revenue roll-off, unfavorable product mix, inflationary pressures, and weaker demand in certain end markets.
- Interest expense increased by $5.1 million in the quarter and $23.5 million for the nine months, primarily because of higher rates on variable-rate debt.
- Operating income for the nine months included $160.8 million of impairment charges recorded in the second quarter related to the Ritter asset group: $106.4 million on finite-lived intangible assets and $54.4 million on property, plant and equipment.
- The Ritter impairment reflected sustained revenue declines caused by elevated customer inventory in Ritter’s end markets and a broader slowdown in research activity.
- During the quarter, Avantor prepaid $210.0 million of its U.S. dollar term loan B-5 and recorded a $2.0 million loss on extinguishment of debt. Nine-month debt repayments totaled $657.9 million.
- Working-capital trends improved relative to 2022, including reductions in accounts receivable and inventory; however, accounts payable changes were a use of cash.
- In June 2023, the revolving credit facility was increased to $975.0 million and extended to June 2028. The receivables facility delinquency-ratio cap was also increased from 13.0% to 16.0%.
Outlook, commentary, risks, contingencies, and unusual items
Management did not provide a specific quantitative earnings or revenue guidance figure in the supplied filing text. Management stated that customer demand and inventory levels were continuing to normalize following the COVID-19 pandemic, while supply-chain constraints, inflation, foreign-exchange volatility, and customer destocking continued to affect results.
- Key operating risks include weaker consumer, business, and government spending; dependence on certain suppliers and essential materials; competition; acquisition integration; product quality and liability exposure; cybersecurity; regulatory and environmental compliance; foreign-currency fluctuations; inflation; and employee retention.
- Interest-rate increases remain a risk because the company has significant variable-rate borrowings. Avantor had two interest-rate swaps with total notional value of $850.0 million and estimated that $20.3 million would be reclassified from accumulated other comprehensive income as a reduction to interest expense over the following 12 months.
- At September 30, 2023, the financial covenant tied to revolver usage was not applicable because the company had not drawn more than 35% of the revolving credit facility.
- Environmental liabilities included a $2.4 million accrued obligation for groundwater remediation in New Jersey and a $1.0 million liability for remediation and monitoring in Poland.
- The filing states that no outstanding litigation was expected to result in material losses if decided adversely, and no unasserted matters were believed reasonably possible to result in a material loss.
- Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether customer destocking, COVID-19 revenue normalization, and weaker biopharmaceutical and advanced-technology demand continue to pressure organic sales.
- Whether gross-margin and Adjusted EBITDA-margin contraction stabilizes amid pricing, productivity, inflation, and product-mix pressures.
- The recoverability of the remaining Ritter asset balances and the risk of additional impairment charges.
- Avantor’s ability to generate sufficient cash flow while meeting required debt repayments and managing higher variable-rate interest expense.
- The availability and borrowing-base limitations of the receivables facility, including the concentration of cash held by non-U.S. subsidiaries.
- The assumptions underlying any future management guidance, including foreign-exchange rates, end-market demand, inventory normalization, and COVID-19-related comparisons.