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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
━━━━━━━━━
FORM 10-Q
━━━━━━━━━
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2023
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 001-38912
Avantor, Inc.
(Exact name of registrant as specified in its charter)
| | | | | |
Delaware | 82-2758923 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
Radnor Corporate Center, Building One, Suite 200
100 Matsonford Road
Radnor, Pennsylvania 19087
(Address of principal executive offices) (zip code)
(610) 386-1700
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | | | | | | | |
Title of each class | | Trading Symbol | | Exchange on which registered |
Common stock, $0.01 par value | | AVTR | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. ☒ Large Accelerated Filer ☐ Accelerated Filer ☐ Non-accelerated Filer ☐ Smaller reporting company ☐ Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
On October 23, 2023, 676,386,215 shares of common stock, $0.01 par value per share, were outstanding.
Avantor, Inc. and subsidiaries
Form 10-Q for the quarterly period ended September 30, 2023
Glossary | | | | | |
| Description |
we, us, our | Avantor, Inc. and its subsidiaries |
| |
Adjusted EBITDA | our earnings or loss before interest, taxes, depreciation, amortization and certain other adjustments |
AMEA | Asia, Middle-East and Africa |
Annual Report | our annual report on Form 10-K for the year ended December 31, 2022 |
AOCI | accumulated other comprehensive income or loss |
| |
COVID-19 | Coronavirus disease of 2019 |
double-digit | greater than 10% |
EURIBOR | the basic rate of interest used in lending between banks on the European Union interbank market |
GAAP | United States generally accepted accounting principles |
| |
high single-digit | 7 - 9% |
LIBOR | the basic rate of interest used in lending between banks on the London interbank market |
long-term | period other than short-term |
low single-digit | 1 - 3% |
M&A | Mergers and Acquisitions |
MCPS | 6.250% Series A Mandatory Convertible Preferred Stock |
mid single-digit | 4 - 6% |
OCI | other comprehensive income or loss |
| |
Ritter | Ritter GmbH and affiliates, a company we acquired in June 2021 |
RSU | restricted stock unit |
SEC | the United States Securities and Exchange Commission |
SG&A expenses | selling, general and administrative expenses |
SOFR | secured overnight financing rate |
Specialty procurement | product sales related to customer procurement services |
VWR | VWR Corporation and its subsidiaries, a company we acquired in November 2017 |
Cautionary factors regarding forward-looking statements
This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, and are subject to the safe harbor created thereby under the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact included in this report are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. These statements may be preceded by, followed by or include the words “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “likely,” “outlook,” “plan,” “potential,” “projection,” “prospects,” “continue,” “goal,” “objective,” “opportunity,” “near-term,” “long-term,” “assumption,” “project,” “guidance,” “target,” “trend,” “seek,” “can,” “could,” “may,” “should,” “would,” “will,” the negatives thereof and other words and terms of similar meaning.
Forward-looking statements are inherently subject to risks, uncertainties and assumptions; they are not guarantees of performance. You should not place undue reliance on these statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure you that the assumptions and expectations will prove to be correct.
You should understand that the following important factors, in addition to those discussed under Part I, Item 1A “Risk Factors” in our Annual Report, as such risk factors may be updated from time to time in our periodic filings with the SEC and in this report, could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:
•disruptions to our operations;
•competition from other industry providers;
•our ability to implement our growth strategy;
•our ability to anticipate and respond to changing industry trends;
•adverse trends in consumer, business, and government spending;
•our dependence on sole or limited sources for some essential materials and components;
•our ability to successfully value and integrate acquired businesses;
•our products’ satisfaction of applicable quality criteria, specifications and performance standards;
•our ability to maintain our relationships with key customers;
•our ability to maintain consistent purchase volumes under purchase orders;
•our ability to maintain and develop relationships with drug manufacturers and contract manufacturing organizations;
•the impact of new laws, regulations, or other industry standards;
•changes in the interest rate environment that increase interest on our borrowings;
•adverse impacts from currency exchange rates or currency controls imposed by any government in major areas where we operate or otherwise;
•our ability to implement and improve processing systems and prevent a compromise of our information systems;
•our ability to protect our intellectual property and avoid third-party infringement claims;
•exposure to product liability and other claims in the ordinary course of business;
•our ability to develop new products responsive to the markets we serve;
•the availability of raw materials;
•our ability to source certain of our products from certain suppliers;
•our ability to contain costs in an inflationary environment;
•our ability to avoid negative outcomes related to the use of chemicals;
•our ability to maintain highly skilled employees;
•our ability to maintain a competitive workforce;
•adverse impact of impairment charges on our goodwill and other intangible assets;
•fluctuations and uncertainties related to doing business outside the United States;
•our ability to obtain and maintain required regulatory clearances or approvals may constrain the commercialization of submitted products;
•our ability to comply with environmental, health and safety laws and regulations, or the impact of any liability or obligation imposed under such laws or regulations;
•our indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt or contractual obligations;
•our ability to generate sufficient cash flows or access sufficient additional capital to meet our debt obligations or to fund our other liquidity needs; and
•our ability to maintain an adequate system of internal control over financial reporting.
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. In addition, all forward-looking statements speak only as of the date of this report. We undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise other than as required under the federal securities laws.
PART I — FINANCIAL INFORMATION
Item 1. Financial statements
Avantor, Inc. and subsidiaries
Index to unaudited condensed consolidated financial statements
Avantor, Inc. and subsidiaries
Unaudited condensed consolidated balance sheets | | | | | | | | | | | |
(in millions) | September 30, 2023 | | December 31, 2022 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 236.9 | | | $ | 372.9 | |
Accounts receivable, net of allowances of $33.5 and $28.2 | 1,150.3 | | | 1,218.4 | |
Inventory | 850.3 | | | 913.5 | |
Other current assets | 147.3 | | | 153.1 | |
Total current assets | 2,384.8 | | | 2,657.9 | |
Property, plant and equipment, net of accumulated depreciation of $579.7 and $518.4 | 698.3 | | | 727.0 | |
Other intangible assets, net (see note 6) | 3,788.1 | | | 4,133.3 | |
Goodwill | 5,637.7 | | | 5,652.6 | |
Other assets | 289.2 | | | 293.5 | |
Total assets | $ | 12,798.1 | | | $ | 13,464.3 | |
Liabilities and stockholders’ equity | | | |
Current liabilities: | | | |
Current portion of debt | $ | 335.6 | | | $ | 364.2 | |
Accounts payable | 655.8 | | | 758.2 | |
Employee-related liabilities | 120.0 | | | 122.4 | |
Accrued interest | 39.6 | | | 49.9 | |
Other current liabilities | 337.1 | | | 364.1 | |
Total current liabilities | 1,488.1 | | | 1,658.8 | |
Debt, net of current portion | 5,290.5 | | | 5,923.3 | |
Deferred income tax liabilities | 648.8 | | | 731.4 | |
Other liabilities | 271.3 | | | 295.4 | |
Total liabilities | 7,698.7 | | | 8,608.9 | |
Commitments and contingencies (see note 7) | | | |
Stockholders’ equity: | | | |
| | | |
Common stock including paid-in capital, 676.3 and 674.3 shares issued and outstanding | 3,817.5 | | | 3,785.3 | |
Accumulated earnings | 1,393.0 | | | 1,170.4 | |
Accumulated other comprehensive loss | (111.1) | | | (100.3) | |
Total stockholders’ equity | 5,099.4 | | | 4,855.4 | |
Total liabilities and stockholders’ equity | $ | 12,798.1 | | | $ | 13,464.3 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
2
Avantor, Inc. and subsidiaries
Unaudited condensed consolidated statements of operations | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except per share data) | Three months ended September 30, | | Nine months ended September 30, |
2023 | | 2022 | | 2023 | | 2022 |
Net sales | $ | 1,720.2 | | | $ | 1,856.5 | | | $ | 5,244.4 | | | $ | 5,717.4 | |
Cost of sales | 1,141.6 | | | 1,205.8 | | | 3,451.0 | | | 3,729.1 | |
Gross profit | 578.6 | | | 650.7 | | | 1,793.4 | | | 1,988.3 | |
Selling, general and administrative expenses | 368.4 | | | 374.9 | | | 1,119.5 | | | 1,109.9 | |
Impairment charges | — | | | — | | | 160.8 | | | — | |
Operating income | 210.2 | | | 275.8 | | | 513.1 | | | 878.4 | |
Interest expense | (72.4) | | | (67.3) | | | (219.5) | | | (196.0) | |
Loss on extinguishment of debt | (2.0) | | | (2.9) | | | (5.9) | | | (10.8) | |
Other income, net | 0.7 | | | 2.7 | | | 3.3 | | | 4.8 | |
Income before income taxes | 136.5 | | | 208.3 | | | 291.0 | | | 676.4 | |
Income tax expense | (28.1) | | | (41.3) | | | (68.4) | | | (131.6) | |
Net income | 108.4 | | | 167.0 | | | 222.6 | | | 544.8 | |
Accumulation of yield on preferred stock | — | | | — | | | — | | | (24.2) | |
Net income available to common stockholders | $ | 108.4 | | | $ | 167.0 | | | $ | 222.6 | | | $ | 520.6 | |
| | | | | | | |
Earnings per share: | | | | | | | |
Basic | $ | 0.16 | | | $ | 0.25 | | | $ | 0.33 | | | $ | 0.81 | |
Diluted | $ | 0.16 | | | $ | 0.25 | | | $ | 0.33 | | | $ | 0.80 | |
Weighted average shares outstanding: | | | | | | | |
Basic | 676.0 | | | 674.1 | | | 675.4 | | | 643.0 | |
Diluted | 678.5 | | | 679.3 | | | 678.1 | | | 680.4 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
3
Avantor, Inc. and subsidiaries
Unaudited condensed consolidated statements of comprehensive income or loss | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Three months ended September 30, | | Nine months ended September 30, |
2023 | | 2022 | | 2023 | | 2022 |
Net income | $ | 108.4 | | | $ | 167.0 | | | $ | 222.6 | | | $ | 544.8 | |
Other comprehensive loss: | | | | | | | |
Foreign currency translation — unrealized loss | (30.4) | | | (62.1) | | | (4.8) | | | (160.1) | |
Derivative instruments: | | | | | | |
|
Unrealized gain | 8.0 | | | 20.7 | | | 24.7 | | | 27.7 | |
Reclassification of (gain) loss into earnings | (8.4) | | | 0.2 | | | (22.5) | | | (1.1) | |
Activity related to defined benefit plans | (0.9) | | | (0.1) | | | (6.6) | | | 4.4 | |
Other comprehensive loss before income taxes | (31.7) | | | (41.3) | | | (9.2) | | | (129.1) | |
Income tax effect | (7.5) | | | (22.2) | | | (1.6) | | | (39.5) | |
Other comprehensive loss | (39.2) | | | (63.5) | | | (10.8) | | | (168.6) | |
Comprehensive income | $ | 69.2 | | | $ | 103.5 | | | $ | 211.8 | | | $ | 376.2 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
4
Avantor, Inc. and subsidiaries
Unaudited condensed consolidated statements of stockholders’ equity | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | | | | | Stockholders’ equity |
| | Common stock including paid-in capital | | Accumulated earnings | | AOCI | | Total |
| | | | Shares | | Amount |
Balance at June 30, 2023 | | | | | 675.7 | | | $ | 3,798.6 | | | $ | 1,284.6 | | | $ | (71.9) | | | $ | 5,011.3 | |
Comprehensive income (loss) | | | | | — | | | — | | | 108.4 | | | (39.2) | | | 69.2 | |
Stock-based compensation expense | | | | | — | | | 9.7 | | | — | | | — | | | 9.7 | |
| | | | | | | | | | | | | |
Stock option exercises and other common stock transactions | | | | | 0.6 | | | 9.2 | | | — | | | — | | | 9.2 | |
| | | | | | | | | | | | | |
Balance at September 30, 2023 | | | | | 676.3 | | | $ | 3,817.5 | | | $ | 1,393.0 | | | $ | (111.1) | | | $ | 5,099.4 | |
| | | | | | | | | | | | | |
Balance at June 30, 2022 | | | | | 673.9 | | | $ | 3,756.1 | | | $ | 861.7 | | | $ | (148.3) | | | $ | 4,469.5 | |
Comprehensive income (loss) | | | | | — | | | — | | | 167.0 | | | (63.5) | | | 103.5 | |
| | | | | | | | | | | | | |
Stock-based compensation expense | | | | | — | | | 13.7 | | | — | | | — | | | 13.7 | |
| | | | | | | | | | | | | |
Stock option exercises and other common stock transactions | | | | | 0.3 | | | 4.7 | | | — | | | — | | | 4.7 | |
| | | | | | | | | | | | | |
Balance at September 30, 2022 | | | | | 674.2 | | | $ | 3,774.5 | | | $ | 1,028.7 | | | $ | (211.8) | | | $ | 4,591.4 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
5
Avantor, Inc. and subsidiaries
Unaudited condensed consolidated statements of stockholders’ equity (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Stockholders’ equity |
MCPS including paid-in capital | | Common stock including paid-in capital | | Accumulated earnings (deficit) | | AOCI | | Total |
Shares | | Amount | | Shares | | Amount |
Balance at December 31, 2022 | — | | | $ | — | | | 674.3 | | | $ | 3,785.3 | | | $ | 1,170.4 | | | $ | (100.3) | | | $ | 4,855.4 | |
Comprehensive income (loss) | — | | | — | | | — | | | — | | | 222.6 | | | (10.8) | | | 211.8 | |
Stock-based compensation expense | — | | | — | | | — | | | 31.6 | | | — | | | — | | | 31.6 | |
| | | | | | | | | | | | | |
Stock option exercises and other common stock transactions | — | | | — | | | 2.0 | | | 0.6 | | | — | | | — | | | 0.6 | |
| | | | | | | | | | | | | |
Balance at September 30, 2023 | — | | | $ | — | | | 676.3 | | | $ | 3,817.5 | | | $ | 1,393.0 | | | $ | (111.1) | | | $ | 5,099.4 | |
| | | | | | | | | | | | | |
Balance at December 31, 2021 | 20.7 | | | $ | 1,003.7 | | | 609.7 | | | $ | 2,752.6 | | | $ | 483.9 | | | $ | (43.2) | | | $ | 4,197.0 | |
| | | | | | | | | | | | | |
Comprehensive income (loss) | — | | | — | | | — | | | — | | | 544.8 | | | (168.6) | | | 376.2 | |
| | | | | | | | | | | | | |
Stock-based compensation expense | — | | | — | | | — | | | 39.1 | | | — | | | — | | | 39.1 | |
Accumulation of yield on preferred stock | — | | | — | | | — | | | (24.2) | | | — | | | — | | | (24.2) | |
Stock option exercises and other common stock transactions | — | | | — | | | 1.6 | | | 3.3 | | | — | | | — | | | 3.3 | |
Conversion of MCPS into Common stock | (20.7) | | | (1,003.7) | | | 62.9 | | | 1,003.7 | | | — | | | — | | | — | |
Balance at September 30, 2022 | — | | | $ | — | | | 674.2 | | | $ | 3,774.5 | | | $ | 1,028.7 | | | $ | (211.8) | | | $ | 4,591.4 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
6
Avantor, Inc. and subsidiaries
Unaudited condensed consolidated statements of cash flows | | | | | | | | | | | |
(in millions) | Nine months ended September 30, |
2023 | | 2022 |
Cash flows from operating activities: | | | |
Net income | $ | 222.6 | | | $ | 544.8 | |
Reconciling adjustments: | | | |
Depreciation and amortization | 301.7 | | | 304.8 | |
Impairment charges | 160.8 | | | — | |
Stock-based compensation expense | 31.7 | | | 35.8 | |
Provision for accounts receivable and inventory | 62.5 | | | 43.9 | |
Deferred income tax benefit | (94.1) | | | (61.8) | |
Amortization of deferred financing costs | 9.9 | | | 12.1 | |
Loss on extinguishment of debt | 5.9 | | | 10.8 | |
Foreign currency remeasurement (gain) loss | (3.1) | | | 4.9 | |
Changes in assets and liabilities: | | | |
Accounts receivable | 55.1 | | | (99.0) | |
Inventory | 9.1 | | | (114.1) | |
Accounts payable | (95.8) | | | 65.1 | |
Accrued interest | (10.3) | | | (11.2) | |
Other assets and liabilities | (38.5) | | | (98.0) | |
Other, net | 0.9 | | | (0.1) | |
Net cash provided by operating activities | 618.4 | | | 638.0 | |
Cash flows from investing activities: | | | |
Capital expenditures | (95.8) | | | (99.8) | |
Cash paid for acquisitions, net of cash acquired | — | | | (20.2) | |
Cash proceeds from settlement of cross currency swap | — | | | 42.5 | |
Other | 2.1 | | | 1.0 | |
Net cash used in investing activities | (93.7) | | | (76.5) | |
Cash flows from financing activities: | | | |
Debt borrowings | — | | | 245.0 | |
Debt repayments | (657.9) | | | (783.0) | |
Payments of debt refinancing fees and premiums | (2.3) | | | — | |
| | | |
Payments of dividends on preferred stock | — | | | (32.4) | |
Proceeds received from exercise of stock options | 14.1 | | | 16.4 | |
Shares repurchased to satisfy employee tax obligations for vested stock-based awards | (13.5) | | | (13.1) | |
Net cash used in financing activities | (659.6) | | | (567.1) | |
Effect of currency rate changes on cash | (1.3) | | | (33.7) | |
Net change in cash, cash equivalents and restricted cash | (136.2) | | | (39.3) | |
Cash, cash equivalents and restricted cash, beginning of period | 396.9 | | | 327.1 | |
Cash, cash equivalents and restricted cash, end of period | $ | 260.7 | | | $ | 287.8 | |
See accompanying notes to the unaudited condensed consolidated financial statements.
7
Avantor, Inc. and subsidiaries
Notes to unaudited condensed consolidated financial statements
1. Nature of operations and presentation of financial statements
We are a global manufacturer and distributor that provides products and services to customers in the biopharmaceutical, healthcare, education & government and advanced technologies & applied materials industries.
Basis of presentation
The accompanying condensed consolidated financial statements have been prepared pursuant to SEC regulations whereby certain information normally included in GAAP financial statements has been condensed or omitted. The financial information presented herein reflects all adjustments (consisting only of normal, recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results for interim periods are not necessarily indicative of the results to be expected for the full year.
We believe that the disclosures included herein are adequate to make the information presented not misleading in any material respect when read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report. Those audited consolidated financial statements include a summary of our significant accounting policies.
Principles of consolidation
All intercompany balances and transactions have been eliminated from the financial statements.
Use of estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported throughout the financial statements. Actual results could differ from those estimates.
Asset impairment - Ritter
The Company’s long-lived assets include property, plant and equipment, finite-lived intangible assets and certain other assets. For impairment testing purposes, long-lived assets may be grouped with working capital and other types of assets or liabilities if they generate cash flows on a combined basis. We evaluate long-lived assets or asset groups for impairment whenever events or changes in circumstances indicate a potential inability to recover their carrying amounts. The test to determine if long-lived assets or asset groups are impaired first compares their carrying values to their estimated undiscounted future cash flows. If the carrying values exceed the estimated undiscounted cash flows, an impairment charge is calculated as the amount that the carrying values exceed their fair values.
Persistently high customer inventory in the end markets served by Ritter and an overall slowdown in research activity has caused Ritter’s revenue to decline compared to prior expectations. Due to these sustained declines, in the second quarter of 2023, we performed an impairment test of the Ritter asset group, which resulted in a fair value that was lower than its carrying value. As a result, we recorded impairment charges of $106.4 million on Ritter’s finite-lived intangible assets and $54.4 million on
Ritter’s property, plant & equipment in the unaudited condensed consolidated statements of operations. These charges impact our Europe reportable segment.
Our impairment test was performed as of June 30, 2023 and utilized our latest estimates of Ritter’s projected cash flows, including revenues, gross margin, SG&A expenses, capital expenditures to maintain the acquired assets, and investments in debt free net working capital, as well as current market assumptions for the discount rate.
We did not identify any events or changes in circumstances that would indicate a potential inability to recover the carrying value of the Ritter asset group as of September 30, 2023.
2. Earnings per share
The following table presents the reconciliation of basic and diluted earnings per share for the three and nine months ended September 30, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except per share data) | Three months ended September 30, 2023 | | Nine months ended September 30, 2023 | | |
Earnings (numerator) | | Weighted average shares outstanding (denominator) | | Earnings per share | | Earnings (numerator) | | Weighted average shares outstanding (denominator) | | Earnings per share | | | | | | |
Basic | $ | 108.4 | | | 676.0 | | | $ | 0.16 | | | $ | 222.6 | | | 675.4 | | | $ | 0.33 | | | | | | | |
Dilutive effect of stock-based awards | — | | | 2.5 | | | | | — | | | 2.7 | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Diluted | $ | 108.4 | | | 678.5 | | | $ | 0.16 | | | $ | 222.6 | | | 678.1 | | | $ | 0.33 | | | | | | | |
The following table presents the reconciliation of basic and diluted earnings per share for the three and nine months ended September 30, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions, except per share data) | Three months ended September 30, 2022 | | Nine months ended September 30, 2022 | | |
Earnings (numerator) | | Weighted average shares outstanding (denominator) | | Earnings per share | | Earnings (numerator) | | Weighted average shares outstanding (denominator) | | Earnings per share | | | | | | |
Basic | $ | 167.0 | | | 674.1 | | | $ | 0.25 | | | $ | 520.6 | | | 643.0 | | | $ | 0.81 | | | | | | | |
Dilutive effect of stock-based awards | — | | | 5.2 | | | | | — | | | 6.8 | | | | | | | | | |
Dilutive impact of MCPS | — | | | — | | | | | $ | 24.2 | | | 30.6 | | | | | | | | | |
Diluted | $ | 167.0 | | | $ | 679.3 | | | $ | 0.25 | | | $ | 544.8 | | | 680.4 | | | $ | 0.80 | | | | | | | |
3. Segment financial information
We report three geographic segments based on customer location: Americas, Europe and AMEA. Each segment manufactures and distributes solutions for the biopharmaceutical, healthcare, education & government and advanced technologies & applied materials industries. Corporate costs are managed on a standalone basis and not allocated to segments.
The following table presents information by reportable segment: | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Three months ended September 30, | | Nine months ended September 30, |
2023 | | 2022 | | 2023 | | 2022 |
Net sales: | | | | | | | |
Americas | $ | 1,019.2 | | | $ | 1,123.2 | | | $ | 3,076.8 | | | $ | 3,423.2 | |
Europe | 579.8 | | | 595.1 | | | 1,816.9 | | | 1,899.3 | |
AMEA | 121.2 | | | 138.2 | | | 350.7 | | | 394.9 | |
Total | $ | 1,720.2 | | | $ | 1,856.5 | | | $ | 5,244.4 | | | $ | 5,717.4 | |
Adjusted EBITDA: | | | | | | | |
Americas | $ | 223.8 | | | $ | 262.3 | | | $ | 711.4 | | | $ | 846.3 | |
Europe | 102.9 | | | 130.3 | | | 335.8 | | | 393.0 | |
AMEA | 33.8 | | | 35.7 | | | 93.7 | | | 101.1 | |
Corporate | (42.7) | | | (44.3) | | | (133.9) | | | (129.2) | |
Total | $ | 317.8 | | | $ | 384.0 | | | $ | 1,007.0 | | | $ | 1,211.2 | |
The amounts above exclude inter-segment activity because it is not material. All of the net sales for each segment are from external customers.
The following table presents the reconciliation of Adjusted EBITDA from net income, the nearest measurement under GAAP: | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Three months ended September 30, | | Nine months ended September 30, |
2023 | | 2022 | | 2023 | | 2022 |
Net income | $ | 108.4 | | | $ | 167.0 | | | $ | 222.6 | | | $ | 544.8 | |
Interest expense | 72.4 | | | 67.3 | | | 219.5 | | | 196.0 | |
Income tax expense | 28.1 | | | 41.3 | | | 68.4 | | | 131.6 | |
Depreciation and amortization | 98.0 | | | 100.6 | | | 301.7 | | | 304.8 | |
Loss on extinguishment of debt | 2.0 | | | 2.9 | | | 5.9 | | | 10.8 | |
Net foreign currency gain from financing activities | (0.5) | | | (1.2) | | | (2.3) | | | (0.2) | |
Other stock-based compensation expense (benefit) | 0.1 | | | (1.6) | | | 0.1 | | | (3.3) | |
| | | | | | | |
Integration-related expenses1 | 0.2 | | | 6.4 | | | 8.3 | | | 13.6 | |
Purchase accounting adjustments2 | — | | | — | | | — | | | 9.4 | |
Restructuring and severance charges3 | 6.1 | | | 1.3 | | | 18.0 | | | 3.7 | |
Reserve for certain legal matters4 | 3.0 | | | — | | | 4.0 | | | — | |
Impairment charges5 | — | | | — | | | 160.8 | | | — | |
| | | | | | | |
Adjusted EBITDA | $ | 317.8 | | | $ | 384.0 | | | $ | 1,007.0 | | | $ | 1,211.2 | |
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1.Represents non-recurring direct costs incurred with third parties and the accrual of a long-term retention incentive to integrate acquired companies. These expenses represent incremental costs and are unrelated to
normal operations of our business. Integration expenses are incurred over a pre-defined integration period specific to each acquisition.
2.Represents the non-cash reduction of contingent consideration related to the Ritter acquisition and the amortization of the purchase accounting adjustment to record inventory acquired from Masterflex at fair value.
3.Reflects the incremental expenses incurred in the period related to initiatives to increase profitability and productivity. Typical costs included in this caption are employee severance, site-related exit costs, and contract termination costs.
4.Represents charges and legal costs in connection with certain litigation and other contingencies that are unrelated to our core operations and not reflective of on-going business and operating results.
5.As described in note 1.
The following table presents net sales by product line: | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Three months ended September 30, | | Nine months ended September 30, |
2023 | | 2022 | | 2023 | | 2022 |
Proprietary materials & consumables | $ | 629.0 | | | $ | 727.4 | | | $ | 1,920.4 | | | $ | 2,216.7 | |
Third party materials & consumables | 632.8 | | | 665.7 | | | 1,929.0 | | | 2,078.4 | |
Services & specialty procurement | 238.6 | | | 225.1 | | | 712.4 | | | 692.3 | |
Equipment & instrumentation | 219.8 | | | 238.3 | | | 682.6 | | | 730.0 | |
Total | $ | 1,720.2 | | | $ | 1,856.5 | | | $ | 5,244.4 | | | $ | 5,717.4 | |
4. Supplemental disclosures of cash flow information
The following tables present supplemental disclosures of cash flow information: | | | | | | | | | | | |
(in millions) | September 30, 2023 | | December 31, 2022 |
Cash and cash equivalents | $ | 236.9 | | | $ | 372.9 | |
Restricted cash classified as other assets | 23.8 | | | 24.0 | |
Total | $ | 260.7 | | | $ | 396.9 | |
At September 30, 2023 and December 31, 2022, amounts included in restricted cash primarily represent funds held in escrow to satisfy a long-term retention incentive related to the acquisition of Ritter.
| | | | | | | | | | | |
(in millions) | Nine months ended September 30, |
2023 | | 2022 |
Cash flows from operating activities: | | | |
Cash paid for income taxes, net | $ | 195.3 | | | $ | 182.3 | |
Cash paid for interest, net, excluding financing leases | 214.2 | | | 187.0 | |
Cash paid for interest on finance leases | 3.8 | | | 3.8 | |
Cash paid under operating leases | 32.4 | | | 32.2 | |
Cash flows from financing activities: | | | |
Cash paid under finance leases | 3.8 | | | 3.5 | |
5. Inventory
The following table presents the components of inventory: | | | | | | | | | | | |
(in millions) | September 30, 2023 | | December 31, 2022 |
Merchandise inventory | $ | 516.7 | | | $ | 556.1 | |
Finished goods | 96.8 | | | 117.1 | |
Raw materials | 173.8 | | | 181.2 | |
Work in process | 63.0 | | | 59.1 | |
Total | $ | 850.3 | | | $ | 913.5 | |
6. Other intangible assets
The following table presents the components of other intangible assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | September 30, 2023 | | December 31, 2022 |
Gross value | | Accumulated amortization and impairment1 | | Carrying value | | Gross value | | Accumulated amortization and impairment1 | | Carrying value |
Customer relationships | $ | 4,793.6 | | | $ | 1,579.8 | | | $ | 3,213.8 | | | $ | 4,806.4 | | | $ | 1,333.5 | | | $ | 3,472.9 | |
Trade names | 353.6 | | | 218.5 | | | 135.1 | | | 354.4 | | | 205.1 | | | 149.3 | |
Other | 629.9 | | | 283.0 | | | 346.9 | | | 630.9 | | | 212.1 | | | 418.8 | |
Total finite-lived | $ | 5,777.1 | | | $ | 2,081.3 | | | 3,695.8 | | | $ | 5,791.7 | | | $ | 1,750.7 | | | 4,041.0 | |
Indefinite-lived | 92.3 | | | | | | | 92.3 | |
Total | $ | 3,788.1 | | | | | | | $ | 4,133.3 | |
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1.As of September 30, 2023, accumulated impairment losses on Customer relationships were $65.9 million and on Other were $40.5 million totaling $106.4 million. As of December 31, 2022, there were no accumulated impairment losses.
7. Commitments and contingencies
Our business involves commitments and contingencies related to compliance with environmental laws and regulations, the manufacture and sale of products and litigation. The ultimate resolution of contingencies is subject to significant uncertainty, and it is reasonably possible that contingencies could be decided unfavorably against us.
Environmental laws and regulations
Our environmental liabilities are subject to changing governmental policy and regulations, discovery of unknown conditions, judicial proceedings, method and extent of remediation, existence of other potentially responsible parties and future changes in technology. We believe that known and unknown environmental matters, if not resolved favorably, could have a material effect on our financial position, liquidity and profitability. Matters to be disclosed are as follows:
The New Jersey Department of Environmental Protection has ordered us to remediate groundwater conditions near our plant in Phillipsburg, New Jersey. At September 30, 2023, our accrued obligation under this order is $2.4 million, which is calculated based on expected cash payments discounted at rates ranging from 4.5% to 5.5% between 2023 and 2045. The undiscounted amount of that obligation is $3.8 million. We are indemnified against any losses incurred in this matter as stipulated through the agreement referenced in our Annual Report.
In 2016, we assessed the environmental condition of our chemical manufacturing site in Gliwice, Poland. Our assessment revealed specific types of soil and groundwater contamination throughout the site. We are also monitoring the condition of a closed landfill on that site. These matters are not covered by our indemnification arrangement because they relate to an operation we subsequently acquired. At September 30, 2023, our balance sheet includes a liability of $1.0 million for remediation and monitoring costs. That liability is estimated primarily on discounted expected remediation payments and is not materially different from its undiscounted amount.
Manufacture and sale of products
Our business involves risk of product liability, patent infringement and other claims in the ordinary course of business arising from the products that we produce ourselves or obtain from our suppliers, as well as from the services we provide. Our exposure to such claims may increase to the extent that we expand our manufacturing operations or service offerings.
We maintain insurance policies to protect us against these risks, including product liability insurance. In many cases the suppliers of products we distribute have indemnified us against such claims. Our insurance coverage or indemnification agreements with suppliers may not be adequate in all pending or any future cases brought against us. Furthermore, our ability to recover under any insurance or indemnification arrangements is subject to the financial viability of our insurers, our suppliers and our suppliers’ insurers, as well as legal enforcement under the local laws governing the arrangements.
We have entered into indemnification agreements with customers of our self-manufactured products to protect them from liabilities and losses arising from our negligence, willful misconduct or sale of defective products. To date, we have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions.
Litigation
At September 30, 2023, there was no outstanding litigation that we believe would result in material losses if decided against us, and we do not believe that there are any unasserted matters that are reasonably possible to result in a material loss.
8. Debt
The following table presents information about our debt: | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | September 30, 2023 | | December 31, 2022 |
Interest terms | | Rate | | Amount | |
Receivables facility | SOFR1 plus 0.80% | | 6.22% | | $ | 297.7 | | | $ | 327.2 | |
Senior secured credit facilities: | | | | | | | |
| | | | | | | |
Euro term loans B-4 | EURIBOR plus 2.50% | | 6.36% | | 625.6 | | | 636.7 | |
Euro term loans B-5 | EURIBOR plus 2.00% | | 5.86% | | 336.0 | | | 342.0 | |
| | | | | | | |
U.S. dollar term loans B-5 | SOFR1 plus 2.25% | | 7.67% | | 872.7 | | | 1,488.3 | |
2.625% secured notes | fixed rate | | 2.625% | | 687.6 | | | 694.5 | |
3.875% unsecured notes | fixed rate | | 3.875% | | 800.0 | | | 800.0 | |
3.875% unsecured notes | fixed rate | | 3.875% | | 423.1 | | | 427.3 | |
4.625% unsecured notes | fixed rate | | 4.625% | | 1,550.0 | | | 1,550.0 | |
Finance lease liabilities | 67.9 | | | 68.9 | |
Other | 12.1 | | | 14.2 | |
Total debt, gross | 5,672.7 | | | 6,349.1 | |
Less: unamortized deferred financing costs | (46.6) | | | (61.6) | |
Total debt | $ | 5,626.1 | | | $ | 6,287.5 | |
Classification on balance sheets: | | | |
Current portion of debt | $ | 335.6 | | | $ | 364.2 | |
Debt, net of current portion | 5,290.5 | | | 5,923.3 | |
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1.SOFR includes credit spread adjustment.
Credit facilities
The following table presents availability under our credit facilities: | | | | | | | | | | | | | | | | | |
(in millions) | September 30, 2023 |
Receivables facility | | Revolving credit facility | | Total |
Capacity | $ | 325.8 | | | $ | 975.0 | | | $ | 1,300.8 | |
Undrawn letters of credit outstanding | (15.4) | | | — | | | (15.4) | |
Outstanding borrowings | (297.7) | | | — | | | (297.7) | |
Unused availability | $ | 12.7 | | | $ | 975.0 | | | $ | 987.7 | |
Capacity under the receivables facility is calculated as the lower of eligible borrowing base or facility limit of $400.0 million. Eligible borrowing base is determined as total available accounts receivable less ineligible accounts receivable and other adjustments. At September 30, 2023, total available accounts receivable under the receivables facility were $576.2 million.
In June 2023, we amended the revolving credit facility to increase its funding limit up to $975.0 million and extended the term to June 29, 2028. We capitalized $2.3 million of fees in connection with this transaction.
In June 2023, the Company entered into an Amendment to the Receivables Purchase Agreement to increase the Delinquency Ratio cap from 13.0% to 16.0%.
Senior secured credit facilities
During the quarter ended September 30, 2023, we made prepayments of $210.0 million on our U.S. dollar term loan B-5 that matures on November 8, 2027. In connection with this prepayment, we expensed $2.0 million of previously unamortized deferred financing costs as a loss on extinguishment of debt. We also amended our U.S. dollar term loan B-5 from LIBOR based floating rate interest to SOFR based floating rate interest during the second quarter of 2023. This amendment was done in accordance with Accounting Standards Codification (ASC) 848 and had no impact on the financial statements. The Company is applying optional expedients and exceptions to certain contract modifications and hedging relationships as permitted under ASU 2020-04 and 2022-06.
Debt covenants
Our debt agreements include representations and covenants that we consider usual and customary, and our receivables facility and senior secured credit facilities include a financial covenant that becomes applicable for periods in which we have drawn more than 35% of our revolving credit facility under the senior secured credit facilities. In this circumstance, we are not permitted to have combined borrowings on our senior secured credit facilities and secured notes in excess of a pro forma net leverage ratio, as defined in our credit agreements. As we had not drawn more than 35% of our revolving credit facility in this period, this covenant was not applicable at September 30, 2023.
9. Accumulated other comprehensive income or loss
The following table presents changes in the components of AOCI: | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Foreign currency translation | | Derivative instruments | | Defined benefit plans | | Total |
Balance at June 30, 2023 | $ | (100.4) | | | $ | 21.9 | | | $ | 6.6 | | | $ | (71.9) | |
Unrealized (loss) gain | (30.4) | | | 8.0 | | | (0.9) | | | (23.3) | |
Reclassification of gain into earnings | — | | | (8.4) | | | — | | | (8.4) | |
Change due to income taxes | (7.9) | | | 0.1 | | | 0.3 | | | (7.5) | |
Balance at September 30, 2023 | $ | (138.7) | | | $ | 21.6 | | | $ | 6.0 | | | $ | (111.1) | |
| | | | | | | |
Balance at June 30, 2022 | $ | (132.5) | | | $ | 4.7 | | | $ | (20.5) | | | $ | (148.3) | |
Unrealized (loss) gain | (62.1) | | | 20.7 | | | — | | | (41.4) | |
Reclassification of loss (gain) into earnings | — | | | 0.2 | | | (0.1) | | | 0.1 | |
Change due to income taxes | (17.4) | | | (5.0) | | | 0.2 | | | (22.2) | |
Balance at September 30, 2022 | $ | (212.0) | | | $ | 20.6 | | | $ | (20.4) | | | $ | (211.8) | |
| | | | | | | |
Balance at December 31, 2022 | $ | (131.3) | | | $ | 19.9 | | | $ | 11.1 | | | $ | (100.3) | |
Unrealized (loss) gain | (4.8) | | | 24.7 | | | (6.6) | | | 13.3 | |
Reclassification of gain into earnings | — | | | (22.5) | | | — | | | (22.5) | |
Change due to income taxes | (2.6) | | | (0.5) | | | 1.5 | | | (1.6) | |
Balance at September 30, 2023 | $ | (138.7) | | | $ | 21.6 | | | $ | 6.0 | | | $ | (111.1) | |
| | | | | | | |
Balance at December 31, 2021 | $ | (19.2) | | | $ | 0.4 | | | $ | (24.4) | | | $ | (43.2) | |
Unrealized (loss) gain | (160.1) | | | 27.7 | | | 4.6 | | | (127.8) | |
Reclassification of gain into earnings | — | | | (1.1) | | | (0.2) | | | (1.3) | |
Change due to income taxes | (32.7) | | | (6.4) | | | (0.4) | | | (39.5) | |
Balance at September 30, 2022 | $ | (212.0) | | | $ | 20.6 | | | $ | (20.4) | | | $ | (211.8) | |
The reclassifications and income tax effects shown above were immaterial to the financial statements and were made to either cost of sales or SG&A expenses depending upon the nature of the underlying transaction. The income tax effects in the three and nine months ended September 30, 2023 on foreign currency translation were due to our net investment hedge and cross-currency swap discussed in note 13.
10. Stock-based compensation
The following table presents the components of stock-based compensation expense: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Classification | | Three months ended September 30, | | Nine months ended September 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Stock options | Equity | | $ | 3.0 | | | $ | 4.1 | | | $ | 10.2 | | | $ | 12.1 | |
RSUs | Equity | | 6.5 | | | 9.3 | | | 20.7 | | | 26.0 | |
Other | Both | | 0.3 | | | (1.3) | | | 0.8 | | | (2.3) | |
Total | $ | 9.8 | | | $ | 12.1 | | | $ | 31.7 | | | $ | 35.8 | |
Award classification: | | | | | | | |
Equity | $ | 9.7 | | | $ | 13.7 | | | $ | 31.6 | | | $ | 39.1 | |
Liability | 0.1 | | | (1.6) | | | 0.1 | | | (3.3) | |
At September 30, 2023, unvested awards under our plans have remaining stock-based compensation expense of $91.9 million to be recognized over a weighted average period of 1.9 years.
Stock options
The following table presents information about outstanding stock options: | | | | | | | | | | | | | | | | | | | | | | | |
(options and intrinsic value in millions) | Number of options | | Weighted average exercise price per option | | Aggregate intrinsic value | | Weighted average remaining term |
Balance at December 31, 2022 | 16.1 | | | $ | 20.90 | | | | | |
Granted | 2.1 | | | 23.53 | | | | | |
Exercised | (0.7) | | | 15.41 | | | | | |
Forfeited | (0.7) | | | 24.83 | | | | | |
Balance at September 30, 2023 | 16.8 | | | 21.29 | | | $ | 36.5 | | | 5.8 years |
Expected to vest | 3.9 | | | 24.83 | | | 2.3 | | | 8.5 years |
Vested | 12.9 | | | 20.22 | | | 34.2 | | | 4.9 years |
During the nine months ended September 30, 2023, we granted stock options that have a contractual life of ten years and will vest annually over four years, subject to the recipient continuously providing service to us through such date.
RSUs
The following table presents information about unvested RSUs: | | | | | | | | | | | |
(awards in millions) | Number of awards | | Weighted average grant date fair value per award |
Balance at December 31, 2022 | 4.2 | | | $ | 24.29 | |
Granted | 2.1 | | | 26.21 | |
Vested | (1.7) | | | 18.80 | |
Forfeited | (0.5) | | | 29.12 | |
Balance at September 30, 2023 | 4.1 | | | 26.69 | |
During the nine months ended September 30, 2023, we granted RSUs that will vest annually over three to four years, subject to the recipient continuously providing service to us throughout the vesting period. Certain of those awards contain performance and market conditions that impact the number of shares that will ultimately vest. We recorded expense on these awards of $1.7 million and $2.9 million for the three months ended September 30, 2023 and September 30, 2022, respectively, and $3.5 million and $7.9 million for the nine months ended September 30, 2023 and September 30, 2022, respectively.
11. Other income or expense, net
The following table presents the components of other income or expense, net: | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Three months ended September 30, | | Nine months ended September 30, |
2023 | | 2022 | | 2023 | | 2022 |
Net foreign currency gain from financing activities | $ | 0.5 | | | $ | 1.2 | | | $ | 2.3 | |
| $ | 0.2 | |
Income related to defined benefit plans | 0.3 | | | 1.4 | | | 1.0 | |
| 4.4 | |
Other | (0.1) | | | 0.1 | | | — | | | 0.2 | |
Other income, net | $ | 0.7 | | | $ | 2.7 | | | $ | 3.3 | | | $ | 4.8 | |
12. Income taxes
The following table presents the relationship between income tax expense and income before income taxes: | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Three months ended September 30, | | Nine months ended September 30, |
2023 | | 2022 | | 2023 | | 2022 |
Income before income taxes | $ | 136.5 | | $ | 208.3 | | $ | 291.0 | | $ | 676.4 |
Income tax expense | (28.1) | | (41.3) | | (68.4) | | (131.6) |
Effective income tax rate | 20.6 | % | | 19.8 | % | | 23.5 | % | | 19.5 | % |
Income tax expense in the quarter is based upon the estimated income for the full year. The composition of the income in different countries and adjustments, if any, in the applicable quarterly periods influences our expense.
The relationship between pre-tax income and income tax expense is affected by the impact of losses for which we cannot claim a tax benefit, non-deductible expenses, and other items that increase tax expense without a relationship to income, such as withholding taxes and changes with respect to uncertain tax positions.
The change in the effective tax rate for the three and nine months ended September 30, 2023 when compared to the three and nine months ended September 30, 2022, is primarily due to the establishment of new valuation allowances against deferred tax assets not expected to be realized as a result of an impairment recognized in the second quarter of 2023, as well as the impact of a partial limitation on the tax deduction of executive compensation expense.
13. Derivative and hedging activities
Hedging instruments:
We engage in hedging activities to reduce our exposure to foreign currency exchange rates and interest rates. Our hedging activities are designed to manage specific risks according to our strategies, as summarized below, which may change from time to time. Our hedging activities consist of the following:
•Economic hedges — We are exposed to changes in foreign currency exchange rates on certain of our euro-denominated term loans and notes that move inversely from our portfolio of euro-denominated intercompany loans. The currency effects for these non-derivative instruments are recorded through earnings in the period of change and substantially offset one another;
•Other hedging activities — Certain of our subsidiaries hedge short-term foreign currency denominated business transactions, external debt and intercompany financing transactions using foreign currency forward contracts. These activities were not material to our consolidated financial statements.
Cash flow hedges of interest rate risk
In April of 2023, the Company executed a $100.0 million interest rate swap to convert SOFR based floating rate interest to fixed rate interest. The transaction is intended to mitigate our exposure to fluctuations in interest rates and will terminate on October 27, 2025. In addition, in April of 2023, we amended our $750.0 million interest rate swap from LIBOR based floating rate interest to SOFR based floating rate interest. This amendment was done in accordance with ASC 848 and had no impact on the financial statements. The Company is applying optional expedients and exceptions to certain contract modifications and hedging relationships as permitted under ASU 2020-04 and 2022-06.
Our objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $20.3 million will be reclassified as a reduction to interest expense.
As of September 30, 2023, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:
| | | | | | | | | | | | | | |
(dollars in millions) | | | | |
Interest rate derivative | | Number of instruments | | Notional |
Interest rate swaps | | 2 | | $ | 850.0 | |
Effect of cash flow hedge accounting on AOCI
The table below presents the effect of cash flow hedge accounting on AOCI for the three and nine months ended September 30, 2023 and September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | |
(in millions) | | | | | | | | | | | | | | | | | | |
Hedging relationships | | Amount of gain or (loss) recognized in OCI on Derivative | | Location of gain or (loss) reclassified from AOCI into income | | Amount of gain or (loss) reclassified from AOCI into income |
| | Three months ended September 30, | | Nine months ended September 30, | | | | Three months ended September 30, | | Nine months ended September 30, |
| | 2023 | | 2022 | | 2023 | | 2022 | | | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | |
Interest rate products | | 4.9 | | | 19.4 | | | 15.0 | | | 22.0 | | | Interest income (expense) | | 5.2 | | | (1.1) | | | 12.7 | | | (3.6) | |
| | | | | | | | | | | | | | | | | | |
Total | | $ | 4.9 | | | $ | 19.4 | | | $ | 15.0 | | | $ | 22.0 | | | | | $ | 5.2 | | | $ | (1.1) | | | $ | 12.7 | | | $ | (3.6) | |
Effect of cash flow hedge accounting on the income statement
The table below presents the effect of our derivative financial instruments on the statement of operations for the three and nine months ended September 30, 2023 and September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Three months ended September 30, | | Nine months ended September 30, | | | | | | |
| | | | | | 2023 | | | | | 2022 | | 2023 | | 2022 | | | | | | |
(in millions) | | | | | | Interest income (expense) | | | | | | | | Interest income (expense) | | | | Interest income (expense) | | Interest income (expense) | | | | | | |
Total amounts of line items presented in the statements of operations where the effects of cash flow hedges are recorded | | | | | | $ | (72.4) | | | | | | | | | $ | (67.3) | | | | | $ | (219.5) | | | $ | (196.0) | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Amount of gain (loss) reclassified from AOCI into income | | | | | | $ | 5.2 | | | | | | | | | $ | (1.1) | | | | | $ | 12.7 | | | $ | (3.6) | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment hedges
We are exposed to fluctuations in foreign exchange rates on investments we hold in foreign entities, specifically our net investment in Avantor Holdings B.V., a EUR-functional-currency consolidated subsidiary, against the risk of changes in the EUR-USD exchange rate.
For derivatives designated as net investment hedges, the gain or loss on the derivative is reported in AOCI as part of the cumulative translation adjustment. Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated.
As of September 30, 2023, we had the following outstanding foreign currency derivatives that were used to hedge its net investments in foreign operations:
| | | | | | | | | | | | | | | | | | | | |
(value in millions) | | | | | | |
Foreign currency derivative | | Number of instruments | | Notional sold | | Notional purchased |
Cross-currency swaps | | 1 | | | € | 732.1 | | | $ | 750.0 | |
Effect of net investment hedges on AOCI and the income statement
The table below presents the effect of our net investment hedges on AOCI and the statement of operations for the three and nine months ended September 30, 2023 and September 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
(in millions) | | | | | | | | | | | | | | | | |
Hedging relationships | | Amount of gain or (loss) recognized in OCI on Derivative | | | | | | Location of gain or (loss) recognized in income on Derivative (amount excluded from effectiveness testing) | | Amount of gain or (loss) recognized in income on Derivative (amount excluded from effectiveness testing) |
| | September 30, | | | | | | | | September 30, |
| | 2023 | | 2022 | | | | | | | | | | 2023 | | 2022 |
Three months ended: | | | | | | | | | | | | | | | | |
Cross currency swaps | | $ | 22.8 | | | $ | 48.6 | | | | | | | | | Interest income | | $ | 3.2 | | | $ | 3.3 | |
Total | | $ | 22.8 | | | $ | 48.6 | | | | | | | | | | | $ | 3.2 | | | $ | 3.3 | |
Nine months ended: | | | | | | | | | | | | | | | | |
Cross currency swaps | | $ | 9.6 | | | $ | 79.4 | | | | | | | | | Interest income | | $ | 9.5 | | | $ | 6.4 | |
Total | | $ | 9.6 | | | $ | 79.4 | | | | | | | | | | | $ | 9.5 | | | $ | 6.4 | |
The Company did not reclassify any other deferred gains or losses related to cash flow hedges from accumulated other comprehensive income (loss) to earnings for the three and nine months ended September 30, 2023 and September 30, 2022.
The table below presents the fair value of our derivative financial instruments as well as their classification on the Balance Sheet as of September 30, 2023 and December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Derivative assets | | Derivative liabilities |
| September 30, 2023 | | December 31, 2022 | | September 30, 2023 | | December 31, 2022 |
(in millions) | Balance sheet location | | Fair value | | Balance sheet location | | Fair value | | Balance sheet location | | Fair value | | Balance sheet location | | Fair value |
Derivatives designated as hedging instruments: | | | | | | | | | | | | | | | |
Interest rate products | Other current assets | | $ | 28.5 | | | Other current assets | | $ | 26.2 | | | Other current liabilities | | $ | — | | | Other current liabilities | | $ | — | |
Foreign exchange products | Other current assets | | — | | | Other current assets | | — | | | Other current liabilities | | (21.3) | | | Other current liabilities | | (21.4) | |
Total | | | $ | 28.5 | | | | | $ | 26.2 | | | | | $ | (21.3) | | | | | $ | (21.4) | |
Non-derivative financial instruments which are designated as hedging instruments:
We designated all of our outstanding €400.0 million 3.875% senior unsecured notes, issued on July 17, 2020, and maturing on July 15, 2028, as a hedge of our net investment in certain of our European operations. For instruments that are designated and qualify as net investment hedges, the foreign currency
transactional gains or losses are reported as a component of AOCI. The gains or losses would be reclassified into earnings upon a liquidation event or deconsolidation of a hedged foreign subsidiary.
Net investment hedge effectiveness is assessed based upon the change in the spot rate of the foreign currency denominated debt. The critical terms of the foreign currency notes match the portion of the net investments designated as being hedged. At September 30, 2023, the net investment hedge was equal to the designated portion of the European operations and was considered to be perfectly effective.
The accumulated (gain) related to the foreign currency denominated debt designated as net investment hedges classified in the foreign currency translation adjustment component of AOCI was $(28.5) million and $(24.3) million as of September 30, 2023 and December 31, 2022, respectively.
The amount of gain related to the foreign currency denominated debt designated as net investment hedges classified in the foreign currency translation adjustment component of other comprehensive income or loss for the three and nine months ended September 30, 2023 and September 30, 2022 are presented below:
| | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Three months ended September 30, | | Nine months ended September 30, |
2023 | | 2022 | | 2023 | | 2022 |
Net investment hedges | $ | (13.5) | | | $ | (27.1) | | | $ | (4.2) | | | $ | (63.3) | |
14. Financial instruments and fair value measurements
Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable and debt.
Certain financial and nonfinancial assets and liabilities are measured at fair value on a nonrecurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. As discussed in note 1, during the second quarter of 2023, property, plant and equipment, customer relationships and developed technology related to the Ritter asset group were deemed to be impaired and their carrying values were reduced to estimated fair values of $25.9 million, $31.4 million and $19.3 million, respectively. This was the result of an impairment charge of $160.8 million. The Company estimates the fair value of the Ritter asset group using Level 3 inputs, which included a discounted cash flow analysis.
Assets and liabilities for which fair value is only disclosed
The carrying amount of cash and cash equivalents was the same as its fair value and is a Level 1 measurement. The carrying amounts for trade accounts receivable and accounts payable approximated fair value due to their short-term nature and are Level 2 measurements.
The following table presents the gross amounts, which exclude unamortized deferred financing costs, and the fair values of debt instruments: | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | September 30, 2023 | | December 31, 2022 |
Gross amount | | Fair value | | Gross amount | | Fair value |
Receivables facility | $ | 297.7 | | | $ | 297.7 | | | $ | 327.2 | | | $ | 327.2 | |
Senior secured credit facilities: | | | | | | | |
| | | | | | | |
Euro term loans B-4 | 625.6 | | | 626.4 | | | 636.7 | | | 627.5 | |
Euro term loans B-5 | 336.0 | | | 338.2 | | | 342.0 | | | 340.7 | |
| | | | | | | |
U.S. dollar term loans B-5 | 872.7 | | | 873.3 | | | 1,488.3 | | | 1,485.5 | |
2.625% secured notes | 687.6 | | | 658.9 | | | 694.5 | | | 658.5 | |
3.875% unsecured notes | 800.0 | | | 689.4 | | | 800.0 | | | 672.0 | |
3.875% unsecured notes | 423.1 | | | 390.1 | | | 427.3 | | | 396.5 | |
4.625 % unsecured notes | 1,550.0 | | | 1,413.1 | | | 1,550.0 | | | 1,407.6 | |
Finance lease liabilities | 67.9 | | | 67.9 | | | 68.9 | | | 68.9 | |
Other | 12.1 | | | 12.1 | | | 14.2 | | | 14.2 | |
Total | $ | 5,672.7 | | | $ | 5,367.1 | | | $ | 6,349.1 | | | $ | 5,998.6 | |
The fair values of debt instruments are based on standard pricing models that take into account the present value of future cash flows, and in some cases private trading data, which are level 2 measurements.
Item 2. Management’s discussion and analysis of financial condition and results of operations
This discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those contained in or implied by any forward-looking statements. See “Cautionary factors regarding forward-looking statements.”
Basis of presentation
This discussion should be read in conjunction with the accompanying condensed consolidated financial statements and notes. Pursuant to SEC rules for reports covering interim periods, we have prepared this discussion and analysis to enable you to assess material changes in our financial condition and results of operations since December 31, 2022, the date of our Annual Report. Therefore, we encourage you to read this discussion and analysis in conjunction with the Annual Report.
Overview
During the three months ended September 30, 2023, we recorded net sales of $1,720.2 million, net income of $108.4 million and Adjusted EBITDA of $317.8 million. Net sales decreased by 7.3%, which included a 9.6% decline in organic sales compared to the same period in 2022. See “Reconciliations of non-GAAP measures” for a reconciliation of net income to Adjusted EBITDA and “Results of operations” for a reconciliation of net sales growth (decline) to organic net sales growth (decline).
Factors and current trends affecting our business and results of operations
The following updates the factors and current trends disclosed in the Annual Report. These updates could affect our performance and financial condition in future periods.
Our results were impacted by the continuing effects of the coronavirus pandemic
Customer demand and required inventory levels continue to normalize in the transition from the COVID-19 pandemic, which has impacted our results for the three months ended September 30, 2023. For a discussion of the impact of the COVID-19 pandemic and associated economic disruptions, and the actual operational and financial impacts that we experienced through December 31, 2022, see “Part II—Item 7—Management's discussion and analysis of financial condition and results of operations” in the Annual Report. For additional discussion of the potential impact of the COVID-19 pandemic and associated economic disruptions on our results, see “The COVID-19 pandemic has adversely impacted, and continues to pose risks to, our business, operating results, cash flows and/or financial condition, the nature and extent of which could be material.” included in “Part I—Item 1A—Risk factors” in the Annual Report.
We have been impacted by supply chain constraints and inflationary pressures
We have experienced inventory fluctuations and build up at customers as a result of global supply chain disruptions and have experienced inflationary pressures across all of our cost categories. While we have implemented pricing and productivity measures to combat these pressures, they may continue to adversely impact our results.
Fluctuations in foreign currency rates impact our results
Our consolidated results of operations are comprised of many different functional currencies that translate into our U.S. Dollar reporting currency. The movement of the U.S. Dollar against those functional currencies, particularly the Euro, has caused significant variability in our results and may continue to do so in the future.
Key indicators of performance and financial condition
To evaluate our performance, we monitor a number of key indicators including certain non-GAAP financial measurements that we believe are useful to investors, creditors and others in assessing our performance. These measurements should not be considered in isolation or as a substitute for reported GAAP results because they may include or exclude certain items as compared to similar GAAP-based measurements, and such measurements may not be comparable to similarly-titled measurements reported by other companies. Rather, these measurements should be considered as an additional way of viewing aspects of our operations that provide a more complete understanding of our business.
The key indicators that we monitor are as follows:
•Net sales, gross margin, operating income and net income or loss. These measures are discussed in the section entitled “Results of operations”;
•Organic net sales growth, which is a non-GAAP measure discussed in the section entitled “Results of operations.” Organic net sales growth (decline) eliminates from our reported net sales change the impact of changes in foreign currency exchange rates. We believe that this measurement is useful to investors as a way to measure and evaluate our underlying commercial operating performance consistently across our segments and the periods presented. This measurement is used by our management for the same reason. Reconciliations to the change in reported net sales, the most directly comparable GAAP financial measure, are included in the section entitled “Results of operations”;
•Adjusted EBITDA and Adjusted EBITDA margin, which are non-GAAP measures discussed in the section entitled “Results of operations.” Adjusted EBITDA is used by investors to measure and evaluate our operating performance exclusive of interest expense, income tax expense, depreciation, amortization and certain other adjustments. Adjusted EBITDA margin is Adjusted EBITDA divided by net sales as determined under GAAP. We believe that these measurements are useful to investors as a way to analyze the underlying trends in our business consistently across the periods presented. This measurement is used by our management for the same reason. A reconciliation of net income or loss, the most directly comparable GAAP financial measure, to Adjusted EBITDA is included in the section entitled “Reconciliations of non-GAAP measures”;
•Cash flows from operating activities, which we discuss in the section entitled “Liquidity and capital resources—Historical cash flows”;
•Free cash flow, which is a non-GAAP measure, is equal to our cash flows from operating activities, plus acquisition-related costs paid in the period, less capital expenditures. We believe that this measurement is useful to investors as it provides a view on the Company’s ability to generate cash for use in financing or investing activities. This measurement is used by management for the same reason. A reconciliation of cash flows from operating activities, the most directly comparable GAAP financial measure, to free cash flow, is included in the section entitled “Liquidity and capital resources—Historical cash flows.”
Results of operations
We present results of operations in the same way that we manage our business, evaluate our performance and allocate our resources. We also provide discussion of net sales and Adjusted EBITDA by geographic segment based on customer location: Americas, Europe and AMEA. Corporate costs are managed on a standalone basis and not allocated to segments.
Executive summary
| | | | | | | | | | | | | | | | | |
(dollars in millions) | Three months ended September 30, | | Change |
2023 | | 2022 | |
Net sales | $ | 1,720.2 | | | $ | 1,856.5 | | | $ | (136.3) | |
Gross margin | 33.6 | % | | 35.0 | % | | (140) bps |
Operating income | $ | 210.2 | | | $ | 275.8 | | | $ | (65.6) | |
Net income | 108.4 | | | 167.0 | | | (58.6) | |
Adjusted EBITDA | 317.8 | | | 384.0 | | | (66.2) | |
Adjusted EBITDA margin | 18.5 | % | | 20.7 | % | | (220) bps |
The third quarter net sales decline was driven by decreases in all three regions primarily due to declines in customer demand, the impact of customer destocking, and COVID-19 related headwinds. Unfavorable product mix and inflationary factors contributed to contraction in gross margin. Softness in sales volumes along with unfavorable product mix drove Adjusted EBITDA margin contraction.
Net Sales
Three months ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Three months ended September 30, | | Reconciliation of net sales growth (decline) to organic net sales growth (decline) |
| Net sales growth (decline) | | Foreign currency impact | | | | Organic net sales growth (decline) |
2023 | | 2022 | | |
Americas | $ | 1,019.2 | | | $ | 1,123.2 | | | $ | (104.0) | | | $ | 1.0 | | | | | $ | (105.0) | |
Europe | 579.8 | | | 595.1 | | | (15.3) | | | 41.1 | | | | | (56.4) | |
AMEA | 121.2 | | | 138.2 | | | (17.0) | | | — | | | | | (17.0) | |
Total | $ | 1,720.2 | | | $ | 1,856.5 | | | $ | (136.3) | | | $ | 42.1 | | | | | $ | (178.4) | |
Net sales decreased $136.3 million or 7.3%, which included $42.1 million or 2.3% of favorable foreign currency impact. Organic net sales decreased by $178.4 million or 9.6% (declining 7.9% when excluding the impact of sales of COVID-19-related products in both periods, referred to herein as COVID-19 related headwinds or tailwinds).
In the Americas, net sales decreased $104.0 million or 9.3%, which included $1.0 million or 0.1% of favorable foreign currency impact. Organic net sales decreased by $105.0 million or 9.4% (7.9% excluding COVID-19 headwinds). Additional information on organic net sales by end market (with approximate percentage of total organic net sales for the region) is as follows:
•Biopharma (55%) — Sales declined double-digits, primarily due to reduced customer demand, as well as the roll-off of COVID-19 revenues for vaccines, in addition to destocking of lab products and single-use solutions.
•Healthcare (10%) — Sales increased low single-digits primarily due to growth in our formulated silicones offering for medical implants, partially offset by destocking and demand softness in consumables offerings to customers in this end market.
•Education and government (15%) — Sales increased low single-digits primarily due to continued strong growth to higher education customers, partially offset by weaker demand from K-12 and government customers.
•Advanced technologies & applied materials (20%) — Sales decreased double-digits driven by softness in the demand for our semiconductor and electronic device offerings.
In Europe, net sales decreased $15.3 million or 2.6%, which included $41.1 million or 6.9% of favorable foreign currency impact. Organic net sales decreased $56.4 million or 9.5% (8.6% excluding COVID-19 headwinds). Additional information on organic net sales by end market (with approximate percentage of total organic net sales for the region) is as follows:
•Biopharma (50%) — Sales declined double-digits, primarily due to reduced customer demand and destocking of lab consumables and single-use solutions as well as the roll-off of COVID-19 revenues for vaccines.
•Healthcare (10%) — Sales declined double-digits primarily due to reduced customer demand and destocking of lab consumables.
•Education & government (10%) — Sales were flat driven by improved activity in academia and government labs offset by destocking of lab consumables.
•Advanced technologies & applied materials (30%) — Sales decreased low single-digits primarily driven by reduced customer demand and destocking of lab consumables.
In AMEA, net sales decreased $17.0 million or 12.3%. There was no material foreign currency impact to net sales. Organic net sales decreased $17.0 million or 12.3% (5.4% excluding COVID-19 headwinds). Additional information on organic net sales by end market (with approximate percentage of total organic net sales for the region) is as follows:
•Biopharma (45%) — Sales decreased low single-digits due to the roll-off of COVID-19 revenues associated with vaccine production.
•Advanced technologies & applied materials (45%) — Sales declined double-digits primarily driven by softness in our proprietary offerings into the semiconductor industry.
Nine months ended | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Nine months ended September 30, | | Reconciliation of net sales growth (decline) to organic net sales growth (decline) |
| Net sales growth (decline) | | Foreign currency impact | | | | Organic net sales growth (decline) |
2023 | | 2022 | | |
Americas | $ | 3,076.8 | | | $ | 3,423.2 | | | $ | (346.4) | | | $ | (3.7) | | | | | $ | (342.7) | |
Europe | 1,816.9 | | | 1,899.3 | | | (82.4) | | | 19.4 | | | | | (101.8) | |
AMEA | 350.7 | | | 394.9 | | | (44.2) | | | (8.0) | | | | | (36.2) | |
Total | $ | 5,244.4 | | | $ | 5,717.4 | | | $ | (473.0) | | | $ | 7.7 | | | | | $ | (480.7) | |
Net sales decreased $473.0 million or 8.3%, which included $7.7 million or 0.1% of favorable foreign currency impact. Organic decline in net sales was $480.7 million or 8.4% (5.3% excluding COVID-19 headwinds).
In the Americas, net sales decreased $346.4 million or 10.1%, which included $3.7 million or 0.1% of unfavorable foreign currency impact. Organic decline in net sales was $342.7 million or 10.0% (6.8% excluding COVID-19 headwinds) for reasons similar to the three month period, in addition to the roll-off of COVID-19 testing and PPE revenues.
In Europe, net sales decreased $82.4 million or 4.3%, which included $19.4 million or 1.0% of favorable foreign currency impact. Organic decline in net sales was $101.8 million or 5.3% (2.9% excluding COVID-19 headwinds) for reasons similar to the three month period, in addition to the roll-off of COVID-19 testing.
In AMEA, net sales decreased $44.2 million or 11.2%, which included $8.0 million or 2.0% of unfavorable foreign currency impact. Organic decline in net sales was $36.2 million or 9.2% (4.4% excluding COVID-19 headwinds) for reasons similar to the three month period.
Gross margin | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Change | | Nine months ended September 30, | | Change |
2023 | | 2022 | 2023 | | 2022 | |
Gross margin | 33.6 | % | | 35.0 | % | | (140) bps | | 34.2 | % | | 34.8 | % | | (60) bps |
Three and nine months ended
Gross margin for the three and nine months ended September 30, 2023 contracted by 140 basis points and 60 basis points, respectively, resulting primarily from unfavorable product mix and the impact of inflationary pressures, partially offset by lower distribution costs.
Operating income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Three months ended September 30, | | Change | | Nine months ended September 30, | | Change |
2023 | | 2022 | 2023 | | 2022 | |
Gross profit | $ | 578.6 | | | $ | 650.7 | | | $ | (72.1) | | | $ | 1,793.4 | | | $ | 1,988.3 | | | $ | (194.9) | |
Operating expenses (excluding impairment charges) | 368.4 | | | 374.9 | | | (6.5) | | | 1,119.5 | | | 1,109.9 | | | 9.6 | |
Impairment charges | — | | | — | | | — | | | 160.8 | | | — | | | 160.8 | |
Operating income | $ | 210.2 | | | $ | 275.8 | | | $ | (65.6) | | | $ | 513.1 | | | $ | 878.4 | | | $ | (365.3) | |
Three months ended
Operating income decreased primarily from lower gross profit, as previously discussed, partially offset by lower operating expenses driven by lower accruals related to incentive compensation.
Nine months ended
Operating income decreased primarily from lower gross profit, as previously discussed, as well as higher operating expenses driven by asset impairment charges recorded in the second quarter of 2023, the accrual of a long-term retention incentive, inflation and investments made to grow the business, partially offset by lower accruals related to incentive compensation.
Net income | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Three months ended September 30, | | Change | | Nine months ended September 30, | | Change |
2023 | | 2022 | 2023 | | 2022 | |
Operating income | $ | 210.2 | | | $ | 275.8 | | | $ | (65.6) | | | $ | 513.1 | | | $ | 878.4 | | | $ | (365.3) | |
Interest expense | (72.4) | | | (67.3) | | | (5.1) | | | (219.5) | | | (196.0) | | | (23.5) | |
Loss on extinguishment of debt | (2.0) | | | (2.9) | | | 0.9 | | | (5.9) | | | (10.8) | | | 4.9 | |
Other income, net | 0.7 | | | 2.7 | | | (2.0) | | | 3.3 | | | 4.8 | | | (1.5) | |
Income tax expense | (28.1) | | | (41.3) | | | 13.2 | | | (68.4) | | | (131.6) | | | 63.2 | |
Net income | $ | 108.4 | | | $ | 167.0 | | | $ | (58.6) | | | $ | 222.6 | | | $ | 544.8 | | | $ | (322.2) | |
Three and nine months ended
Net income decreased primarily due to lower operating income, as previously discussed, as well as higher interest expense from rising interest rates on our variable-rate term loans, partially offset by loss on the extinguishment of our debt resulting from lower optional prepayments of our term loans and by lower income tax expense due to lower income before income taxes.
Adjusted EBITDA and Adjusted EBITDA margin
For a reconciliation of Adjusted EBITDA to Net income, the most directly comparable measure under GAAP, see “Reconciliations of non-GAAP financial measures.”
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(dollars in millions) | Three months ended September 30, | | Change | | Nine months ended September 30, | | Change |
2023 | | 2022 | 2023 | | 2022 | |
Adjusted EBITDA: | | | | | | | | | | | |
Americas | $ | 223.8 | | $ | 262.3 | | $ | (38.5) | | | $ | 711.4 | | $ | 846.3 | | $ | (134.9) | |
Europe | 102.9 | | 130.3 | | (27.4) | | | 335.8 | | 393.0 | | (57.2) | |
AMEA | 33.8 | | 35.7 | | (1.9) | | | 93.7 | | 101.1 | | (7.4) | |
Corporate | (42.7) | | (44.3) | | 1.6 | | | (133.9) | | (129.2) | | (4.7) | |
Total | $ | 317.8 | | $ | 384.0 | | $ | (66.2) | | | $ | 1,007.0 | | $ | 1,211.2 | | $ | (204.2) | |
| | | | | | | | | | | |
Adjusted EBITDA margin | 18.5 | % | | 20.7 | % | | (220) bps | | 19.2 | % | | 21.2 | % | | (200) bps |
| | | | | | | | | | | |
Three months ended
Adjusted EBITDA decreased $66.2 million or 17.2%, which included a favorable foreign currency translation impact of $7.1 million. The remaining decline was $73.3 million or 19.0% which is further discussed below.
In the Americas, Adjusted EBITDA declined $38.5 million or 14.7%, or 14.8% when adjusted for favorable foreign currency translation impact. The decrease was driven by lower sales volumes, unfavorable manufacturing variances and product mix, partially offset by reduced operating expenses and lower distribution costs.
In Europe, Adjusted EBITDA declined $27.4 million or 21.0%, or 26.4% when adjusted for favorable foreign currency translation impact. The decrease was driven by sales volume contraction and unfavorable product mix, partially offset by reduced operating expenses, distribution costs and favorable manufacturing variances.
In AMEA, Adjusted EBITDA declined $1.9 million or 5.3%. There was no material foreign currency translation impact to Adjusted EBITDA. The decrease was driven by lower sales volume and inflationary pressures, partially offset by lower operating expenses and distribution costs.
In Corporate, Adjusted EBITDA increased $1.6 million or 3.6% reflecting continued cost containment across the corporate functions.
Nine months ended
Adjusted EBITDA decreased $204.2 million or 16.9%, which included an unfavorable foreign currency translation impact of $1.7 million or 0.1%. The remaining decline was $202.5 million or 16.8% which is further discussed below.
In the Americas, Adjusted EBITDA declined $134.9 million or 15.9%, or 15.8% when adjusted for unfavorable foreign currency translation impact. Lower gross profit from sales volume decline and unfavorable product mix was partially offset by commercial excellence and lower distribution costs.
In Europe, Adjusted EBITDA declined $57.2 million or 14.6%, or 15.0% when adjusted for favorable foreign currency translation impact due to lower gross profit from sales volume decline and unfavorable product mix, partially offset by commercial excellence.
In AMEA, Adjusted EBITDA declined $7.4 million or 7.3%, or 5.3% when adjusted for unfavorable foreign currency translation impact due to lower gross profit from sales volume decline and inflationary pressures, partially offset by lower distribution costs.
In Corporate, Adjusted EBITDA declined $4.7 million or 3.6% reflecting investments in our workforce made over the course of 2022 and into 2023.
Reconciliations of non-GAAP financial measures
The following table presents the reconciliation of net income to Adjusted EBITDA: | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Three months ended September 30, | | Nine months ended September 30, |
2023 | | 2022 | | 2023 | | 2022 |
Net income | $ | 108.4 | | | $ | 167.0 | | | $ | 222.6 | | | $ | 544.8 | |
Interest expense | 72.4 | | | 67.3 | | | 219.5 | | | 196.0 | |
Income tax expense | 28.1 | | | 41.3 | | | 68.4 | | | 131.6 | |
Depreciation and amortization | 98.0 | | | 100.6 | | | 301.7 | | | 304.8 | |
Loss on extinguishment of debt | 2.0 | | | 2.9 | | | 5.9 | | | 10.8 | |
Net foreign currency gain from financing activities | (0.5) | | | (1.2) | | | (2.3) | | | (0.2) | |
Other stock-based compensation expense (benefit) | 0.1 | | | (1.6) | | | 0.1 | | | (3.3) | |
| | | | | | | |
Integration-related expenses1 | 0.2 | | | 6.4 | | | 8.3 | | | 13.6 | |
Purchase accounting adjustments2 | — | | | — | | | — | | | 9.4 | |
Restructuring and severance charges3 | 6.1 | | | 1.3 | | | 18.0 | | | 3.7 | |
Reserve for certain legal matters4 | 3.0 | | | — | | | 4.0 | | | — | |
Impairment charges5 | — | | | — | | | 160.8 | | | — | |
| | | | | | | |
Adjusted EBITDA | $ | 317.8 | | | $ | 384.0 | | | $ | 1,007.0 | | | $ | 1,211.2 | |
━━━━━━━━━
1.Represents non-recurring direct costs incurred with third parties and the accrual of a long-term retention incentive to integrate acquired companies. These expenses represent incremental costs and are unrelated to normal operations of our business. Integration expenses are incurred over a pre-defined integration period specific to each acquisition.
2.Represents the non-cash reduction of contingent consideration related to the Ritter acquisition and the amortization of the purchase accounting adjustment to record inventory acquired from Masterflex at fair value.
3.Reflects the incremental expenses incurred in the period related to initiatives to increase profitability and productivity. Typical costs included in this caption are employee severance, site-related exit costs, and contract termination costs.
4.Represents charges and legal costs in connection with certain litigation and other contingencies that are unrelated to our core operations and not reflective of on-going business and operating results.
5.As described in note 1 to our unaudited condensed consolidated financial statements.
Liquidity and capital resources
We fund short-term cash requirements primarily from operating cash flows and credit facilities. Most of our long-term financing is from indebtedness. For the three and nine months ended September 30, 2023, we generated $230.7 million and $618.4 million of cash from operating activities, ended the quarter with $236.9 million of cash and cash equivalents and our availability under our credit facilities was $987.7 million. We have no debt repayments due in the next twelve months other than required term loan payments of $32.8 million and receivables facility borrowing of $297.7 million.
Liquidity
The following table presents our primary sources of liquidity: | | | | | | | | | | | | | | | | | |
(in millions) | September 30, 2023 |
Receivables facility | | Revolving credit facility | | Total |
Unused availability under credit facilities: | | | | | |
Capacity | $ | 325.8 | | | $ | 975.0 | | | $ | 1,300.8 | |
Undrawn letters of credit outstanding | (15.4) | | | — | | | (15.4) | |
Outstanding borrowings | (297.7) | | | — | | | (297.7) | |
Unused availability | $ | 12.7 | | | $ | 975.0 | | | $ | 987.7 | |
Cash and cash equivalents | 236.9 | |
Total liquidity | $ | 1,224.6 | |
Some of our credit line availability depends upon maintaining a sufficient borrowing base of eligible accounts receivable. We believe that we have sufficient capital resources to meet our liquidity needs.
Our debt agreements include representations and covenants that we consider usual and customary, and our receivables facility and senior secured credit facilities include a financial covenant that becomes applicable for periods in which we have drawn more than 35% of our revolving credit facility under the senior secured credit facilities. In this circumstance, we are not permitted to have combined borrowings on our senior secured credit facilities and secured notes in excess of a pro forma net leverage ratio, as defined in our credit agreements. As we had not drawn more than 35% of our revolving credit facility in this period, this covenant was not applicable at September 30, 2023.
At September 30, 2023, $215.6 million or 91.0% of our $236.9 million in cash and cash equivalents was held by our non-U.S. subsidiaries and may be subject to certain taxes upon repatriation, primarily where foreign withholding taxes apply.
Historical cash flows
The following table presents a summary of cash provided by (used in) various activities: | | | | | | | | | | | | | | | | | |
(in millions) | Nine months ended September 30, | | Change |
2023 | | 2022 | |
Operating activities: | | | | | |
Net income | $ | 222.6 | | | $ | 544.8 | | | (322.2) | |
Non-cash items1 | 475.3 | | | 350.5 | | | 124.8 | |
Working capital changes2 | (10.0) | | | (155.1) | | | 145.1 | |
All other | (69.5) | | | (102.2) | | | 32.7 | |
Total | $ | 618.4 | | | $ | 638.0 | | | $ | (19.6) | |
Investing activities | $ | (93.7) | | | $ | (76.5) | | | $ | (17.2) | |
Cash paid for acquisitions, net of cash acquired | — | | | (20.2) | | | 20.2 | |
Capital expenditures | (95.8) | | | (99.8) | | | 4.0 | |
Cash proceeds from settlement of cross currency swap | — | | | 42.5 | | | (42.5) | |
Financing activities | (659.6) | | | (567.1) | | | (92.5) | |
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1.Consists of typical non-cash charges including depreciation and amortization, impairments, stock based compensation expense, deferred income tax expense and others.
2.Includes changes to our accounts receivable, inventory, contract assets and accounts payable.
Cash flows from operating activities provided $19.6 million less cash in 2023 primarily due to lower net income, partially offset by improved working capital and lower payments for incentive compensation payments for fiscal year 2022 company performance.
Investing activities used $17.2 million more cash in 2023. The change was primarily attributable to the absence of cross currency swap settlement and acquisition activity in 2023 which provided a net cash inflow of $22.3 million in 2022, partially offset by a reduction in capital expenditures compared to the prior year.
Financing activities used $92.5 million more cash in 2023 primarily due to the net repayments made on the receivables facility in 2023 compared to having net borrowings in 2022. This was partially offset by lower repayments on our term loans in 2023 compared to the prior year.
Free cash flow | | | | | | | | | | | | | | | | | |
(in millions) | Nine months ended September 30, | | Change |
2023 | | 2022 | |
Net cash provided by operating activities | $ | 618.4 | | | $ | 638.0 | | | $ | (19.6) | |
| | | | | |
Capital expenditures | (95.8) | | | (99.8) | | | 4.0 | |
Free cash flow | $ | 522.6 | | | $ | 538.2 | | | $ | (15.6) | |
Free cash flow was $15.6 million lower in 2023 due to the changes in cash flows from operating activities noted above, partially offset by slight reduction in capital spending across the Company in 2023.
Indebtedness
For information about our indebtedness, refer to the section entitled “Liquidity” and note 8 to our unaudited condensed consolidated financial statements included in Part I, Item 1 — “Financial statements.”
New accounting standards
There were no new accounting standards that we expect to have a material impact on our financial position or results of operations upon adoption.
Item 3. Quantitative and qualitative disclosures about market risk
There have been no significant changes to the disclosures about market risk included in our Annual Report.
Item 4. Controls and procedures
Management’s evaluation of disclosure controls and procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)), as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2023, the design and operation of our disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes in internal control over financial reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) during the fiscal quarter ended September 30, 2023, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal proceedings
For additional information regarding legal proceedings and matters, see note 7 to our unaudited condensed consolidated financial statements included in Part I, Item 1 — “Financial Statements,” which information is incorporated into this item by reference.
Item 1A. Risk factors
For information regarding factors that could affect the Company's results of operations, financial condition and liquidity, see the risk factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report. There have been no material changes to the risk factors disclosed in Part I—Item 1A of the Annual Report.
Item 2. Unregistered sales of equity securities and use of proceeds
None.
Item 3. Defaults upon senior securities
None.
Item 4. Mine safety disclosures
Not applicable.
Item 5. Other information
None.
Item 6. Exhibits
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| | | | Location of exhibits |
Exhibit no. | | Exhibit description | | Form | | Exhibit no. | | Filling date |
| | Amendment No. 4 dated as of September 19, 2023 to the Receivables Purchase Agreement, dated as of March 27, 2020 (as amended by Amendment No.1 to Receivables Purchase Agreement, dated as of December 21, 2021, Amendment No.2 to Receivables Purchase Agreement, dated as of October 25, 2022 and Amendment No. 3 to Receivables Purchase Agreement, dated as of June 14, 2023), among Avantor Receivables Funding, LLC, VWR International, LLC, Avantor Funding, Inc., as performance guarantor, PNC Bank, National Association, as administrator, LC Bank, Related Committed Purchaser and Purchaser Agent, and Wells Fargo Bank, National Association, as Related Committed Purchaser, Purchaser Agent and LC Participant | | * | | | | |
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101 | | XBRL exhibits | | * | | | | |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | * | | | | |
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* Filled herewith
** Furnished herewith
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. | | | | | | | | | | | |
| Avantor, Inc. |
| |
Date: October 27, 2023 | By: | /s/ Steven Eck |
| | Name: | Steven Eck |
| | Title: | Senior Vice President, Chief Accounting Officer (Principal Accounting Officer) |