Avantor(AVTR) - 2022 Q4 - Annual Report

PART I Business Avantor provides mission-critical products and services to biopharma, healthcare, and advanced technology industries globally - Avantor serves over 300,000 customer locations in more than 180 countries, positioning itself as a one-stop shop for research, scale-up, and manufacturing activities[15][16] 2022 Net Sales Breakdown by Segment and Customer Group | Category | Segment/Group | Percentage of Net Sales | | :--- | :--- | :--- | | Geographic Segment | Americas | ~60% | | | Europe | ~33% | | | AMEA | ~7% | | Customer Group | Biopharma | ~54% | | | Advanced Technologies & Applied Materials | ~26% | | | Education & Government | ~12% | | | Healthcare | ~8% | - The company's product and service offerings are largely recurring, with over 85% of net sales derived from such offerings[25] - Avantor operates over 200 facilities globally, including more than 35 manufacturing sites (12 of which are cGMP compliant) and 13 innovation centers[34][35] - As of December 31, 2022, the company had approximately 14,500 employees in over 30 countries, with about 6,200 in the U.S[40] - The company is subject to extensive regulation by global authorities including the FDA, DEA, and EMA, and must comply with standards like cGMP and ICH Q7[53][54] Risk Factors The company faces significant risks from supply chain disruptions, competition, regulations, and its debt burden - Business & Industry Risks: - The COVID-19 pandemic continues to pose risks, potentially causing unpredictable demand shifts and supply chain disruptions - The company has experienced challenges from global supply chain disruptions and inflationary pressures across all cost categories - Competition is intense, with pressures from regional players, large multinationals, and consolidation in the biopharma and healthcare industries - A significant portion of revenue comes from outside the U.S, exposing the company to risks from currency fluctuations, political instability, and trade restrictions - The business depends on complex information systems, and any failure or security breach could harm operations and reputation[66][69][71][84] - Regulatory Risks: - The company must comply with a wide array of laws from agencies like the FDA, DEA, and EMA, with failure to comply potentially leading to adverse consequences - The business is subject to stringent environmental, health, and safety laws (e.g, CERCLA), and could face significant costs for compliance or remediation[111][112][118] - Indebtedness Risks: - A significant amount of debt could make it difficult to satisfy obligations, expose the company to interest rate risk on variable-rate borrowings, and restrict strategic actions - Credit facilities contain restrictive covenants that could limit business activities and lead to default if breached[123][124] - Stock Ownership Risks: - The company has no current plans to pay cash dividends on its common stock - The certificate of incorporation includes an exclusive forum provision, limiting stockholder litigation to courts within Delaware, which could discourage lawsuits[127][129] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[133] Properties The company operates a global network of owned and leased manufacturing sites, distribution centers, and offices - Key owned properties in the Americas include manufacturing and distribution facilities in Phillipsburg, NJ, and Paris, KY[134] - Key leased properties include the corporate headquarters in Radnor, PA, and a manufacturing and research facility in Carpinteria, CA[134] - In Europe, the company owns manufacturing and distribution centers in Schwabmuenchen, Germany, and Briare, France, and leases a major distribution center in Lutterworth, United Kingdom[135] - In the AMEA region, the company owns a manufacturing facility in Changzhou, China, and leases distribution and service centers in Singapore and India[135] Legal Proceedings Details regarding legal proceedings are incorporated by reference from the consolidated financial statements - For details on legal proceedings, refer to Note 13 of the consolidated financial statements[136] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[136] Information about our Executive Officers This section provides biographical summaries of the company's executive officers and their professional experience - Michael Stubblefield serves as the Director, President, and Chief Executive Officer[137][138] - Thomas Szlosek is the Executive Vice President and Chief Financial Officer[137][138] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE under the symbol "AVTR" and no dividends are currently expected - The company's common stock trades on the NYSE under the ticker symbol AVTR[143] - Avantor does not currently expect to pay any dividends on its common stock[144] Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, net sales grew 1.7% to $7.51 billion, driven by biopharma and advanced technologies despite currency headwinds FY 2022 Financial Highlights | Metric | FY 2022 | FY 2021 | Change | | :--- | :--- | :--- | :--- | | Net Sales | $7,512.4 M | $7,386.1 M | +1.7% | | Net Income | $686.5 M | $572.6 M | +19.9% | | Adjusted EBITDA | $1,570.7 M | $1,458.6 M | +7.7% | | Gross Margin | 34.6% | 33.9% | +70 bps | | Adjusted EBITDA Margin | 20.9% | 19.8% | +110 bps | 2022 Net Sales Growth Reconciliation (in millions) | Segment | Net Sales Growth | Foreign Currency Impact | M&A Impact | Organic Net Growth | | :--- | :--- | :--- | :--- | :--- | | Americas | $233.8 | $(14.1) | $133.1 | $114.8 | | Europe | $(160.8) | $(276.4) | $92.0 | $23.6 | | AMEA | $53.3 | $(26.6) | $43.1 | $36.8 | | Total | $126.3 | $(317.1) | $268.2 | $175.2 | - Organic sales growth of 2.4% (6.0% excluding COVID-19 headwinds) was primarily driven by growth in proprietary products and services[168] - Cash flow from operating activities decreased by $110.0 million to $843.6 million in 2022, primarily due to higher payments for interest, taxes, and incentive compensation[192][193] - Free cash flow decreased by $210.1 million to $710.2 million in 2022, reflecting lower operating cash flow and increased capital expenditures[196] - Critical accounting policies include testing goodwill and other intangible assets for impairment, estimating valuation allowances on deferred tax assets, accounting for uncertain tax positions, and valuing assets and liabilities in business combinations[205][206][209][211][218] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from foreign currency exchange rates and interest rate fluctuations - Foreign Currency Risk: A 10% strengthening of the U.S dollar in 2022 would have decreased net income by $14.3 million and Adjusted EBITDA by $60.3 million[223] - Interest Rate Risk: At December 31, 2022, a 100 basis point (1%) increase in variable interest rates would have increased annual interest expense by $20.4 million[225] Financial Statements and Supplementary Data The required financial statements and supplementary data are included at the end of the report - The required information is located at the end of the report, starting on page F-1[227] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants - None[229] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of year-end 2022 - Management concluded that disclosure controls and procedures were effective as of December 31, 2022[230] - Management concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework[232] - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the effectiveness of the company's internal control over financial reporting[233][236] Other Information The company reports no other information for this item - None[242] Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable to the company - Not applicable[242] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, officers, and governance is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference from the 2023 Proxy Statement[244] Executive Compensation Information regarding executive compensation is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference from the 2023 Proxy Statement[245] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference from the 2023 Proxy Statement[245] Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference from the 2023 Proxy Statement[245] Principal Accountant Fees and Services Information regarding accountant fees and services is incorporated by reference from the 2023 proxy statement - Information is incorporated by reference from the 2023 Proxy Statement[246] PART IV Exhibits and Financial Statement Schedules This section lists all documents filed with the Form 10-K, including financial statements and key corporate agreements - The financial statements and schedules are indexed on page F-1[247] - Exhibits filed include key corporate governance documents, debt agreements (such as the Credit Agreement and various Indentures), and executive compensation plans (such as the 2019 Equity Incentive Plan)[248][259][260] Form 10-K Summary The company reports no summary for this item - None[263] Financial Statements Report of Independent Registered Public Accounting Firm The auditor issued unqualified opinions on the financial statements and internal controls, highlighting two Critical Audit Matters - The auditor issued an unqualified opinion on both the financial statements and the effectiveness of internal control over financial reporting[271][272] - A Critical Audit Matter was identified related to the impairment testing of Goodwill for the Americas and Europe reporting units, which required significant auditor judgment regarding assumptions for net sales growth, discount rates, and peer group selection[277][278] - A second Critical Audit Matter concerned the impairment evaluation of long-lived assets for Ritter GmbH, following a decline in revenues compared to expectations, which required significant judgment in assessing impairment indicators and future cash flow forecasts[280][283] Consolidated Financial Statements The statements show total assets of $13.46 billion and net income of $686.5 million for the year ended December 31, 2022 Consolidated Balance Sheet Data (in millions) | Account | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | $2,657.9 | $2,477.2 | | Goodwill | $5,652.6 | $5,341.1 | | Total Assets | $13,464.3 | $13,897.2 | | Total Current Liabilities | $1,658.8 | $1,450.8 | | Debt, net of current portion | $5,923.3 | $6,978.0 | | Total Liabilities | $8,608.9 | $9,700.2 | | Total Stockholders' Equity | $4,855.4 | $4,197.0 | Consolidated Statement of Operations Data (in millions) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net Sales | $7,512.4 | $7,386.1 | $6,393.6 | | Gross Profit | $2,602.8 | $2,502.7 | $2,080.5 | | Operating Income | $1,130.2 | $972.2 | $706.8 | | Net Income | $686.5 | $572.6 | $116.6 | | Diluted EPS | $1.01 | $0.85 | $0.09 | Consolidated Statement of Cash Flows Data (in millions) | Account | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $843.6 | $953.6 | $929.8 | | Net cash used in investing activities | $(109.6) | $(4,121.7) | $(59.1) | | Net cash (used in) provided by financing activities | $(648.7) | $3,219.2 | $(782.9) | Notes to Consolidated Financial Statements The notes detail accounting policies, business combinations, debt instruments, and other key financial information - Business Combinations (Note 4): Details the 2021 acquisitions of Masterflex for $2.87 billion and Ritter GmbH for $1.08 billion, which expanded offerings in bioproduction and lab automation[363][367] - Goodwill and Intangibles (Note 11): As of Dec 31, 2022, Goodwill was $5.65 billion and Other Intangible Assets were $4.13 billion with no impairment charges recorded in 2022[403][404] - Debt (Note 14): Total gross debt was $6.35 billion as of Dec 31, 2022, down from $7.11 billion in 2021, with maturities extending beyond 2027[425][426] - Equity (Note 15): In May 2022, all outstanding Mandatory Convertible Preferred Stock (MCPS) automatically converted into 62.9 million shares of common stock[436] - Derivative and Hedging Activities (Note 21): The company uses interest rate swaps, cross-currency swaps, and foreign-denominated debt to hedge against interest rate and foreign currency risks[481][482][489]