Avantor(AVTR) - 2021 Q2 - Quarterly Report

FORM 10-Q Filing Information This section provides essential details about the Form 10-Q filing, including the reporting period, registrant identification, and securities information Filing Details This section details the Form 10-Q filing period, registrant identification, registered securities, and filer status - The report is a Quarterly Report on Form 10-Q for the period ended June 30, 2021[2] - Avantor, Inc. is incorporated in Delaware with principal executive offices in Radnor, Pennsylvania[4] Registered Securities | Title of each class | Trading Symbol(s) | Name of each exchange on which registered | | :------------------ | :---------------- | :---------------------------------------- | | Common stock, $0.01 par value | AVTR | New York Stock Exchange | | 6.250% Series A Mandatory Convertible Preferred Stock, $0.01 par value | AVTR PRA | New York Stock Exchange | - The registrant is a Large Accelerated Filer and not a shell company[6] - As of July 21, 2021, 584,163,209 shares of common stock, $0.01 par value per share, were outstanding[6] Table of Contents & Preliminary Information This section provides the report's structural overview, a glossary of terms, and cautionary statements regarding forward-looking information Table of Contents This section outlines the Form 10-Q's structure, listing main parts, items, page references, a glossary, and cautionary statements - The report is structured into PART I — FINANCIAL INFORMATION (Items 1-4) and PART II — OTHER INFORMATION (Items 1-6)[7][8] - The table of contents also includes a Glossary and Cautionary factors regarding forward-looking statements[9] Glossary This section defines key terms and acronyms used in the report for clarity and understanding - Key terms defined include: Adjusted EBITDA, AMEA, AOCI, CERCLA, cGMP, COVID-19, double-digit, EURIBOR, FASB, GAAP, LIBOR, MCPS, OEM, PPE, RSU, SEC, SG&A expenses, Specialty procurement, and VWR[10] Cautionary Factors Regarding Forward-Looking Statements This section warns that forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from projections - All statements, excluding historical facts, are forward-looking, discussing current expectations and projections for financial condition, operations, plans, objectives, performance, and business[11] - Important factors causing material differences from forward-looking statements include operational disruptions, competition, growth strategy execution, supply dependence, acquisition integration, regulatory changes, interest/currency rate fluctuations, intellectual property protection, product liability, and indebtedness[12][13] PART I — FINANCIAL INFORMATION This part presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis of financial condition and results of operations Item 1. Financial statements This item presents Avantor's unaudited condensed consolidated financial statements, including balance sheets, income statements, comprehensive income, equity, cash flows, and notes - The financial statements include unaudited condensed consolidated balance sheets, statements of operations, comprehensive income or loss, stockholders' equity, cash flows, and accompanying notes[16] Index to Unaudited Condensed Consolidated Financial Statements This index lists the specific unaudited condensed consolidated financial statements and their page numbers within the report - The index lists the Unaudited condensed consolidated balance sheets, statements of operations, comprehensive income or loss, stockholders' equity, cash flows, and Notes to unaudited condensed consolidated financial statements[16] Unaudited Condensed Consolidated Balance Sheets The balance sheets present the company's financial position at June 30, 2021, and December 31, 2020, showing increased assets and liabilities from acquisitions and debt | (in millions) | June 30, 2021 | December 31, 2020 | | :------------ | :------------ | :---------------- | | Total Assets | $11,249.7 | $9,906.5 | | Total Liabilities | $8,263.8 | $7,232.2 | | Total Stockholders' Equity | $2,985.9 | $2,674.3 | - Goodwill increased from $2,860.2 million to $3,557.8 million, and other intangible assets, net, increased from $4,048.8 million to $4,372.0 million from December 31, 2020, to June 30, 2021[17] - Debt, net of current portion, increased from $4,867.5 million to $5,611.5 million from December 31, 2020, to June 30, 2021[17] Unaudited Condensed Consolidated Statements of Operations The statements of operations show significant growth in net sales, gross profit, operating income, and net income for the three and six months ended June 30, 2021, driven by strong performance and lower interest expense | (in millions, except per share data) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net sales | $1,858.6 | $1,478.7 | $3,644.2 | $2,997.7 | | Cost of sales | $1,232.1 | $988.1 | $2,404.9 | $2,005.2 | | Gross profit | $626.5 | $490.6 | $1,239.3 | $992.5 | | Operating income | $254.7 | $166.6 | $521.0 | $325.0 | | Net income | $157.8 | $60.2 | $321.8 | $107.2 | | Net income available to common stockholders | $141.6 | $44.0 | $289.5 | $74.9 | | Basic EPS | $0.24 | $0.08 | $0.50 | $0.13 | | Diluted EPS | $0.24 | $0.08 | $0.49 | $0.13 | - Interest expense decreased from $92.1 million to $51.0 million for the three months and from $186.6 million to $102.5 million for the six months ended June 30, 2021[20] Unaudited Condensed Consolidated Statements of Comprehensive Income or Loss This statement details comprehensive income, encompassing net income and other components like foreign currency translation and derivative gains/losses | (in millions) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :------------ | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $157.8 | $60.2 | $321.8 | $107.2 | | Other comprehensive income (loss) | $17.5 | $44.5 | $(20.3) | $(22.9) | | Comprehensive income | $175.3 | $104.7 | $301.5 | $84.3 | - Foreign currency translation resulted in an unrealized gain of $16.5 million for the three months ended June 30, 2021, compared to $44.7 million in the prior year[23] Unaudited Condensed Consolidated Statements of Stockholders' Equity These statements show changes in stockholders' equity components, including MCPS, common stock, accumulated earnings, and AOCI, reflecting comprehensive income, stock-based compensation, and preferred stock yield | (in millions) | Balance at Dec 31, 2020 | Comprehensive income | Stock-based compensation expense | Accumulation of yield on preferred stock | Stock option exercises and other common stock transactions | Balance at June 30, 2021 | | :------------ | :---------------------- | :------------------- | :------------------------------- | :-------------------------------------- | :--------------------------------------------------------- | :----------------------- | | MCPS including paid-in capital | $1,003.7 | — | — | — | — | $1,003.7 | | Common stock including paid-in capital | $1,737.6 | — | $22.3 | $(32.3) | $20.1 | $1,747.7 | | Accumulated earnings (deficit) | $(88.7) | $321.8 | — | — | — | $233.1 | | AOCI | $21.7 | $(20.3) | — | — | — | $1.4 | | Total | $2,674.3 | $301.5 | $22.3 | $(32.3) | $20.1 | $2,985.9 | Unaudited Condensed Consolidated Statements of Cash Flows Cash flow statements indicate increased operating cash, significantly higher investing cash usage due to acquisitions, and substantial financing cash from new debt issuances | (in millions) | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :------------ | :----------------------------- | :----------------------------- | | Net cash provided by operating activities | $390.7 | $342.3 | | Net cash used in investing activities | $(1,203.9) | $(24.4) | | Net cash provided by (used in) financing activities | $777.8 | $(86.4) | | Net change in cash and cash equivalents | $(39.9) | $228.6 | - Cash paid for acquisitions, net of cash acquired, was $1,166.7 million for the six months ended June 30, 2021, compared to zero in the prior year[32] - Debt borrowings were $1,134.6 million for the six months ended June 30, 2021, compared to zero in the prior year[32] Notes to Unaudited Condensed Consolidated Financial Statements These notes provide detailed explanations and additional information for the condensed consolidated financial statements, covering accounting policies, business combinations, segment data, debt, and other disclosures - The notes provide detailed explanations for the amounts reported in the condensed consolidated financial statements[33] - Key areas covered include nature of operations, new accounting standards, business combinations, earnings per share, segment financial information, cash flow disclosures, inventory, intangible assets, commitments and contingencies, debt, AOCI, stock-based compensation, other income/expense, income taxes, derivative activities, and fair value measurements[34][43][45][56][59][65][67][69][71][80][87][89][95][98][101][106] 1. Nature of operations and presentation of financial statements This note describes Avantor's global business, financial statement presentation, consolidation principles, estimates, recent acquisitions, and immaterial classification error corrections - Avantor is a global manufacturer and distributor serving biopharmaceutical, healthcare, education & government, and advanced technologies & applied materials industries[34] - The company acquired RIM Bio and Ritter GmbH in June 2021[38] Correction of Immaterial Classification Error in Net Sales by Product Lines (Six months ended June 30, 2020) | (in millions) | Previously reported | Adjustment | As adjusted | | :---------------------------------- | :------------------ | :--------- | :---------- | | Proprietary materials & consumables | $1,092.1 | $(129.9) | $962.2 | | Third party materials & consumables | $1,154.1 | $125.2 | $1,279.3 | | Services & specialty procurement | $364.6 | $8.1 | $372.7 | | Equipment & instrumentation | $386.9 | $(3.4) | $383.5 | | Total | $2,997.7 | $— | $2,997.7 | - An immaterial classification error in the unaudited condensed consolidated statement of cash flows for the six months ended June 30, 2020, was corrected, increasing 'Provision for accounts receivable and inventory' by $9.2 million and decreasing 'Inventory' by $9.2 million, with no effect on net cash provided by operating activities[42] 2. New accounting standards This note confirms the company adopted a new FASB income tax standard on January 1, 2021, with no material financial statement impact, and no other new standards are expected to have a material impact - The company implemented the FASB's new standard to simplify income tax accounting on January 1, 2021[43] - The adoption of this new standard did not impact the company's financial statements[43] 3. Business combinations This note details the June 2021 acquisitions of Ritter GmbH and RIM Bio, including strategic rationale, preliminary purchase consideration, and fair values of acquired assets and liabilities - On June 10, 2021, Avantor acquired Ritter GmbH for preliminary net cash consideration of $1,077.5 million, expanding proprietary offerings to biopharma and healthcare markets and enhancing lab automation workflows[45][47] Preliminary Fair Values of Net Assets Acquired from Ritter GmbH (June 10, 2021) | (in millions) | June 10, 2021 | | :---------------------------------- | :------------ | | Accounts receivable | $47.6 | | Inventory | $25.4 | | Property, plant & equipment | $111.2 | | Other intangible assets | $476.5 | | Goodwill | $685.2 | | Other assets and liabilities | $(0.6) | | Accounts payable | $(14.1) | | Accrued expenses | $(51.4) | | Debt | $(20.4) | | Deferred income tax liabilities | $(146.3) | | Total net assets | $1,113.1 | - On June 1, 2021, Avantor acquired RIM Bio, a China-based single-use bioprocess bag manufacturer, to expand single-use manufacturing, distribution, and cleanroom capabilities in the AMEA region; this acquisition's impact was not material to financial statements[53] - Acquisition-related costs of $21.6 million and $24.6 million were incurred for the three and six months ended June 30, 2021, respectively, and expensed in SG&A[54] 4. Earnings per share This note reconciles basic and diluted earnings per share, detailing the numerator (net income available to common stockholders) and denominator (weighted average shares outstanding) Earnings Per Share (Three months ended June 30) | (in millions, except per share data) | 2021 | 2020 | | :----------------------------------- | :--- | :--- | | Basic Earnings (numerator) | $141.6 | $44.0 | | Basic Weighted average shares outstanding (denominator) | 582.6 | 575.6 | | Basic Earnings per share | $0.24 | $0.08 | | Diluted Earnings per share | $0.24 | $0.08 | Earnings Per Share (Six months ended June 30) | (in millions, except per share data) | 2021 | 2020 | | :----------------------------------- | :--- | :--- | | Basic Earnings (numerator) | $289.5 | $74.9 | | Basic Weighted average shares outstanding (denominator) | 581.9 | 574.6 | | Basic Earnings per share | $0.50 | $0.13 | | Diluted Earnings per share | $0.49 | $0.13 | - Diluted EPS calculations for both periods excluded 62.9 million common stock equivalents under the MCPS because they were anti-dilutive[58] 5. Segment financial information This note presents net sales and Adjusted EBITDA by geographic segment (Americas, Europe, AMEA) and reconciles total Adjusted EBITDA to net income Net Sales by Segment | (in millions) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :-------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Americas | $1,069.8 | $857.5 | $2,104.9 | $1,756.6 | | Europe | $666.0 | $521.0 | $1,316.4 | $1,065.0 | | AMEA | $122.8 | $100.2 | $222.9 | $176.1 | | Total | $1,858.6 | $1,478.7 | $3,644.2 | $2,997.7 | Adjusted EBITDA by Segment | (in millions) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :-------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Americas | $251.7 | $197.4 | $503.7 | $387.4 | | Europe | $123.8 | $88.3 | $254.9 | $180.0 | | AMEA | $28.5 | $22.5 | $51.1 | $35.9 | | Corporate | $(37.4) | $(34.9) | $(80.0) | $(67.2) | | Total | $366.6 | $273.3 | $729.7 | $536.1 | Reconciliation of Adjusted EBITDA from Net Income | (in millions) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :----------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $157.8 | $60.2 | $321.8 | $107.2 | | Interest expense | $51.0 | $92.1 | $102.5 | $186.6 | | Income tax expense | $57.3 | $18.5 | $104.7 | $36.2 | | Depreciation and amortization | $86.1 | $97.8 | $175.1 | $194.3 | | Loss on extinguishment of debt | $3.2 | — | $8.4 | — | | Net foreign currency loss (gain) from financing activities | $1.2 | $(1.8) | $2.0 | $(0.2) | | Other stock-based compensation expense | $0.7 | $1.1 | $1.3 | — | | Acquisition-related expenses | $21.6 | — | $24.6 | — | | Integration-related expenses | $0.5 | $2.2 | $0.5 | $7.6 | | Restructuring and severance charges | $0.2 | $3.2 | $1.8 | $4.4 | | Receipt of disgorgement penalty | $(13.0) | — | $(13.0) | — | | Adjusted EBITDA | $366.6 | $273.3 | $729.7 | $536.1 | Net Sales by Product Line | (in millions, as adjusted) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :---------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Proprietary materials & consumables | $630.8 | $483.6 | $1,196.0 | $962.2 | | Third party materials & consumables | $739.4 | $629.0 | $1,497.8 | $1,279.3 | | Services & specialty procurement | $232.2 | $181.6 | $452.0 | $372.7 | | Equipment & instrumentation | $256.2 | $184.5 | $498.4 | $383.5 | | Total | $1,858.6 | $1,478.7 | $3,644.2 | $2,997.7 | 6. Supplemental disclosures of cash flow information This note provides additional details on cash and cash equivalents, restricted cash, cash paid for income taxes, interest, and leases, plus non-cash investing and financing activities Cash and Cash Equivalents | (in millions) | June 30, 2021 | December 31, 2020 | | :--------------------------------------- | :------------ | :---------------- | | Cash and cash equivalents | $223.0 | $286.6 | | Restricted cash classified as other assets | $26.3 | $2.6 | | Total | $249.3 | $289.2 | - Cash paid for income taxes, net, was $69.5 million for the six months ended June 30, 2021 (vs $25.5 million in 2020)[66] - Cash paid for interest was $92.9 million for the six months ended June 30, 2021 (vs $173.9 million in 2020)[66] - Preliminary fair value of acquisition contingent consideration was $35.6 million for the six months ended June 30, 2021[66] 7. Inventory This note details the company's inventory composition, showing increases in merchandise, finished goods, raw materials, and work in process from December 31, 2020, to June 30, 2021 Components of Inventory | (in millions) | June 30, 2021 | December 31, 2020 | | :-------------------- | :------------ | :---------------- | | Merchandise inventory | $512.3 | $463.0 | | Finished goods | $122.4 | $115.9 | | Raw materials | $162.7 | $123.2 | | Work in process | $43.5 | $37.5 | | Total | $840.9 | $739.6 | 8. Other intangible assets This note breaks down other intangible assets, including customer relationships, trade names, and developed technology, showing gross value, accumulated amortization, and carrying value Components of Other Intangible Assets (June 30, 2021) | (in millions) | Gross value | Accumulated amortization | Carrying value | | :--------------------- | :---------- | :----------------------- | :------------- | | Customer relationships | $5,019.4 | $1,005.4 | $4,014.0 | | VWR trade name | $272.7 | $188.9 | $83.8 | | Other finite-lived | $318.8 | $136.9 | $181.9 | | Total finite-lived | $5,610.9 | $1,331.2 | $4,279.7 | | Indefinite-lived | — | — | $92.3 | | Total | — | — | $4,372.0 | 9. Commitments and contingencies This note discusses environmental liabilities, product liability, patent infringement, and litigation, detailing specific remediation obligations and the absence of material outstanding litigation - At June 30, 2021, the accrued obligation for groundwater remediation near the Phillipsburg, New Jersey plant was $3.5 million (undiscounted $4.2 million)[73] - A liability of $3.3 million was recorded at June 30, 2021, for remediation and monitoring costs at the Gliwice, Poland chemical manufacturing site due to soil and groundwater contamination[74] - The business involves risks of product liability, patent infringement, and other claims, for which the company maintains insurance and indemnification agreements[76][77] - At June 30, 2021, no outstanding litigation was believed to result in material losses[78] 10. Debt This note details the company's debt, including term loans, notes, credit facility availability, recent amendments, prepayments, and debt covenants Debt Information | (in millions) | June 30, 2021 | December 31, 2020 | | :---------------------------------------------------------------------------------------------------- | :------------ | :---------------- | | Total debt, gross | $5,733.3 | $4,972.2 | | Less: unamortized deferred financing costs | $(82.3) | $(78.3) | | Total debt | $5,651.0 | $4,893.9 | | Current portion of debt | $39.5 | $26.4 | | Debt, net of current portion | $5,611.5 | $4,867.5 | Availability Under Credit Facilities (June 30, 2021) | (in millions) | Receivables facility | Revolving credit facility | Total | | :------------------------------ | :------------------- | :------------------------ | :---- | | Capacity | $300.0 | $515.0 | $815.0 | | Unused availability | $291.2 | $513.4 | $804.6 | - On July 7, 2021, the LIBOR floor for U.S. Dollar term loans was reduced from 1.00% to 0.50%[83] - On June 30, 2021, prepayments of $61.9 million on U.S. dollar term loans and $39.1 million on Euro term loans resulted in a $3.2 million loss on extinguishment of debt[83] - New term loans totaling $1,134.6 million were issued on June 10, 2021, to fund the Ritter GmbH acquisition[83] 11. Accumulated other comprehensive income or loss This note details changes in AOCI components, including foreign currency translation adjustments, derivative instruments, and defined benefit plans, across various periods Changes in Components of AOCI (June 30, 2021) | (in millions) | Foreign currency translation | Derivative instruments | Defined benefit plans | Total | | :-------------------------------------- | :--------------------------- | :--------------------- | :-------------------- | :---- | | Balance at March 31, 2021 | $13.6 | $(1.2) | $(28.5) | $(16.1) | | Unrealized gain (loss) | $16.5 | $(1.2) | — | $15.3 | | Reclassification of loss (gain) into earnings | — | $1.5 | $(0.2) | $1.3 | | Income tax effect | $1.0 | $(0.1) | — | $0.9 | | Balance at June 30, 2021 | $31.1 | $(1.0) | $(28.7) | $1.4 | - The foreign currency translation component of AOCI showed an unrealized gain of $16.5 million for the three months ended June 30, 2021[87] 12. Stock-based compensation This note presents stock-based compensation expense by award type and details outstanding stock options and unvested restricted stock units, including grants, exercises, and forfeitures Stock-based Compensation Expense | (in millions) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :-------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Stock options | $4.7 | $4.5 | $9.3 | $8.4 | | RSUs | $6.5 | $5.5 | $12.2 | $10.4 | | Other | $1.0 | $1.5 | $2.1 | $0.8 | | Total | $12.2 | $11.6 | $23.6 | $20.0 | - At June 30, 2021, unvested awards had $98.6 million in remaining stock-based compensation expense to be recognized over a weighted average period of 1.9 years[90] - At June 30, 2021, 18.4 million stock options were outstanding with a weighted average exercise price of $19.96 and an aggregate intrinsic value of $287.0 million[92] - At June 30, 2021, 4.4 million RSUs were unvested with a weighted average grant date fair value of $19.23[94] 13. Other income or expense, net This note details other income or expense, net, including foreign currency gains/losses, defined benefit plan income, and a significant disgorgement penalty Components of Other Income or Expense, Net | (in millions) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :--------------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net foreign currency (loss) gain from financing activities | $(1.2) | $1.8 | $(2.0) | $0.2 | | Income related to defined benefit plans | $2.6 | $2.3 | $5.0 | $4.6 | | Other | $13.2 | $0.1 | $13.4 | $0.2 | | Total Other income, net | $14.6 | $4.2 | $16.4 | $5.0 | - The company recognized $13.0 million of other income during the three months ended June 30, 2021, related to a disgorgement penalty from Goldman Sachs[96] 14. Income taxes This note presents the relationship between income tax expense and income before taxes, explaining the effective income tax rate and its changes, primarily due to geographical income distribution Income Tax Expense and Effective Income Tax Rate | (in millions) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :-------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Income before income taxes | $215.1 | $78.7 | $426.5 | $143.4 | | Income tax expense | $(57.3) | $(18.5) | $(104.7) | $(36.2) | | Effective income tax rate | 26.6% | 23.5% | 24.5% | 25.2% | - The change in the effective tax rate is primarily related to the change in the geographical distribution of income before income taxes[100] 15. Derivative and hedging activities This note describes the company's strategies for managing foreign currency exchange rate exposure using economic hedges and a net investment hedge, detailing instruments and effectiveness - Avantor engages in hedging activities to reduce foreign currency exchange rate exposure, including economic hedges for euro-denominated term loans/notes and short-term foreign currency forward contracts[101] - The company designated its outstanding €400.0 million 3.875% senior unsecured notes as a hedge of its net investment in certain European operations[102] - The net investment hedge was considered perfectly effective at June 30, 2021[104] - The accumulated loss related to the net investment hedges classified in AOCI was $22.4 million at June 30, 2021 (vs $37.6 million at December 31, 2020)[105] 16. Financial instruments and fair value measurements This note provides fair value information for financial instruments, including cash, accounts receivable, accounts payable, and debt, and details changes in contingent consideration liabilities Fair Values of Debt Instruments (June 30, 2021) | (in millions) | Carrying value | Fair value | | :-------------------------------------- | :------------- | :--------- | | Total debt (excluding deferred financing costs) | $5,733.3 | $5,870.0 | - The fair values of debt instruments are based on standard pricing models and private trading data, classified as Level 2 measurements[110] - Contingent consideration liabilities had an ending balance of $35.2 million at June 30, 2021, primarily due to acquisitions, and are classified as Level 3 measurements[111] Item 2. Management's discussion and analysis of financial condition and results of operations This section provides management's perspective on financial condition and results of operations, highlighting key performance indicators, business trends, and segment-level financial analysis - This discussion should be read in conjunction with the accompanying condensed consolidated financial statements and notes, focusing on material changes since December 31, 2020[114] - Key indicators monitored include: net sales, gross margin, operating income, net income or loss, organic net sales growth, Adjusted EBITDA and Adjusted EBITDA margin, cash flows from operating activities, and free cash flow[120] Basis of presentation This sub-section clarifies that the discussion should be read with the condensed consolidated financial statements and notes, focusing on material changes since the last Annual Report - The discussion should be read in conjunction with the accompanying condensed consolidated financial statements and notes[114] - The analysis focuses on material changes in financial condition and results of operations since December 31, 2020[114] Overview Avantor, a leading global provider, reported strong Q2 2021 financial results with significant increases in net sales, net income, and Adjusted EBITDA, including substantial organic growth - Avantor is a leading global provider of mission-critical products and services to customers in the biopharmaceutical, healthcare, education & government, and advanced technologies & applied materials industries[115] - In the second quarter of 2021, net sales were $1,858.6 million, net income was $157.8 million, and Adjusted EBITDA was $366.6 million[116] - Net sales increased by 25.7%, including 20.5% organic growth, compared to the same period in 2020[116] - The acquisitions of Ritter GmbH and RIM Bio did not materially impact the results of operations for the three and six months ended June 30, 2021[115] Factors and current trends affecting our business and results of operations This section highlights the ongoing impact of the COVID-19 pandemic on the company's results across all three regions for the three and six months ended June 30, 2021 - The results for each of the three regions (Americas, Europe, AMEA) continue to be impacted by the COVID-19 pandemic for the three and six months ended June 30, 2021[118] Key indicators of performance and financial condition This section defines key GAAP and non-GAAP financial measures, including organic net sales growth, Adjusted EBITDA, and free cash flow, used to assess company performance - Key indicators monitored include: Net sales, gross margin, operating income, net income or loss (GAAP measures)[120] - Non-GAAP measures include: Organic net sales growth (eliminates impacts of acquisitions/disposals and foreign currency), Adjusted EBITDA and Adjusted EBITDA margin (measures operating performance exclusive of interest, taxes, depreciation, amortization, and certain other adjustments), and Free cash flow (cash flow from operating activities plus acquisition-related costs paid, less capital expenditures)[120] Results of operations This section analyzes the company's financial performance, including net sales, gross margin, operating income, net income, and Adjusted EBITDA, segmented by geography and product line - Results of operations are presented consistent with how management manages the business, evaluates performance, and allocates resources[122] - Discussion includes net sales and Adjusted EBITDA by geographic segment (Americas, Europe, and AMEA), with corporate costs managed separately[122] Executive summary Avantor achieved strong Q2 revenue growth, driven by biopharma, healthcare, education & government, and advanced technologies & applied materials end markets, augmented by COVID-19 sales, leading to gross margin and Adjusted EBITDA margin expansion Q2 2021 Financial Highlights | (dollars in millions) | Three months 2021 | Three months 2020 | Change | | :-------------------- | :---------------- | :---------------- | :----- | | Net sales | $1,858.6 | $1,478.7 | $379.9 | | Gross margin | 33.7% | 33.2% | 50 bps | | Operating income | $254.7 | $166.6 | $88.1 | | Net income | $157.8 | $60.2 | $97.6 | | Adjusted EBITDA | $366.6 | $273.3 | $93.3 | | Adjusted EBITDA margin | 19.7% | 18.5% | 125 bps | - Second quarter revenue growth reflects strong growth in biopharma, healthcare, education & government, and advanced technologies & applied materials end markets, augmented by COVID-19 related sales[123] - Double-digit growth of proprietary materials and consumables, commercial excellence, productivity, and cost containment contributed to gross margin and Adjusted EBITDA margin expansion[123] Net sales Net sales significantly increased for the three and six months ended June 30, 2021, driven by strong organic growth across all segments and favorable foreign currency, with notable double-digit growth in biopharma and healthcare - For the three months ended June 30, net sales increased $379.9 million (25.7%), including $74.8 million (5.2%) favorable foreign currency impact; organic growth was $305.1 million (20.5%)[124] - Americas net sales grew 24.8% (23.6% organic), driven by double-digit growth in Biopharma (COVID-19 vaccine, R&D), Healthcare (medical/clinical labs, COVID-19 diagnostics, silicone offerings), and Education & Government (academic labs recovery)[126] - Europe net sales grew 27.8% (16.5% organic), with double-digit growth in Biopharma (COVID-19 vaccine, consumables, PPE), Healthcare (COVID-19 testing, silicone offerings), Education & Government, and Advanced Technologies & Applied Materials[127][128] - AMEA net sales grew 22.6% (16.4% organic), driven by double-digit growth in Biopharma (proprietary production materials, single-use offerings) and mid single-digit growth in Advanced Technologies & Applied Materials (semiconductor industry)[128][129] - For the six months ended June 30, net sales increased $646.5 million (21.6%), including $134.3 million (4.6%) favorable foreign currency impact; organic growth was $512.2 million (17.0%)[131] Gross margin Gross margin expanded for both the three and six months ended June 30, 2021, primarily due to commercial excellence and a favorable product mix, including strong proprietary offering sales Gross Margin Percentage | Percentage | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Change | | :----------- | :------------------------------- | :------------------------------- | :----- | | Gross margin | 33.7% | 33.2% | 50 bps | | Percentage | Six months ended June 30, 2021 | Six months ended June 30, 2020 | Change | | :----------- | :----------------------------- | :----------------------------- | :----- | | Gross margin | 34.0% | 33.1% | 90 bps | - The increase in gross margin was primarily due to commercial excellence and favorable product mix from strong sales of proprietary product offerings[134] Operating income Operating income significantly increased for both the three and six months ended June 30, 2021, driven by higher gross profit, partially offset by increased operating expenses from acquisitions and incentive compensation Operating Income | (in millions) | Three months 2021 | Three months 2020 | Change | | :--------------- | :---------------- | :---------------- | :----- | | Operating income | $254.7 | $166.6 | $88.1 | | (in millions) | Six months 2021 | Six months 2020 | Change | | :--------------- | :-------------- | :-------------- | :----- | | Operating income | $521.0 | $325.0 | $196.0 | - Gross profit increased by $135.9 million for the three months and $246.8 million for the six months ended June 30, 2021[137] - The increase in operating expenses primarily relates to acquisition-related expenses and increased incentive compensation expense[137] Net income or loss Net income substantially increased for both the three and six months ended June 30, 2021, driven by operating income growth and lower interest expense, partially offset by higher income tax expense and a loss on debt extinguishment Net Income | (in millions) | Three months 2021 | Three months 2020 | Change | | :----------- | :---------------- | :---------------- | :----- | | Net income | $157.8 | $60.2 | $97.6 | | (in millions) | Six months 2021 | Six months 2020 | Change | | :----------- | :-------------- | :-------------- | :----- | | Net income | $321.8 | $107.2 | $214.6 | - The increase in net income was primarily driven by operating income growth and lower interest expense due to debt repricings and refinancings[139] - This was partially offset by higher income tax expense and a loss on extinguishment of debt related to optional prepayments[139] Adjusted EBITDA and Adjusted EBITDA margin Adjusted EBITDA significantly increased for both the three and six months ended June 30, 2021, across all segments, driven by gross margin expansion and favorable sales volume, partially offset by increased incentive compensation and SG&A expenses Adjusted EBITDA and Margin | (in millions) | Three months 2021 | Three months 2020 | Change | | :-------------------- | :---------------- | :---------------- | :----- | | Total Adjusted EBITDA | $366.6 | $273.3 | $93.3 | | Adjusted EBITDA margin | 19.7% | 18.5% | 1.2% | | (in millions) | Six months 2021 | Six months 2020 | Change | | :-------------------- | :-------------- | :-------------- | :----- | | Total Adjusted EBITDA | $729.7 | $536.1 | $193.6 | | Adjusted EBITDA margin | 20.0% | 17.9% | 2.1% | - For the three months, Adjusted EBITDA grew 34.2% (29.2% adjusted for foreign currency), driven by gross margin expansion and favorable volume, partially offset by increased incentive compensation and SG&A expenses[144][145] - For the six months, Adjusted EBITDA grew 36.1% (31.6% adjusted for foreign currency), with similar drivers across segments[146][147] Reconciliations of non-GAAP financial measures This section provides a detailed reconciliation of net income to Adjusted EBITDA for the three and six months ended June 30, 2021, and 2020 Reconciliation of Net Income to Adjusted EBITDA | (in millions) | Three months ended June 30, 2021 | Three months ended June 30, 2020 | Six months ended June 30, 2021 | Six months ended June 30, 2020 | | :----------------------------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net income | $157.8 | $60.2 | $321.8 | $107.2 | | Interest expense | $51.0 | $92.1 | $102.5 | $186.6 | | Income tax expense | $57.3 | $18.5 | $104.7 | $36.2 | | Depreciation and amortization | $86.1 | $97.8 | $175.1 | $194.3 | | Loss on extinguishment of debt | $3.2 | — | $8.4 | — | | Net foreign currency loss (gain) from financing activities | $1.2 | $(1.8) | $2.0 | $(0.2) | | Other stock-based compensation expense | $0.7 | $1.1 | $1.3 | — | | Acquisition-related expenses | $21.6 | — | $24.6 | — | | Integration-related expenses | $0.5 | $2.2 | $0.5 | $7.6 | | Restructuring and severance charges | $0.2 | $3.2 | $1.8 | $4.4 | | Receipt of disgorgement penalty | $(13.0) | — | $(13.0) | — | | Adjusted EBITDA | $366.6 | $273.3 | $729.7 | $536.1 | Liquidity and capital resources This section discusses the company's ability to meet financial obligations, detailing liquidity sources, historical cash flow, free cash flow generation, debt structure, and covenants - Short-term cash requirements are primarily funded from operating cash flows, while long-term financing comes from indebtedness[150] - For the six months ended June 30, 2021, the company generated $390.7 million of cash from operating activities[150] - At quarter-end, cash and cash equivalents were $223.0 million, with $804.6 million available under credit facilities[151] Liquidity Avantor's total liquidity at June 30, 2021, was $1,027.6 million, comprising cash and unused credit facilities, with sufficient capital resources, though much cash is held by non-U.S. subsidiaries Primary Sources of Liquidity (June 30, 2021) | (in millions) | Amount | | :--------------------------------------- | :----- | | Unused availability under credit facilities | $804.6 | | Cash and cash equivalents | $223.0 | | Total liquidity | $1,027.6 | - At June 30, 2021, $194.1 million (87.0%) of cash and cash equivalents was held by non-U.S. subsidiaries and may be subject to certain taxes upon repatriation[153] - The financial covenant under senior secured credit facilities was not applicable at June 30, 2021, as less than 35% of the revolving credit facility was drawn[153] Historical cash flows Operating cash flows increased due to higher net income, investing activities used significantly more cash due to acquisitions, and financing activities provided substantial cash from new debt issuances Summary of Cash Flows (Six months ended June 30) | (in millions) | 2021 | 2020 | Change | | :--------------------- | :--- | :--- | :----- | | Operating activities | $390.7 | $342.3 | $48.4 | | Investing activities | $(1,203.9) | $(24.4) | $(1,179.5) | | Financing activities | $777.8 | $(86.4) | $864.2 | - Cash flows from operating activities increased primarily due to significantly higher net income, offset by increased working capital requirements and larger incentive compensation payouts[156] - Investing activities used significantly more cash due to $1,166.7 million paid for the acquisitions of Ritter GmbH and RIM Bio, as well as increased capital spending[156] - Financing activities provided more cash primarily due to the issuance of new Euro term loans to finance the Ritter GmbH acquisition, partially offset by optional prepayments on existing term loans[156] Free cash flow Free cash flow increased by $60.6 million to $376.8 million for the six months ended June 30, 2021, driven by higher operating cash flows, partially offset by increased capital spending and acquisition-related expenses Free Cash Flow (Six months ended June 30) | (in millions) | 2021 | 2020 | Change | | :---------------------------------------- | :--- | :--- | :----- | | Net cash provided by operating activities | $390.7 | $342.3 | $48.4 | | Acquisition-related expenses paid | $24.6 | — | $24.6 | | Capital expenditures | $(38.5) | $(26.1) | $(12.4) | | Free cash flow | $376.8 | $316.2 | $60.6 | - Free cash flow was $60.6 million higher in 2021 due to changes in cash flows from operating activities, which included $24.6 million of non-recurring acquisition-related costs, offset by an increase in capital spending[157][158] Indebtedness This section directs readers to the 'Liquidity' section and Note 10 for detailed information on the company's indebtedness - For information about indebtedness, refer to the 'Liquidity' section and Note 10 to the unaudited condensed consolidated financial statements[159] New accounting standards This section directs readers to Note 2 of the financial statements for information on new accounting standards - For information about new accounting standards, refer to Note 2 to the unaudited condensed consolidated financial statements[160] Item 3. Quantitative and qualitative disclosures about market risk This item reports no significant changes to the company's market risk disclosures since its last Annual Report - There have been no significant changes to the disclosures about market risk included in the company's Annual Report[161] Item 4. Controls and procedures This item reports on the effectiveness of disclosure controls and procedures and confirms no material changes in internal control over financial reporting - Management evaluated the effectiveness of disclosure controls and procedures as of June 30, 2021[162] - There have been no material changes in internal control over financial reporting during the fiscal quarter ended June 30, 2021[163] Management's evaluation of disclosure controls and procedures Management, with the CEO and CFO, concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of June 30, 2021 - The Chief Executive Officer and Chief Financial Officer concluded that the design and operation of disclosure controls and procedures were effective as of June 30, 2021[162] Changes in internal control over financial reporting No changes in the company's internal control over financial reporting during the fiscal quarter ended June 30, 2021, materially affected or are reasonably likely to materially affect it - No changes in internal control over financial reporting during the fiscal quarter ended June 30, 2021, have materially affected or are reasonably likely to materially affect internal control over financial reporting[163] PART II — OTHER INFORMATION This part contains disclosures on legal proceedings, risk factors, equity sales, defaults, mine safety, other information, and exhibits Item 1. Legal proceedings This item discloses potential environmental liabilities at Phillipsburg, New Jersey, and Paris, Kentucky, and for elemental mercury export, with expected settlements under $1 million, and refers to Note 9 - The EPA notified the company of potential liabilities under the Toxic Substances Control Act and the Emergency Planning and Community Right to Know Act for its Phillipsburg, New Jersey facility[164] - Additional potential liabilities relate to the Paris, Kentucky facility and export shipments of elemental mercury, which were voluntarily disclosed[164] - The company expects to settle these matters for less than $1 million[164] - Additional information regarding legal proceedings is incorporated by reference from Note 9 to the financial statements[165] Item 1A. Risk factors This item reports no material changes to the risk factors previously disclosed in Part I, Item 1A of the company's Annual Report - There have been no material changes to the risk factors disclosed in Part I—Item 1A of the Annual Report[166] Item 2. Unregistered sales of equity securities and use of proceeds This item reports no unregistered sales of equity securities or use of proceeds during the period - No unregistered sales of equity securities and use of proceeds[166] Item 3. Defaults upon senior securities This item reports no defaults upon senior securities during the period - No defaults upon senior securities[166] Item 4. Mine safety disclosures This item states that the disclosure is not applicable to the company - Mine safety disclosures are not applicable[166] Item 5. Other information This item reports no other information to disclose - No other information to disclose[166] Item 6. Exhibits This item lists exhibits filed with the Form 10-Q, including corporate documents, credit agreement amendments, and certifications - Exhibits include the Third Amended and Restated Certificate of Incorporation, Amendment No. 6 and No. 7 to the Credit Agreement, an Amended and Restated Employment Letter Agreement, Certifications of Principal Executive Officer and Principal Financial Officer (pursuant to Section 302 and 906 of Sarbanes-Oxley Act), and XBRL exhibits[169] Signature This section contains the official signature block, certifying the report on behalf of Avantor, Inc Signature This section contains the official signature block, certifying the report on behalf of Avantor, Inc - The report is signed by Steven Eck, Senior Vice President, Chief Accounting Officer (Principal Accounting Officer) of Avantor, Inc[171] - The report was signed on July 30, 2021[171]