Avantor, Inc. 2020 Q2 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 six months ended June 30, 2020, with comparisons to the corresponding 2019 periods. Results were materially affected by the COVID-19 pandemic, which produced divergent effects across regions and end markets.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net sales | $1,478.7 million, down 3.5% | $2,997.7 million, down 0.5% |
| Gross profit | $490.6 million | $992.5 million |
| Gross margin | 33.2%, up 110 basis points | 33.1%, up 100 basis points |
| Operating income | $166.6 million | $325.0 million |
| Net income | $60.2 million | $107.2 million |
| Net income available to common stockholders | $44.0 million | $74.9 million |
| Diluted EPS | $0.08 | $0.13 |
| Adjusted EBITDA | $273.3 million | $536.1 million |
| Adjusted EBITDA margin | 18.5%, up 100 basis points | 17.9%, up 70 basis points |
| Cash flow from operations | $89.2 million in Q2 | $342.3 million |
At June 30, 2020, cash and cash equivalents were $415.3 million, total liquidity was $951.4 million, and unused credit-facility availability was $536.1 million. Gross debt was $5,198.2 million and debt net of deferred financing costs was $5,078.1 million. Required debt repayments during the next twelve months were stated to be $10.7 million of term-loan prepayments, with no other material scheduled repayments identified.
Material changes versus the prior comparable period
- Second-quarter sales declined $53.7 million, primarily from a 2.0% organic decline and a $22.8 million unfavorable foreign-currency effect. Six-month organic sales increased 1.0% despite second-quarter COVID-19 disruption.
- Operating income increased $47.5 million in the quarter and $68.3 million year to date. The improvement reflected lower SG&A, the non-recurrence of $42.7 million of prior-year stock-based compensation, cost controls, and higher gross margins.
- Net income improved from a 2019 loss of $48.7 million to income of $60.2 million in Q2. The comparison benefited from lower interest expense and the absence of the prior-year $70.2 million loss on debt extinguishment.
- Adjusted EBITDA increased 1.7% in Q2 and 3.7% year to date. Corporate Adjusted EBITDA declined because of higher public-company costs, stock-based compensation, and miscellaneous provisions.
- Americas sales declined 7.3% in Q2, while Europe increased 0.5% and AMEA increased 13.5%. Proprietary materials and consumables sales increased, while third-party materials, services and specialty procurement, and equipment and instrumentation declined.
- Operating cash flow increased by $273.2 million year to date, primarily because of higher operating income, lower interest and tax payments, and more favorable working-capital movements.
Guidance, outlook, risks and unusual items
The filing does not provide a clear quantitative earnings or revenue outlook. Management stated that COVID-19 had a mixed regional impact and that its future effects on operations, demand, supply chains, cash flow and financial condition remained uncertain. Favorable product mix, commercial execution, restructuring benefits, productivity improvements, and discretionary cost containment supported margins.
- COVID-19 reduced demand in elective procedures, clinical diagnostics, education, academic research, industrial markets, and capital equipment, while increasing demand for certain biopharmaceutical products, personal protective equipment, testing-related chemicals and consumables.
- Potential COVID-19 effects include manufacturing and distribution interruptions, logistics constraints, raw-material shortages, customer defaults or lower orders, government-mandated product allocation, regulatory actions, and reduced capacity to pursue acquisitions or growth initiatives.
- In July 2020, after the reporting date, Avantor issued $1.55 billion of 4.625% senior unsecured notes and €400 million of 3.875% senior unsecured notes due July 2028, using proceeds and cash to redeem its $2.0 billion of 9% unsecured notes due 2025.
- Also in July, the company amended its revolving credit facility, increasing availability by $265 million to $515 million and extending maturity to July 2025.
- The company was in compliance with debt covenants at June 30, 2020. Environmental obligations included a $4.0 million accrued Phillipsburg, New Jersey remediation liability and a $3.4 million Poland remediation and monitoring liability.
- The company reported no outstanding litigation expected to result in material losses. A regulatory matter involving EPA reporting obligations was expected to settle for less than $1 million.
- The company completed a May 2020 secondary offering of 51.75 million shares sold by existing stockholders at $16.25 per share; Avantor issued no shares and received no proceeds.
Important facts for investors to verify
- Whether COVID-19-related demand weakness, supply-chain disruption, and regional market declines persist or intensify.
- The sustainability of margin expansion and Adjusted EBITDA growth after temporary cost controls and the non-recurrence of prior-year stock compensation.
- Post-quarter debt refinancing results, including the effect of replacing 9% notes with lower-coupon notes and the company’s continuing leverage.
- Cash conversion, inventory growth, accounts-receivable allowances, and the extent to which operating cash flow remains elevated.
- Future conversion or dilution associated with the 20.7 million shares of mandatory convertible preferred stock and excluded common-stock equivalents.
- Potential environmental, regulatory, product-liability, supply-chain, foreign-currency, and customer-concentration exposures.
- The filing states that disclosure controls were effective and that no material changes to internal control over financial reporting occurred during the quarter.