Avantor, Inc.: Form 10-Q for the period ended Mar 31, 2024

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, 2023, 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 March 31, 2024, we recorded net sales of $1,679.8 million, net income of $60.4 million, Adjusted EBITDA of $283.0 million and Adjusted Operating Income of $258.4 million. Net sales decreased by 5.6%, which included a 6.3% decline in organic sales compared to the same period in 2023. See “Reconciliations of non-GAAP measures” for reconciliations of net income to Adjusted EBITDA and Adjusted Operating Income, and net income margin to Adjusted EBITDA margin and Adjusted Operating Income margin. See “Results of operations” for a reconciliation of net sales growth (decline) to organic net sales growth (decline).

Segment Change

Effective January 1, 2024, we changed our operating model and reporting segment structure from three

reportable segments to two reportable segments, Laboratory Solutions and Bioscience Production. This structure aligns with how our Chief Executive Officer, who is our chief operating decision maker, intends to measure segment operating performance and allocate resources across our operating segments. This reportable segment change has no impact on our consolidated operating results.

In connection with the operating model and reporting structure change, our chief operating decision

maker changed the measure used to evaluate segment profitability from Adjusted EBITDA to Adjusted Operating Income. All disclosures relating to segment profitability, including those for comparative periods, have been revised as a result of this change.

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 may affect our performance and financial condition in future periods.

Our business continues to be impacted by the transition from the global coronavirus pandemic

Customer demand and required inventory levels continue to normalize in the transition from the COVID-19 pandemic. For a discussion of this trend and associated economic disruptions, and the actual operational and financial impacts that we experienced through December 31, 2023, see “Part II—Item 7—Management's discussion and analysis of financial condition and results of operations” 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. As appropriate, we supplement our results of operations determined in accordance with U.S. generally accepted accounting principles (“GAAP”) with certain non-GAAP financial measurements that we believe are useful to investors, creditors and others in assessing our performance. These measures 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 measures, and such measures may not be comparable to similarly titled measures reported by other companies. Rather, these measures 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, operating income margin, net income or loss and net income or loss margin. 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 impacts of revenues from any acquired businesses that have been owned for less than one year and 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 our net income or loss adjusted for the following items: (i) interest expense, (ii) income tax expense, (iii) amortization of acquired intangible assets, (iv) depreciation expense, (v) losses on extinguishment of debt, (vi) charges associated with the impairment of certain assets, (vii) 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 as a way to analyze the underlying trends in our business consistently across the periods presented. These measurements are used by our management for the same reason. A reconciliation of net income or loss and net income or loss margin, the most directly comparable GAAP financial measures, to Adjusted EBITDA and Adjusted EBITDA margin, respectively, are included in the section entitled “Reconciliations of non-GAAP measures”;
• Adjusted Operating Income and Adjusted Operating Income margin, which are non-GAAP measures discussed in the section entitled “Results of operations.” Adjusted operating income is our net income or loss adjusted for the following items: (i) interest expense, (ii) income tax expense, (iii) amortization of acquired intangible assets, (iv) losses on extinguishment of debt, (v) charges associated with the impairment of certain assets, (vi) and certain other adjustments. This

measurement is our segment reporting profitability measure under generally accepted accounting principles. Adjusted Operating Income margin is Adjusted Operating Income 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. These measurements are used by our management for the same reason. A reconciliation of net income or loss and net income or loss margin, the most directly comparable GAAP financial measures, to Adjusted Operating Income and Adjusted Operating Income margin, respectively, are 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 Operating Income by segment: Laboratory Solutions and Bioscience Production. Corporate costs are managed on a standalone basis, certain of which are allocated to our reportable segments.

Executive summary

(dollars in millions)

The first quarter net sales decline was driven by decreases in both segments primarily due to reduced customer demand. Unfavorable product mix contributed to contraction in gross margin. Softness in sales volume and unfavorable product mix drove Adjusted EBITDA and Adjusted Operating Income margin contraction.

Net Sales

Three months ended

(in millions)

Net sales decreased $100.5 million or 5.6%, which included $12.0 million or 0.7% of favorable foreign currency impact. Organic net sales decreased by $112.5 million or 6.3%.

In the Laboratory Solutions segment, net sales decreased $45.9 million or 3.8%, which included $9.0 million or 0.7% of favorable foreign currency impact. Organic net sales decreased $54.9 million or 4.5%. Sales decline was primarily driven by decreased demand in biopharma and healthcare end markets.

In the Bioscience Production segment, net sales decreased $54.6 million or 9.5%, which included $3.0 million or 0.5% of favorable foreign currency impact. Organic net sales decreased by $57.6 million or 10.0%. Sales decline was primarily driven by decreased demand in biopharma and healthcare end markets.

Gross margin

Three months ended

Gross margin for the three months ended March 31, 2024 contracted by 110 basis points resulting primarily from unfavorable product mix.

Operating income

(in millions)

Three months ended

Operating income decreased primarily from lower gross profit, as previously discussed and higher operating expenses driven by restructuring and severance charges, transformation expenses and inflationary pressures on salary expenses.

Net income

(in millions)

Three months ended

Net income decreased primarily due to lower operating income, as previously discussed, partially offset by lower interest expense on account of debt repayments made over the last twelve months and lower income tax expense due to lower income before income taxes.

Adjusted EBITDA and Adjusted EBITDA margin

For a reconciliation of Adjusted EBITDA and Adjusted EBITDA margin to net income and net income margin, respectively, the most directly comparable measures under GAAP, see “Reconciliations of non-GAAP financial measures.”

(dollars in millions)

Three months ended

Adjusted EBITDA decreased by $63.2 million or 18.3%, which included a favorable foreign currency translation impact of $1.0 million or 0.3%.The remaining decline was $64.2 million or 18.6% primarily driven by lower sales volume and unfavorable product mix.

Adjusted Operating Income and Adjusted Operating Income margin

For a reconciliation of Adjusted Operating Income and Adjusted Operating Income margin to net income and net income margin, respectively, the most directly comparable measures under GAAP, see “Reconciliations of non-GAAP financial measures.”

(dollars in millions)

Adjusted Operating Income decreased $64.7 million or 20.0%, which included a favorable foreign currency translation impact of $0.9 million or 0.3%. The remaining decline was $65.6 million or 20.3% which is further discussed below.

In the Laboratory Solutions segment, Adjusted Operating Income declined $24.0 million or 13.9%, or 13.7% when adjusted for unfavorable foreign currency translation impact. The decrease was due to lower sales volume.

In the Bioscience Production segment, Adjusted Operating Income declined $40.6 million or 24.2%, or 24.3% when adjusted for favorable foreign currency translation impact. The decrease was driven primarily by lower sales volume.

In Corporate, Adjusted Operating Income decreased $0.1 million or 0.6%, due to immaterial offsetting factors.

Reconciliations of non-GAAP financial measures

The following table presents the reconciliation of net income and net income margin to Adjusted EBITDA and Adjusted EBITDA margin, respectively:

(dollars in millions)

1. Represents 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. Reflects the incremental expenses incurred in the period related to restructuring initiatives to increase profitability and productivity. Costs included in this caption are specific to employee severance, site-related exit costs, and contract termination costs. The expenses recognized in 2024 represent costs incurred to achieve the Company’s publicly-announced cost transformation initiative.

3. Represents incremental expenses directly associated with the Company’s publicly-announced cost transformation initiative, primarily related to the cost of external advisors.

The following table presents the reconciliation of net income and net income margin to Adjusted Operating Income and Adjusted Operating Income margin, respectively:

(dollars in millions)

1. Represents 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. Reflects the incremental expenses incurred in the period related to restructuring initiatives to increase profitability and productivity. Costs included in this caption are specific to employee severance, site-related exit costs, and contract termination costs. The expenses recognized in 2024 represent costs incurred to achieve the Company’s publicly-announced cost transformation initiative.

3. Represents incremental expenses directly associated with the Company’s publicly-announced cost transformation initiative, primarily related to the cost of external advisors.

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 months ended March 31, 2024, we generated $141.6 million of cash from operating activities, ended the quarter with $234.9 million of cash and cash equivalents and our availability under our credit facilities was $1,018.4 million. We have no debt repayments due in the next twelve months other than required term loan payments of $18.6 million considering the effect of repricing of the U.S. Dollar term loan as described in note 9 to our unaudited consolidated financial statements and receivables facility borrowing of $262.2 million.

Liquidity

The following table presents our primary sources of liquidity:

(in millions)

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 March 31, 2024.

At March 31, 2024, $222.7 million or 94.8% of our $234.9 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)

1. Consists of typical non-cash charges including depreciation and amortization, 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 $77.9 million less cash in 2024 primarily due to lower income before income taxes.

Investing activities used $6.9 million more cash in 2024. The change was primarily attributable to an increase in capital expenditures compared to the prior year.

Financing activities used $144.8 million less cash in 2024 primarily due to the net borrowings made on the receivables facility in 2024 compared to having net repayments in 2023 and higher proceeds received from stock options exercises in 2024 compared to the prior year.

Free cash flow

(in millions)

Free cash flow was $84.6 million lower in 2024 primarily due to lower income before income taxes and an increase in capital spending across the Company in 2024 as noted above.

Indebtedness

For information about our indebtedness, refer to the section entitled “Liquidity” and note 9 to our unaudited condensed consolidated financial statements included in Part I, Item 1 — “Financial statements.”

Quantitative and qualitative disclosures about market risk appear in Item 7A in the Company’s 2023 Annual Report. There were no material changes during the quarter ended March 31, 2024 to this information as reported in the Company’s 2023 Annual Report.

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 March 31, 2024, 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 March 31, 2024, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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.