Avantor, Inc. — 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 Form 10-Q covers the quarter and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Avantor completed the acquisitions of RIM Bio on June 1, 2021 and Ritter GmbH on June 10, 2021. Management stated that these acquisitions did not materially affect reported operating results for the quarter or six-month period.
Key financial metrics
| Metric | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 |
|---|---|---|---|---|
| Net sales | $1,858.6 million | $1,478.7 million | $3,644.2 million | $2,997.7 million |
| Gross profit | $626.5 million | $490.6 million | $1,239.3 million | $992.5 million |
| Gross margin | 33.7% | 33.2% | 34.0% | 33.1% |
| Operating income | $254.7 million | $166.6 million | $521.0 million | $325.0 million |
| Net income | $157.8 million | $60.2 million | $321.8 million | $107.2 million |
| Net income available to common stockholders | $141.6 million | $44.0 million | $289.5 million | $74.9 million |
| Diluted EPS | $0.24 | $0.08 | $0.49 | $0.13 |
| Adjusted EBITDA | $366.6 million | $273.3 million | $729.7 million | $536.1 million |
| Adjusted EBITDA margin | 19.7% | 18.5% | 20.0% | 17.9% |
Six-month net cash provided by operating activities was $390.7 million, compared with $342.3 million in the prior-year period. Free cash flow, as defined by the company, was $376.8 million versus $316.2 million. Capital expenditures were $38.5 million.
Cash paid for acquisitions was $1,166.7 million, primarily relating to Ritter GmbH and RIM Bio. Financing activities provided $777.8 million, including $1,134.6 million of new debt borrowings, partially offset by $316.1 million of debt repayments, financing costs, and preferred-stock dividends. Cash and cash equivalents were $223.0 million at June 30, 2021, while total cash, including restricted cash, was $249.3 million.
Total debt was $5,651.0 million, net of deferred financing costs, compared with $4,893.9 million at December 31, 2020. Gross debt was $5,733.3 million. Available credit-facility capacity was $804.6 million, producing reported total liquidity of $1,027.6 million including cash. Required debt repayments due within the next twelve months, excluding required term-loan payments, were $33.6 million.
Material changes versus the prior comparable period
- Second-quarter net sales increased 25.7% to $1,858.6 million, including 20.5% organic growth and a 5.2% favorable foreign-currency impact. Six-month sales increased 21.6%, including 17.0% organic growth.
- Growth reflected recovery in core markets as economies reopened after COVID-19 lockdowns, continued COVID-19-related sales of PPE and products supporting diagnostic testing and vaccine production, and increased demand across biopharmaceutical, healthcare, education and government, and advanced technologies markets.
- Gross margin expanded 50 basis points in the quarter and 90 basis points for the six months, primarily from commercial excellence and favorable mix, including stronger proprietary-product sales.
- Operating income increased $88.1 million in the quarter and $196.0 million for the six months. Net income increased $97.6 million and $214.6 million, respectively.
- Lower interest expense, resulting from debt repricing, refinancing, and lower debt in portions of the comparison period, materially benefited earnings. This was partly offset by higher taxes and $8.4 million of six-month losses on debt extinguishment.
- Operating expenses increased partly because of $21.6 million of second-quarter and $24.6 million of six-month acquisition-related costs and higher incentive compensation.
- Debt increased substantially to fund the Ritter acquisition. The company issued $1,134.6 million of term loans and recorded preliminary goodwill of $685.2 million and other acquired intangible assets of $476.5 million.
- Working-capital investment increased, with accounts receivable rising to $1,268.8 million and inventory to $840.9 million at June 30, 2021, from $1,113.3 million and $739.6 million, respectively, at year-end 2020.
Guidance, outlook, commentary, risks, and unusual items
The filing does not provide a clear numerical outlook or formal full-year guidance. Management described continued recovery in the core business, strong demand in biopharmaceutical and healthcare markets, and ongoing benefits from proprietary offerings, commercial excellence, productivity, and cost containment. The company cautioned that interim results are not necessarily indicative of full-year results.
- COVID-19 continued to affect regional results and remains a potential source of material disruption to operations, demand, supply chains, cash flows, and financial condition.
- Other stated risks include competition, dependence on sole or limited suppliers, raw-material availability, foreign exchange, interest-rate increases, acquisition integration and valuation, regulatory and environmental compliance, product liability, intellectual property claims, cybersecurity, employee retention, and goodwill or intangible-asset impairment.
- The Ritter acquisition included contingent consideration with a preliminary fair value of $35.6 million and a maximum potential payout of $336.0 million over three years. The purchase-price allocation remained preliminary and could change materially.
- Other income included a $13.0 million receipt related to disgorgement of disallowed trading profits from Goldman Sachs, formerly a related party.
- The company recorded $3.2 million of second-quarter and $8.4 million of six-month losses on extinguishment of debt from optional debt prepayments.
- Known environmental liabilities included $3.5 million for groundwater remediation near Phillipsburg, New Jersey, and $3.3 million for remediation and monitoring in Gliwice, Poland. The company reported no outstanding litigation expected to result in material losses.
- An EPA-related reporting matter involving certain facilities and mercury exports was expected by management to settle for less than $1 million.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2021, with no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether strong organic growth and COVID-19-related demand persist as markets normalize and pandemic-driven demand moderates.
- The final purchase-price allocation, operating contribution, integration progress, and contingent payments associated with Ritter GmbH and RIM Bio.
- Debt reduction plans, variable-rate exposure, refinancing requirements, and compliance with applicable leverage covenants.
- The sustainability of gross-margin and Adjusted EBITDA-margin expansion after acquisition, incentive-compensation, and supply-chain effects.
- Working-capital trends, particularly the growth in accounts receivable and inventory relative to sales.
- Potential environmental, regulatory, product-liability, tax, and other contingent exposures not fully resolved at June 30, 2021.
- The company’s use of non-GAAP measures, including organic sales growth, Adjusted EBITDA, and free cash flow, and reconciliation of those measures to GAAP results.