Avantor, Inc. — 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 report covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Net sales | $1,856.5 million | $1,834.3 million | $5,717.4 million | $5,478.5 million |
| Gross profit | $650.7 million | $615.9 million | $1,988.3 million | $1,855.2 million |
| Gross margin | 35.0% | 33.6% | 34.8% | 33.9% |
| Operating income | $275.8 million | $237.2 million | $878.4 million | $758.2 million |
| Net income | $167.0 million | $156.8 million | $544.8 million | $478.6 million |
| Diluted EPS | $0.25 | $0.24 | $0.80 | $0.73 |
| Adjusted EBITDA | $384.0 million | $359.2 million | $1,211.2 million | $1,088.9 million |
| Adjusted EBITDA margin | 20.7% | 19.6% | 21.2% | 19.9% |
Q3 net sales increased 1.2%, including 4.5% organic growth, 2.5% growth from acquisitions and a 5.8% unfavorable foreign-currency impact. Nine-month sales increased 4.4%, including 3.9% organic growth, 4.6% acquisition impact and a 4.1% unfavorable currency impact.
Operating cash flow was $258.3 million in Q3 and $638.0 million for the first nine months, compared with $652.6 million in the prior-year nine-month period. Nine-month free cash flow was $538.2 million, down from $606.1 million, primarily because of higher capital expenditures and lower operating cash flow. Capital expenditures were $99.8 million versus $71.1 million.
At September 30, 2022, cash and cash equivalents were $265.6 million and total liquidity was $821.7 million, consisting of cash plus $556.1 million of unused credit availability. Gross debt was $6,253.3 million and reported debt, net of deferred financing costs, was $6,188.1 million. Debt declined from $7,113.2 million gross at December 31, 2021, primarily because of term-loan repayments. Interest expense increased to $196.0 million for the nine months from $156.6 million.
Material changes versus the prior comparable period
- Gross margin expanded 140 basis points in Q3 and 90 basis points year to date, reflecting commercial excellence, favorable proprietary-product mix and acquired higher-margin products.
- Q3 operating income increased $38.6 million and net income increased $10.2 million. Higher operating income was partly offset by higher interest expense, a $2.9 million debt-extinguishment loss and higher quarterly taxes.
- Nine-month net income increased $66.2 million despite higher interest expense and the absence of $13.0 million of other income recognized in 2021 from a disgorgement penalty payment.
- Americas sales increased 7.5% in Q3, Europe declined 11.8% largely because of currency translation, and AMEA increased 20.6%. On an organic basis, all three regions grew.
- Masterflex, Ritter and RIM Bio acquisitions continued to affect reported results. Masterflex contributed $46.5 million of Q3 revenue and $178.7 million for the first nine months.
- In May 2022, all 20.7 million outstanding Series A mandatory convertible preferred shares converted into 62.9 million common shares. No preferred shares remained outstanding at September 30, 2022.
Guidance, outlook, risks and unusual items
The filing does not provide a clear quantitative full-year revenue, earnings or cash-flow guidance figure. Management cited continued demand in biopharma and advanced technologies, pricing and productivity actions, and growth in proprietary products. Results remain exposed to COVID-19-related demand changes, supply-chain constraints, inflation, freight costs, foreign-exchange volatility and softer industrial or education demand in certain markets.
Management reported that its disclosure controls and procedures were effective and that there were no material changes in internal control over financial reporting. The company stated that it had sufficient capital resources for liquidity needs and that its applicable leverage covenant was not triggered at quarter-end.
On October 25, 2022, after quarter-end, the accounts receivable facility was amended and extended to October 27, 2025. Its funding limit increased to $400.0 million, with borrowings priced at SOFR plus a spread based on the company’s first-lien net leverage ratio.
Environmental liabilities included accrued obligations of $2.6 million for remediation in New Jersey and $1.3 million for remediation and monitoring in Poland. The company reported no outstanding litigation expected to result in material losses, while noting that environmental and product-related contingencies involve uncertainty.
Key facts investors should verify
- Reconcile Adjusted EBITDA and free cash flow to GAAP results, including acquisition, integration, purchase-accounting, restructuring and stock-based compensation adjustments.
- Assess debt-service capacity in light of approximately $6.2 billion of reported debt, rising interest expense and variable-rate exposure.
- Monitor the effect of foreign-currency movements, particularly the euro, on reported revenue, earnings and accumulated other comprehensive loss.
- Evaluate whether pricing and productivity actions continue to offset inflation, freight costs and supply-chain constraints.
- Confirm the sustainability of organic growth after COVID-19-related demand effects and acquisition contributions normalize.
- Review the October 2022 accounts receivable facility amendment and associated borrowing-base, covenant and minimum-funding requirements.