Avantor, Inc 10-Q for FY2020 Q2
Avantor, Inc. (AVTR)
10-Q
2020-07-29
For: 2020-06-30
View Original
Added on
April 07, 2026
About this 10-Q
Avantor, Inc filed this 10-Q on July 29, 2020, covering the quarter ended June 30, 2020 (FY2020 Q2).
Headline figures
Quarter ended June 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $1.48B
- down 3.5% from $1.53B a year earlier
- Net income
- $60.2M
- compared with a net loss of $48.7M a year earlier
- Diluted EPS
- $0.08
- compared with -$0.98 a year earlier
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
━━━━━━━━━
FORM 10-Q
━━━━━━━━━
For the quarterly period ended June 30, 2020
For the transition period from __________ to __________
Commission file number: 001-38912
____________________________
(Exact name of registrant as specified in its charter)
___________________________________
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(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(s) | Name of each exchange on which registered | ||||||||||||
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 July 21, 2020, 576,568,200 shares of common stock, $0.01 par value per share, were outstanding.
Avantor, Inc. and subsidiaries
Form 10-Q for the quarterly period ended June 30, 2020
Table of contents
| Page | ||||||||
i
Glossary
Description | |||||
we, us, our | Avantor, Inc. and its subsidiaries | ||||
2019 Plan | the Avantor, Inc. 2019 Equity Incentive Plan, a stock-based compensation plan | ||||
Adjusted EBITDA | our earnings or loss before interest, taxes, depreciation, amortization and certain other adjustments | ||||
Annual Report | our annual report on Form 10-K for the year ended December 31, 2019 | ||||
AMEA | Asia, Middle-East and Africa | ||||
AOCI | accumulated other comprehensive income or loss | ||||
| CARES | the Coronavirus Aid, Relief, and Economic Security Act | ||||
| CERCLA | Comprehensive Environmental Response, Compensation, and Liability Act | ||||
cGMP | Current Good Manufacturing Practice | ||||
| double-digit | greater than 10% | ||||
EURIBOR | the basic rate of interest used in lending between banks on the European Union interbank market | ||||
FASB | the Financial Accounting Standards Board of the United States | ||||
GAAP | United States generally accepted accounting principles | ||||
high single-digit | 7 - 9% | ||||
| IPO | initial public offering | ||||
| JCPS | Junior Convertible Preferred Stock | ||||
LIBOR | the basic rate of interest used in lending between banks on the London interbank market | ||||
low single-digit | 1 - 3% | ||||
MCPS | 6.250% Series A Mandatory Convertible Preferred Stock | ||||
mid single-digit | 4 - 6% | ||||
| NuSil | NuSil Acquisition Corp, NuSil Investments LLC and subsidiaries, a business organization with which we merged in 2016 | ||||
| NuSil Investors | NuSil LLC and NuSil 2.0 LLC, former owners of NuSil that are controlled by its former management | ||||
RSU | restricted stock unit | ||||
| SAR | stand alone appreciation right | ||||
SEC | the United States Securities and Exchange Commission | ||||
SG&A expenses | selling, general and administrative expenses | ||||
Specialty procurement | product sales related to customer procurement services | ||||
VWR | VWR Corporation and its subsidiaries, a company we acquired in November 2017 | ||||
ii
Cautionary factors regarding forward-looking statements
This report contains forward-looking statements. 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,” “project,” “projection,” “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.
In the first quarter of 2020, we updated our risk factors to reflect new developments in the scale and scope of the new global coronavirus pandemic under Part II, Item 1A, “Risk Factors.” You should also understand that the following important factors, in addition to those discussed under “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 our relationships with distributors;
iii
•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 avoid negative outcomes related to the use of chemicals;
•our ability to maintain highly skilled employees;
•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
iv
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.
v
PART I — FINANCIAL INFORMATION
Item 1. Financial statements
Avantor, Inc. and subsidiaries
Index to unaudited condensed consolidated financial statements
| Page | |||||
1
Avantor, Inc. and subsidiaries
Unaudited condensed consolidated balance sheets
(in millions) | June 30, 2020 | December 31, 2019 | |||||||||
Assets | |||||||||||
Current assets: | |||||||||||
Cash and cash equivalents | $ | $ | |||||||||
Accounts receivable, net of allowances of $ | |||||||||||
Inventory | |||||||||||
Other current assets | |||||||||||
Total current assets | |||||||||||
Property, plant and equipment, net of accumulated depreciation of $ | |||||||||||
Other intangible assets, net (see note 8) | |||||||||||
Goodwill | |||||||||||
Other assets | |||||||||||
Total assets | $ | $ | |||||||||
Liabilities and stockholders’ equity | |||||||||||
Current liabilities: | |||||||||||
Current portion of debt | $ | $ | |||||||||
Accounts payable | |||||||||||
Employee-related liabilities | |||||||||||
Accrued interest | |||||||||||
Other current liabilities | |||||||||||
Total current liabilities | |||||||||||
Debt, net of current portion | |||||||||||
Deferred income tax liabilities | |||||||||||
Other liabilities | |||||||||||
Total liabilities | |||||||||||
Commitments and contingencies, see note 10 | |||||||||||
Stockholders’ equity: | |||||||||||
MCPS including paid-in capital, | |||||||||||
Common stock including paid-in capital, | |||||||||||
Accumulated deficit | ( | ( | |||||||||
Accumulated other comprehensive loss | ( | ( | |||||||||
Total stockholders’ equity | |||||||||||
Total liabilities and stockholders’ equity | $ | $ | |||||||||
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 June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
Net sales | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Cost of sales | |||||||||||||||||||||||||||||||||||
Gross profit | |||||||||||||||||||||||||||||||||||
Selling, general and administrative expenses | |||||||||||||||||||||||||||||||||||
Operating income | |||||||||||||||||||||||||||||||||||
Interest expense | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
Loss on extinguishment of debt | ( | ( | |||||||||||||||||||||||||||||||||
Other income, net | |||||||||||||||||||||||||||||||||||
Income (loss) before income taxes | ( | ( | |||||||||||||||||||||||||||||||||
Income tax (expense) benefit | ( | ( | ( | ||||||||||||||||||||||||||||||||
Net income (loss) | ( | ( | |||||||||||||||||||||||||||||||||
Accumulation of yield on preferred stock | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
Accretion of make whole premium on series A preferred stock | ( | ( | |||||||||||||||||||||||||||||||||
Net income (loss) available to common stockholders | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
Earnings (loss) per share: | |||||||||||||||||||||||||||||||||||
Basic | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
Diluted | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
Weighted average shares outstanding: | |||||||||||||||||||||||||||||||||||
Basic | |||||||||||||||||||||||||||||||||||
Diluted | |||||||||||||||||||||||||||||||||||
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 June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
Other comprehensive income (loss): | |||||||||||||||||||||||||||||||||||
Foreign currency translation — unrealized gain (loss) | ( | ||||||||||||||||||||||||||||||||||
Derivative instruments: | |||||||||||||||||||||||||||||||||||
Unrealized gain (loss) | ( | ( | |||||||||||||||||||||||||||||||||
Reclassification of gain into earnings | ( | ( | ( | ||||||||||||||||||||||||||||||||
Defined benefit plans: | |||||||||||||||||||||||||||||||||||
Unrealized (loss) gain | ( | ||||||||||||||||||||||||||||||||||
Reclassification of gain into earnings | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
Other comprehensive income (loss) before income taxes | ( | ||||||||||||||||||||||||||||||||||
Income tax effect | ( | ||||||||||||||||||||||||||||||||||
Other comprehensive income (loss) | ( | ||||||||||||||||||||||||||||||||||
Comprehensive income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
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 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| MCPS including paid-in capital | Common stock including paid-in capital | Accumulated deficit | AOCI | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 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, 2020 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at March 31, 2019 | $ | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuances, net of issuance costs | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of JCPS | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive (loss) income | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulation of yield on preferred stock | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accretion of make whole premium on series A preferred stock | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of warrants | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Award reclassification | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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 deficit | AOCI | Total | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2019 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact of new accounting standard | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive income (loss) | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulation of yield on preferred stock | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock option exercises and other common stock transactions | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2020 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at December 31, 2018 | $ | $ | ( | $ | ( | $ | ( | $ | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Impact of new accounting standard | — | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Issuances, net of issuance costs | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Conversion of JCPS | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive (loss) income | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation expense | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulation of yield on preferred stock | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accretion of make whole premium on series A preferred stock | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Exercise of warrants | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Award reclassification | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Balance at June 30, 2019 | $ | $ | $ | ( | $ | ( | $ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
See accompanying notes to the unaudited condensed consolidated financial statements.
6
Avantor, Inc. and subsidiaries
Unaudited condensed consolidated statements of cash flows
(in millions) | Six months ended June 30, | ||||||||||||||||
2020 | 2019 | ||||||||||||||||
Cash flows from operating activities: | |||||||||||||||||
Net income (loss) | $ | $ | ( | ||||||||||||||
Reconciling adjustments: | |||||||||||||||||
Depreciation and amortization | |||||||||||||||||
Stock-based compensation expense | |||||||||||||||||
Provision for accounts receivable and inventory | |||||||||||||||||
Deferred income tax benefit | ( | ( | |||||||||||||||
Amortization of deferred financing costs | |||||||||||||||||
Loss on extinguishment of debt | |||||||||||||||||
Foreign currency remeasurement loss (gain) | ( | ||||||||||||||||
Changes in assets and liabilities: | |||||||||||||||||
Accounts receivable | ( | ( | |||||||||||||||
Inventory | ( | ( | |||||||||||||||
Accounts payable | |||||||||||||||||
Accrued interest | ( | ||||||||||||||||
Other assets and liabilities | ( | ||||||||||||||||
Other, net | ( | ||||||||||||||||
Net cash provided by operating activities | |||||||||||||||||
Cash flows from investing activities: | |||||||||||||||||
Capital expenditures | ( | ( | |||||||||||||||
Other | |||||||||||||||||
Net cash used in investing activities | ( | ( | |||||||||||||||
Cash flows from financing activities: | |||||||||||||||||
Debt borrowings | |||||||||||||||||
Debt repayments | ( | ( | |||||||||||||||
Payments of contingent consideration | ( | ||||||||||||||||
Proceeds from issuance of stock, net of issuance costs | |||||||||||||||||
Redemption of series A preferred stock | ( | ||||||||||||||||
Payments of dividends on preferred stock | ( | ||||||||||||||||
Proceeds received from exercise of stock options | |||||||||||||||||
Net cash used in financing activities | ( | ( | |||||||||||||||
Effect of currency rate changes on cash | ( | ( | |||||||||||||||
Net change in cash and cash equivalents | ( | ||||||||||||||||
Cash, cash equivalents and restricted cash, beginning of period | |||||||||||||||||
Cash, cash equivalents and restricted cash, end of period | $ | $ | |||||||||||||||
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
We have prepared these condensed consolidated financial statements 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, updates to which are included in note 2.
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.
Global coronavirus outbreak
The ongoing coronavirus outbreak known as COVID-19 has adversely affected global economies, financial markets and the overall environment in which we do business, and the extent to which it may impact our future results of operations and overall financial performance remains uncertain.
In response to the COVID-19 outbreak, on March 27, 2020, the United States Government enacted the CARES Act, which provides financial stimulus to qualifying businesses. We expect to benefit from the provisions under the CARES Act that allow for an increased deduction of business interest for income tax purposes for fiscal years 2019 and 2020, and for the deferral of payments for certain employment taxes incurred through the end of fiscal year 2020. We expect benefits of $29.5 million and $17.0 million for fiscal years 2019 and 2020, respectively, from the
8
increased business interest deduction. We will apply the 2019 benefit to our fiscal year 2020 estimated tax payments.
Secondary offering
On May 26, 2020, we completed a secondary offering of 51.75 million shares of our common stock held by certain of our stockholders at the public offering price of $16.25 per share, including the full exercise by the underwriters of their option to purchase up to 6.75 million additional shares of common stock. No shares were sold by us, and we received no proceeds from this offering. Fees incurred to complete this transaction were expensed and immaterial.
2. Summary of significant accounting policies
Interim update to segment reporting policy
During the quarter ended March 31, 2020, our Chief Executive Officer, who is our chief operating decision maker, changed the measure he uses to evaluate segment profitability from Management EBITDA to Adjusted EBITDA. All disclosures relating to segment profitability, including those for comparative periods, have been revised as a result of this change.
3. New accounting standards
New tax standard
In December 2019, the FASB issued a new standard to simplify the accounting for income taxes by removing certain exceptions to the existing guidance and also providing for additional clarification. This standard encompasses multiple amendments, and requires adoption either retrospectively, prospectively, or using a modified retrospective approach, depending on the amendment. For the amendments in which we are given the choice between adopting retrospectively or on a modified retrospective basis, we expect to adopt on a modified retrospective basis. All other amendments will be adopted using the method prescribed by the standard. The standard is effective on January 1, 2021 and we are currently evaluating its impact. Two of the provisions included in this amendment that are most relevant to us are: 1) the provision requiring companies to recognize a franchise (or similar) tax that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, and 2) the provision requiring companies to evaluate when a step-up in the tax basis of goodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction.
New credit losses standard
In June 2016, the FASB issued a new standard that modifies the recognition of credit losses related to financial assets. Under the new standard, an entity must measure and record its total expected credit losses, rather than recording such losses when it is probable that they have occurred, as was required under the previous standard. We adopted the new guidance on January 1, 2020 using a modified retrospective approach applied to our portfolio of trade receivables as
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of that date. On the adoption date, we (i) recorded a $1.6 million cumulative effect adjustment to increase accumulated deficit, (ii) increased our allowance for credit losses to accounts receivable by $2.2 million, and (iii) recognized a $0.6 million reduction to deferred income tax liabilities.
Other
4. Earnings or loss per share
The following table presents the reconciliation of basic and diluted earnings per share for the three and six months ended June 30, 2020:
| Three months ended June 30, 2020 | Six months ended June 30, 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in millions, except per share data) | Earnings (numerator) | Weighted average shares outstanding (denominator) | Earnings per share | Earnings (numerator) | Weighted average shares outstanding (denominator) | Earnings per share | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Basic | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Dilutive effect of stock-based awards | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Diluted | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
For the three and six months ended June 30, 2020, diluted earnings per share included accumulation of yield on preferred stock of $16.2 million and $32.3 million, respectively, and excluded 62.9 million and 62.9 million, respectively, of common stock equivalents under the MCPS because they were anti-dilutive to the calculation.
For the three and six months ended June 30, 2019, basic and diluted loss per share calculations were the same because we reported a net loss available to common stockholders. The following table presents the number of common shares from convertible instruments that were excluded from the calculations of diluted loss per share because the effect would have been anti-dilutive:
| (in millions) | Three months ended June 30, 2019 | Six months ended June 30, 2019 | |||||||||
| Stock options | |||||||||||
| Restricted stock units | |||||||||||
| MCPS | |||||||||||
| Total | |||||||||||
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5. Segment financial information
We report based on 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 June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
Net sales: | |||||||||||||||||||||||||||||||||||
Americas | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Europe | |||||||||||||||||||||||||||||||||||
AMEA | |||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Adjusted EBITDA: | |||||||||||||||||||||||||||||||||||
Americas | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Europe | |||||||||||||||||||||||||||||||||||
AMEA | |||||||||||||||||||||||||||||||||||
Corporate | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
The amounts above exclude inter-segment activity because it is not material. All of the net sales for each segment are from external customers.
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The following table presents the reconciliation of Adjusted EBITDA from net income or loss, the nearest measurement under GAAP:
(in millions) | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
Net income (loss) | $ | $ | ( | $ | $ | ( | |||||||||||||||||||||||||||||
Interest expense | |||||||||||||||||||||||||||||||||||
Income tax expense (benefit) | ( | ||||||||||||||||||||||||||||||||||
Depreciation and amortization | |||||||||||||||||||||||||||||||||||
Net foreign currency gain from financing activities | ( | ( | ( | ( | |||||||||||||||||||||||||||||||
Loss on extinguishment of debt | |||||||||||||||||||||||||||||||||||
Other stock-based compensation expense | |||||||||||||||||||||||||||||||||||
Restructuring and severance charges | |||||||||||||||||||||||||||||||||||
VWR transaction, integration and planning expenses | |||||||||||||||||||||||||||||||||||
Other | ( | ( | |||||||||||||||||||||||||||||||||
Adjusted EBITDA | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
The following table presents net sales by product line:
(in millions) | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
Proprietary materials & consumables | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Third party materials & consumables | |||||||||||||||||||||||||||||||||||
Services & specialty procurement | |||||||||||||||||||||||||||||||||||
Equipment & instrumentation | |||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
6. Supplemental disclosures of cash flow information
The following tables present supplemental disclosures of cash flow information:
(in millions) | June 30, 2020 | December 31, 2019 | |||||||||
Cash and cash equivalents | $ | $ | |||||||||
Restricted cash classified as other assets | |||||||||||
Total | $ | $ | |||||||||
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(in millions) | Six months ended June 30, | ||||||||||||||||
2020 | 2019 | ||||||||||||||||
Cash flows from operating activities: | |||||||||||||||||
Cash paid for income taxes, net | $ | $ | |||||||||||||||
Cash paid for interest | |||||||||||||||||
Cash paid under operating leases | |||||||||||||||||
Cash paid under finance leases | |||||||||||||||||
Cash flows from financing activities | |||||||||||||||||
Cash paid under finance leases | |||||||||||||||||
| Noncash financing activities: | |||||||||||||||||
Accrued but unpaid stock issuance costs | |||||||||||||||||
7. Inventory
The following table presents the components of inventory:
(in millions) | June 30, 2020 | December 31, 2019 | |||||||||
Merchandise inventory | $ | $ | |||||||||
Finished goods | |||||||||||
Raw materials | |||||||||||
Work in process | |||||||||||
Total | $ | $ | |||||||||
8. Other intangible assets
The following table presents the components of other intangible assets:
(in millions) | June 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Gross value | Accumulated amortization | Carrying value | Gross value | Accumulated amortization | Carrying value | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
Customer relationships | $ | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||
VWR trade name | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total finite-lived | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||
Indefinite-lived | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total | $ | $ | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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9. Restructuring and severance
The following table presents restructuring and severance charges by plan:
(in millions) | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
2017 restructuring program | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Other | |||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
During the second quarter of 2020, there were no material updates to our liabilities or expense under the 2017 restructuring program.
10. 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 we will experience adverse outcomes related to these matters.
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.
Mallinckrodt indemnification
In 2010, New Mountain Capital acquired us from Covidien plc in accordance with a stock purchase agreement dated May 25, 2010. At that time, we were organized as Mallinckrodt Baker, Inc. or MBI. Pursuant to the terms of that agreement, we are entitled to various levels of indemnification with respect to environmental liabilities involving the former MBI operations. In 2013, in connection with the Covidien plc divestiture of Mallinckrodt Group S.a.r.l and Mallinckrodt LLC, together “Mallinckrodt,” and by a second amendment to the stock purchase agreement dated June 6, 2013, but effective upon the consummation of the divestiture, Covidien plc assigned its obligations as described herein to Mallinckrodt, and Mallinckrodt assumed those obligations from Covidien plc. As a result of the stock purchase agreement and assignment, Mallinckrodt is contractually obligated to indemnify and defend us for all off-site environmental liabilities (for example, Superfund or CERCLA liabilities) arising from the pre-closing disposal of chemicals or wastes by former MBI operations.
In connection with environmental liabilities arising from pre-closing noncompliance with environmental laws, Mallinckrodt is contractually obligated to reimburse us for a percentage of
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the total liability, with such reimbursements made through disbursements from a $30.0 million environmental escrow established at the time of the closing. Specifically, Mallinckrodt will be responsible for reimbursement of 80 % of the total costs up to $40.0 million of such environmental liabilities. Mallinckrodt will then be responsible for reimbursement of 50 % of the next $40.0 million of such environmental liabilities. If such environmental liabilities exceed $80.0 million in the aggregate, Mallinckrodt will be responsible for reimbursement of 100 % of such liabilities up to the next $30.0 million in the aggregate. Currently, reimbursements are 80% of the amounts spent by us, with reimbursements and settlements to date exceeding $12.0 million. In addition, in connection with operation and maintenance activities required pursuant to administrative consent orders and subsequently issued remedial action permits involving our Phillipsburg, New Jersey facility, amounts in excess of a small annual threshold are also subject to reimbursement, currently at the 80 % level.
Other noteworthy matters
The New Jersey Department of Environmental Protection has ordered us to remediate groundwater conditions near our plant in Phillipsburg, New Jersey. This matter is covered by the indemnification arrangement previously described. At June 30, 2020, our accrued obligation under this order is $4.0 million, which is calculated based on expected cash payments discounted at rates ranging from 0.1 % in 2020 to 1.4 % in 2045. The undiscounted amount of that obligation is $4.4 million.
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 June 30, 2020, our balance sheet includes a liability of $3.4 million for remediation and monitoring costs. That liability is estimated primarily on expected remediation payments discounted through 2020 and is not materially different than 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.
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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 June 30, 2020, 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.
11. Debt
The following table presents information about our debt:
(dollars in millions) | June 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||
| Interest terms | Rate | Amount | |||||||||||||||||||||||||||||||||
Receivables facility | LIBOR plus | % | $ | $ | |||||||||||||||||||||||||||||||
Senior secured credit facilities: | |||||||||||||||||||||||||||||||||||
Euro term loans | EURIBOR plus | % | |||||||||||||||||||||||||||||||||
U.S. dollar term loans | LIBOR plus | % | |||||||||||||||||||||||||||||||||
4.75% secured notes | fixed rate | % | |||||||||||||||||||||||||||||||||
6% secured notes | fixed rate | % | |||||||||||||||||||||||||||||||||
9% unsecured notes | fixed rate | % | |||||||||||||||||||||||||||||||||
Finance lease liabilities | |||||||||||||||||||||||||||||||||||
Other | |||||||||||||||||||||||||||||||||||
Total debt, gross | |||||||||||||||||||||||||||||||||||
Less: unamortized deferred financing costs | ( | ( | |||||||||||||||||||||||||||||||||
Total debt | $ | $ | |||||||||||||||||||||||||||||||||
Classification on balance sheets: | |||||||||||||||||||||||||||||||||||
Current portion of debt | $ | $ | |||||||||||||||||||||||||||||||||
Debt, net of current portion | |||||||||||||||||||||||||||||||||||
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Credit facilities
The following table presents availability under our credit facilities:
(in millions) | June 30, 2020 | ||||||||||||||||||||||||||||
| Receivables facility | Revolving credit facility | Total | |||||||||||||||||||||||||||
Capacity | $ | $ | $ | ||||||||||||||||||||||||||
Undrawn letters of credit outstanding | ( | ( | ( | ||||||||||||||||||||||||||
Outstanding borrowings | |||||||||||||||||||||||||||||
Unused availability | $ | $ | $ | ||||||||||||||||||||||||||
Maximum availability | $ | $ | $ | ||||||||||||||||||||||||||
Capacity under the receivables facility depends upon maintaining a sufficient borrowing base of eligible accounts receivable. At June 30, 2020, $431.5 million of accounts receivable were available as collateral under the facility.
Receivables facility
The receivables facility is with a commercial bank, functions like a line of credit and matures on March 27, 2023. Borrowings are secured by accounts receivable which are sold by certain of our domestic subsidiaries to a special-purpose consolidated subsidiary. As a result, those receivables are not available to satisfy the claims of other creditors. We bear the risk of collection on those receivables and account for the receivables facility as a secured borrowing.
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. When applicable, we may not have combined borrowings on our senior secured credit facilities and secured notes in excess of a pro forma net leverage ratio, as defined. We were in compliance with this covenant at June 30, 2020.
Transactions subsequent to period-end
In July of 2020, we issued $1,550.0 million of 4.625% senior unsecured notes and €400.0 million of 3.875% senior unsecured notes, which will mature on July 15, 2028. We used the net proceeds from the sale of these notes, along with cash on hand, to redeem all $2,000.0 million of our 9.00 % unsecured notes that were due in October of 2025. Also in July of 2020, we refinanced our revolving credit facility to obtain an additional $265.0 million of available funding, bringing the total amount of available funding under this facility to $515.0 million. The revolving credit facility will mature on July 14, 2025. Both the senior unsecured notes and the amendment to the revolving credit facility include covenants that we consider usual and customary.
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12. 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 March 31, 2020 | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
Unrealized gain (loss) | ( | ||||||||||||||||||||||
Reclassification of gain into earnings | ( | ( | ( | ||||||||||||||||||||
Income tax effect | |||||||||||||||||||||||
Balance at June 30, 2020 | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
Balance at March 31, 2019 | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
Unrealized gain (loss) | ( | ||||||||||||||||||||||
Reclassification of gain into earnings | ( | ( | |||||||||||||||||||||
Income tax effect | |||||||||||||||||||||||
Balance at June 30, 2019 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Balance at December 31, 2019 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
Unrealized (loss) gain | ( | ( | |||||||||||||||||||||
Reclassification of gain into earnings | ( | ( | ( | ||||||||||||||||||||
Income tax effect | ( | ( | |||||||||||||||||||||
Balance at June 30, 2020 | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
Balance at December 31, 2018 | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||
Unrealized gain (loss) | ( | ||||||||||||||||||||||
Reclassification of gain into earnings | ( | ( | ( | ||||||||||||||||||||
Income tax effect | |||||||||||||||||||||||
Balance at June 30, 2019 | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||||||
The reclassifications and income tax effects shown above were immaterial to the financial statements. The reclassifications were made to either cost of sales or SG&A expenses depending upon the nature of the underlying transaction.
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13. Stock-based compensation
The following table presents the components of stock-based compensation expense:
(in millions) | Classification | Three months ended June 30, | Six months ended June 30, | ||||||||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||
Stock options | Equity | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||
RSUs | Equity | ||||||||||||||||||||||||||||||||||||||||
Optionholder awards | Liability | ||||||||||||||||||||||||||||||||||||||||
| SARs | Equity | ||||||||||||||||||||||||||||||||||||||||
Other | Both | ||||||||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
Balance sheet classification: | |||||||||||||||||||||||||||||||||||||||||
Equity | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||||||
Liability | |||||||||||||||||||||||||||||||||||||||||
At June 30, 2020, unvested awards under the 2019 Plan have remaining stock-based compensation expense of $100.4 million to be recognized over a weighted average period of 1.9 years.
At June 30, 2020, 11.8 million shares were available for future issuance under the 2019 Plan.
Following our IPO in the second quarter of 2019, we recognized $26.9 million of stock-based compensation expense related to 0.9 million stock options, which included the successful completion of an IPO as a performance condition. The stock-based compensation expense was the grant date fair value for these awards.
In November 2019, the NuSil investors settled the SARs. We were not required to pay any cash upon settlement of those awards.
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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, 2019 | $ | ||||||||||||||||||||||
Granted | |||||||||||||||||||||||
Exercised | ( | ||||||||||||||||||||||
Forfeited | ( | ||||||||||||||||||||||
Balance at June 30, 2020 | $ | ||||||||||||||||||||||
Expected to vest | |||||||||||||||||||||||
Vested | |||||||||||||||||||||||
During the six months ended June 30, 2020, we granted stock options that have a contractual life of ten years and will vest annually over to four years , subject to the recipient continuously providing service to us through each 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, 2019 | $ | ||||||||||
Granted | |||||||||||
Vested | ( | ||||||||||
Forfeited | ( | ||||||||||
Balance at June 30, 2020 | |||||||||||
During the six months ended June 30, 2020, we granted restricted stock units that will vest annually over to four years , subject to the recipient continuously providing service to us through each such date.
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14. Other income or expense, net
The following table presents the components of other income or expense, net:
(in millions) | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
Net foreign currency gain from financing activities | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Income related to defined benefit plans | |||||||||||||||||||||||||||||||||||
Other | ( | ||||||||||||||||||||||||||||||||||
Other income, net | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
15. Income taxes
The following table presents the relationship between income tax expense or benefit and income or loss before income taxes:
(in millions) | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
Income tax (expense) benefit | $ | ( | $ | $ | ( | $ | ( | ||||||||||||||||||||||||||||
Income (loss) before income taxes | ( | ( | |||||||||||||||||||||||||||||||||
Income tax expense or benefit in the quarter is based upon the estimated income or loss for the full year. The composition of the income or loss in different countries and adjustments, if any, in the applicable quarterly periods influences our expense or benefit.
The relationship between pretax income or loss and income tax expense or benefit is greatly 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.
16. Financial instruments and fair value measurements
Our financial instruments include cash and cash equivalents, accounts receivable, accounts payable and debt.
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.
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The following table presents the gross amounts, which exclude unamortized deferred financing costs, and the fair values of debt instruments:
(in millions) | June 30, 2020 | December 31, 2019 | |||||||||||||||||||||||||||||||||
| Gross amount | Fair value | Gross amount | Fair value | ||||||||||||||||||||||||||||||||
Receivables facility | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
Senior secured credit facilities: | |||||||||||||||||||||||||||||||||||
Euro term loans | |||||||||||||||||||||||||||||||||||
U.S. dollar term loans | |||||||||||||||||||||||||||||||||||
4.75% secured notes | |||||||||||||||||||||||||||||||||||
6% secured notes | |||||||||||||||||||||||||||||||||||
9% unsecured notes | |||||||||||||||||||||||||||||||||||
Finance lease liabilities | |||||||||||||||||||||||||||||||||||
Other | |||||||||||||||||||||||||||||||||||
Total | $ | $ | $ | $ | |||||||||||||||||||||||||||||||
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
In addition to historical financial information, this discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our results may differ materially from those contained in or implied by any forward-looking statements. You should carefully read “Cautionary factors regarding forward-looking statements” for additional information. Also, please refer to the “Factors and current trends affecting our business and results of operations” for discussion concerning the ongoing coronavirus outbreak known as COVID-19.
Basis of presentation
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, 2019, the date of our Annual Report. Therefore, we encourage you to read this discussion and analysis in conjunction with the Annual Report.
Overview
We are a leading global provider of mission critical products and services to customers in the biopharmaceutical, healthcare, education & government and advanced technologies & applied materials industries. We have global operations and an extensive product portfolio. We strive to enable customer success through innovation, cGMP manufacturing and comprehensive service offerings. The depth and breadth of our portfolio provides our customers a comprehensive range
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of products and services and allows us to create customized and integrated solutions for our customers.
In the second quarter of 2020, we recorded net sales of $1,478.7 million, net income of $60.2 million and Adjusted EBITDA of $273.3 million. Net sales declined by 3.5%, including a decline in organic net sales of 2.0% compared to the same period in 2019. 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 to organic net sales growth.
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 are being impacted by the ongoing global coronavirus outbreak
The COVID-19 pandemic continues to adversely affect global economies, financial markets and the overall environment in which we do business as further described in Part II, Item 1A, “Risk Factors.” The outbreak continued to have a mixed impact on the second quarter results of our three regions, as described further in the “Results of operations” section.
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 eliminates from our reported net sales the impacts of earnings from any acquired or disposed businesses 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;”
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•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 core 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.”
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 June 30, | Change | |||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
| Net sales | $ | 1,478.7 | $ | 1,532.4 | $ | (53.7) | |||||||||||||||||
| Gross margin | 33.2 | % | 32.1 | % | 110 bps | ||||||||||||||||||
| Operating income | $ | 166.6 | $ | 119.1 | $ | 47.5 | |||||||||||||||||
| Net income (loss) | 60.2 | (48.7) | 108.9 | ||||||||||||||||||||
| Adjusted EBITDA | 273.3 | 268.8 | 4.5 | ||||||||||||||||||||
| Adjusted EBITDA margin | 18.5 | % | 17.5 | % | 100 bps | ||||||||||||||||||
Continued commercial excellence and favorable product mix contributed to strong gross margin expansion helping to drive strong second quarter results, despite a challenging environment driven by COVID-19 impact on the full quarter. Discretionary cost containment also contributed to Adjusted EBITDA margin expansion.
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Net sales
Three months ended
| (in millions) | Three months ended June 30, | Reconciliation of net sales growth to organic net sales growth | |||||||||||||||||||||||||||||||||||||||||||||
| Net sales growth | Foreign currency impact | Organic net sales growth | |||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
Americas | $ | 857.5 | $ | 925.5 | $ | (68.0) | $ | (6.0) | $ | (62.0) | |||||||||||||||||||||||||||||||||||||
Europe | 521.0 | 518.6 | 2.4 | (12.8) | 15.2 | ||||||||||||||||||||||||||||||||||||||||||
AMEA | 100.2 | 88.3 | 11.9 | (4.0) | 15.9 | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 1,478.7 | $ | 1,532.4 | $ | (53.7) | $ | (22.8) | $ | (30.9) | |||||||||||||||||||||||||||||||||||||
Net Sales decreased $53.7 million or 3.5%, which included $22.8 million or 1.5% of unfavorable foreign currency impact. The decline in organic net sales of $30.9 million or 2.0% was primarily due to the impacts of COVID-19.
In the Americas, net sales decreased $68.0 million or 7.3%, which included $6.0 million or 0.5% of unfavorable foreign currency impact. Organic net sales decreased $62.0 million or 6.7%. Additional information by end market is as follows:
•Biopharma — Sales grew in the low single-digits. Biopharma production grew at a double-digit rate driven by strong demand for our proprietary product offering and specialty chemicals. This was offset by relatively flat growth at research & development customers as lab occupancy was reduced due to the COVID-19 pandemic.
•Healthcare — Sales declined in the double digits driven by COVID-19 impact on elective procedures and clinical diagnostics. This was partially offset by growth in the hospitals segment.
•Education and government —Sales declined in the double digits due to school and academic lab closures related to COVID-19. This was partially offset by mid single-digit growth from government customers.
•Advanced technologies & applied materials —We experienced low-single digit contraction driven by softness in our industrial sector partially offset by growth in our semiconductor and microelectronics platforms.
In Europe, net sales increased $2.4 million or 0.5%, which included $12.8 million or 2.5% of unfavorable foreign currency impact. Organic net sales increased $15.2 million or 3.0%. Additional information by end market is as follows:
•Biopharma — Sales grew in the double digits driven by sales of chemicals and consumables and person protective equipment to support our ongoing business, as well as solutions to support COVID-19 detection and testing. This was partially offset by
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declines in equipment and instrumentation as customers continued to limit capital spending amid the pandemic.
•Healthcare — Sales grew in the low single digits as sales of COVID-19 testing kits and personal protective equipment were partially offset by a decline in elective procedures and clinical diagnostics due to COVID-19.
•Education & government — Sales declined in the double digits as a result of academic lab closures due to COVID-19.
• Advanced technologies & applied materials — Sales declined in the double digits as COVID-19 impacted industrial customers.
In AMEA, net sales increased $11.9 million or 13.5%, which included $4.0 million or 4.7% of unfavorable foreign currency impact. Organic net sales increased $15.9 million or 18.2%. Additional information by end market is as follows:
•Biopharma — Sales grew in the double digits driven by strong growth in biopharma production and lab supplies.
•Advanced technologies & applied materials — Sales grew in the double digits primarily driven by sales of chemicals and consumables used to produce COVID-19 testing kits.
Six months ended
| (in millions) | Six months ended June 30, | Reconciliation of net sales growth to organic net sales growth | |||||||||||||||||||||||||||||||||||||||||||||
| Net sales growth | Foreign currency impact | Organic net sales growth | |||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||
Americas | $ | 1,756.6 | $ | 1,782.8 | $ | (26.2) | $ | (10.5) | $ | (15.7) | |||||||||||||||||||||||||||||||||||||
Europe | 1,065.0 | 1,060.7 | 4.3 | (28.6) | 32.9 | ||||||||||||||||||||||||||||||||||||||||||
AMEA | 176.1 | 169.0 | 7.1 | (4.7) | 11.8 | ||||||||||||||||||||||||||||||||||||||||||
Total | $ | 2,997.7 | $ | 3,012.5 | $ | (14.8) | $ | (43.8) | $ | 29.0 | |||||||||||||||||||||||||||||||||||||
Net Sales decreased $14.8 million or 0.5%, which included $43.8 million or 1.5% of unfavorable foreign currency impact. Organic net sales increased $29.0 million or 1.0%, which was impacted by the effects of the COVID-19 pandemic experienced in the second quarter.
In the Americas, net sales decreased $26.2 million or 1.5%, which included $10.5 million or 0.6% of unfavorable foreign currency impact. Organic net sales decreased $15.7 million or 0.9% for reasons similar to the three-month period.
In Europe, net sales increased $4.3 million or 0.4%, which included $28.6 million or 2.8% of unfavorable foreign currency impact. Organic net sales increased $32.9 million or 3.2% for reasons similar to the three-month period.
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In AMEA, net sales increased $7.1 million or 4.2%, which included $4.7 million or 2.9% of unfavorable foreign currency impact. Organic net sales increased $11.8 million or 7.1% for reasons similar to the three-month period, partially offset by logistics constraints in India relating to COVID-19 earlier in the period.
Gross margin
Three months ended June 30, | Change | Six months ended June 30, | Change | ||||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||
Gross margin | 33.2 | % | 32.1 | % | 110 bps | 33.1 | % | 32.1 | % | 100 bps | |||||||||||||||||||||||||||||||||||||
Three months ended
The increase in gross margin included 40 basis points from more favorable prices relative to cost inflation and 70 basis points of favorable product mix, reflecting strong growth from proprietary materials products.
The global restructuring program initiated following the VWR acquisition contributed a total of $16.0 million to 2020 gross profit and included more favorable prices relative to cost inflation, product cost reductions and productivity improvements from leaner footprints and operating practices.
Six months ended
The increase in gross margin included 30 basis points from more favorable prices relative to cost inflation and 70 basis points of favorable product mix, reflecting strong growth from proprietary materials products.
The global restructuring program initiated following the VWR acquisition contributed a total of $41.8 million to 2020 gross profit and included more favorable prices relative to cost inflation, product cost reductions and productivity improvements from leaner footprints and operating practices.
Operating income
(in millions) | Three months ended June 30, | Change | Six months ended June 30, | Change | |||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||
Gross profit | $ | 490.6 | $ | 491.1 | $ | (0.5) | $ | 992.5 | $ | 966.3 | $ | 26.2 | |||||||||||||||||||||||||||||||||||
Operating expenses | 324.0 | 372.0 | (48.0) | 667.5 | 709.6 | (42.1) | |||||||||||||||||||||||||||||||||||||||||
Operating income | $ | 166.6 | $ | 119.1 | $ | 47.5 | $ | 325.0 | $ | 256.7 | $ | 68.3 | |||||||||||||||||||||||||||||||||||
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Three months ended
Gross profit was essentially flat as favorable mix and pricing relative to cost inflation were offset by lower volume from COVID-19. The reduction in operating expenses primarily reflects the non-recurrence of $42.7 million of stock-based compensation expense from the prior year. Operating expenses also declined reflecting discretionary cost controls around travel, expenses and hiring, coupled with government mandated stay-at-home orders in response to COVID-19.
Six months ended
Gross profit increased $26.2 million primarily from the volume increases and pricing relative to cost inflation in the first quarter. The reduction in operating expenses primarily reflects the non-recurrence of $42.7 million of stock-based compensation expense from the prior year. Operating expenses also declined reflecting discretionary cost controls around travel, expenses and hiring, coupled with government mandated stay-at-home orders in response to COVID-19.
Net income or loss
(in millions) | Three months ended June 30, | Change | Six months ended June 30, | Change | |||||||||||||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||
Operating income | $ | 166.6 | $ | 119.1 | $ | 47.5 | $ | 325.0 | $ | 256.7 | $ | 68.3 | |||||||||||||||||||||||||||||||||||
Interest expense | (92.1) | (115.1) | 23.0 | (186.6) | (243.7) | 57.1 | |||||||||||||||||||||||||||||||||||||||||
Loss on extinguishment of debt | — | (70.2) | 70.2 | — | (70.2) | 70.2 | |||||||||||||||||||||||||||||||||||||||||
Other income, net | 4.2 | 15.6 | (11.4) | 5.0 | 10.5 | (5.5) | |||||||||||||||||||||||||||||||||||||||||
Income tax (expense) benefit | (18.5) | 1.9 | (20.4) | (36.2) | (8.2) | (28.0) | |||||||||||||||||||||||||||||||||||||||||
Net income (loss) | $ | 60.2 | $ | (48.7) | $ | 108.9 | $ | 107.2 | $ | (54.9) | $ | 162.1 | |||||||||||||||||||||||||||||||||||
Three and six months ended
Net income for the three and six months ended increased $108.9 million and $162.1 million, respectively, primarily due to higher operating income, as previously discussed, as well as lower interest expense and the absence of a loss on extinguishment of debt from the prior year, both of which were the result of a prepayment of a portion of our term loans using proceeds from our initial public offering. This was partially offset by increased income tax expense driven by higher pre-tax income, and lower other income resulting from less foreign currency gains on financing activities.
Adjusted EBITDA and Adjusted EBITDA margin
For a reconciliation of Adjusted EBITDA to the most directly comparable measure under GAAP, see “Reconciliations of non-GAAP financial measures.”
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(in millions) | Three months ended June 30, | Change | Six months ended June 30, | Change | |||||||||||||||||||||||||||||||||||||||||||
| 2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||
Adjusted EBITDA: | |||||||||||||||||||||||||||||||||||||||||||||||
Americas | $ | 197.4 | $ | 193.8 | $ | 3.6 | $ | 387.4 | $ | 360.1 | $ | 27.3 | |||||||||||||||||||||||||||||||||||
Europe | 88.3 | 81.6 | 6.7 | 180.0 | 171.3 | 8.7 | |||||||||||||||||||||||||||||||||||||||||
AMEA | 22.5 | 17.0 | 5.5 | 35.9 | 35.5 | 0.4 | |||||||||||||||||||||||||||||||||||||||||
Corporate | (34.9) | (23.6) | (11.3) | (67.2) | (50.1) | (17.1) | |||||||||||||||||||||||||||||||||||||||||
Total | $ | 273.3 | $ | 268.8 | $ | 4.5 | $ | 536.1 | $ | 516.8 | $ | 19.3 | |||||||||||||||||||||||||||||||||||
Adjusted EBITDA margin | 18.5 | % | 17.5 | % | 1.0 | % | 17.9 | % | 17.2 | % | 0.7 | % | |||||||||||||||||||||||||||||||||||
Three months ended
Adjusted EBITDA increased $4.5 million or 1.7%, which included an unfavorable foreign currency translation impact of $3.2 million or 1.2%. The reasons for the remaining growth of $7.6 million or 2.9%, are discussed below:
In the Americas, Adjusted EBITDA grew $3.6 million or 1.8%, or 2.2% when adjusted for unfavorable foreign currency translation impact. Favorable product mix, commercial excellence, and savings from SG&A cost management initiatives and government-mandated stay-at-home orders in response to COVID-19 more than offset the volume impact on net sales.
In Europe, Adjusted EBITDA grew $6.7 million or 8.1%, or 10.7% when adjusted for unfavorable foreign currency translation impact. In addition to favorable product mix and commercial excellence, SG&A cost management initiatives and government-mandated stay-at-home orders in response to COVID-19 contributed to the strong growth.
In AMEA, Adjusted EBITDA grew $5.5 million or 32.7%, or 35.8% when adjusted for unfavorable foreign currency translation. In addition to favorable product mix and commercial excellence, SG&A cost management initiatives and government-mandated stay-at-home orders in response to COVID-19 contributed to the strong growth.
In Corporate, Adjusted EBITDA declined $11.3 million or 47.8% reflecting increased public company costs, stock-based compensation expense and miscellaneous provisions.
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Six months ended
Adjusted EBITDA increased $19.3 million or 3.7%, which included an unfavorable foreign currency translation impact of $5.6 million or 1.1%. The reasons for the remaining growth of $24.8 million or 4.8%, are discussed below:
In the Americas, Adjusted EBITDA grew $27.3 million or 7.5%, or 7.8% when adjusted for unfavorable foreign currency translation impact for reasons similar to the three-month period.
In Europe, Adjusted EBITDA grew $8.7 million or 5.1%, or 7.4% when adjusted for unfavorable foreign currency translation impact for reasons similar to the three-month period.
In AMEA, Adjusted EBITDA grew $0.4 million or 1.2%, or 3.3% when adjusted for unfavorable foreign currency translation impact for reasons similar to the three-month period.
In Corporate, Adjusted EBITDA declined $17.1 million or 34.1% for reasons similar to the three-month period.
Reconciliations of non-GAAP financial measures
The following table presents the reconciliation of net income or loss to Adjusted EBITDA:
(in millions) | Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||||||
2020 | 2019 | 2020 | 2019 | ||||||||||||||||||||||||||||||||
Net income (loss) | $ | 60.2 | $ | (48.7) | $ | 107.2 | $ | (54.9) | |||||||||||||||||||||||||||
Interest expense | 92.1 | 115.1 | 186.6 | 243.7 | |||||||||||||||||||||||||||||||
Income tax expense (benefit) | 18.5 | (1.9) | 36.2 | 8.2 | |||||||||||||||||||||||||||||||
Depreciation and amortization | 97.8 | 103.0 | 194.3 | 201.3 | |||||||||||||||||||||||||||||||
Net foreign currency gain from financing activities | (1.8) | (14.3) | (0.2) | (8.1) | |||||||||||||||||||||||||||||||
Loss on extinguishment of debt | — | 70.2 | — | 70.2 | |||||||||||||||||||||||||||||||
Other share-based compensation expense | 1.1 | 42.7 | — | 42.7 | |||||||||||||||||||||||||||||||
Restructuring and severance charges | 3.2 | 0.9 | 4.4 | 6.4 | |||||||||||||||||||||||||||||||
VWR transaction, integration and planning expenses | 1.5 | 5.1 | 5.1 | 11.4 | |||||||||||||||||||||||||||||||
Other | 0.7 | (3.3) | 2.5 | (4.1) | |||||||||||||||||||||||||||||||
Adjusted EBITDA | $ | 273.3 | $ | 268.8 | $ | 536.1 | $ | 516.8 | |||||||||||||||||||||||||||
Liquidity and capital resources
We fund short-term cash requirements primarily from operating cash flows. Most of our long-term financing is from indebtedness.
The ongoing COVID-19 outbreak has dramatically reduced global economic activity and negatively impacted the financial markets. Despite this, in the second quarter of 2020 our results
30
remained strong. We generated $89.2 million of cash provided by operating activities, we ended the quarter with $415.3 million of cash and cash equivalents and our availability under credit facilities was $536.1 million. We also have no debt repayments due in the next twelve months other than required term loan prepayments of $10.7 million.
Liquidity
The following table presents our primary sources of liquidity:
(in millions) | June 30, 2020 | ||||||||||||||||||||||||||||
| Receivables facility | Revolving credit facility | Total | |||||||||||||||||||||||||||
Unused availability under credit facilities: | |||||||||||||||||||||||||||||
Capacity | $ | 300.0 | $ | 250.0 | $ | 550.0 | |||||||||||||||||||||||
Undrawn letters of credit outstanding | (12.3) | (1.6) | (13.9) | ||||||||||||||||||||||||||
Outstanding borrowings | — | — | — | ||||||||||||||||||||||||||
Unused availability | $ | 287.7 | $ | 248.4 | $ | 536.1 | |||||||||||||||||||||||
Cash and cash equivalents | 415.3 | ||||||||||||||||||||||||||||
Total liquidity | $ | 951.4 | |||||||||||||||||||||||||||
We fund short-term cash requirements primarily from operating cash flows. 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. As of June 30, 2020, we were in compliance with our debt covenants.
At June 30, 2020, $211.7 million or 51.0% of our $415.3 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.
In July of 2020, we refinanced our revolving credit facility to obtain an additional $265.0 million of available funding, bringing the total amount of available funding under this facility to $515.0 million, and $815.0 million when combined with the receivables facility. The revolving credit facility will mature on July 14, 2025. For additional information, see note 11 to our unaudited condensed consolidated financial statements included in Part I, Item 1 — “Financial statements.”
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Historical cash flows
The following table presents a summary of cash provided by (used in) various activities:
(in millions) | Six months ended June 30, | Change | |||||||||||||||||||||
| 2020 | 2019 | ||||||||||||||||||||||
Operating activities: | |||||||||||||||||||||||
Working capital changes* | $ | (26.0) | $ | (140.0) | $ | 114.0 | |||||||||||||||||
Non-cash items | 232.7 | 295.3 | (62.6) | ||||||||||||||||||||
All other | 135.6 | (86.2) | 221.8 | ||||||||||||||||||||
Total | 342.3 | 69.1 | 273.2 | ||||||||||||||||||||
Investing activities | (24.4) | (20.3) | (4.1) | ||||||||||||||||||||
Financing activities | (86.4) | (67.8) | (18.6) | ||||||||||||||||||||
Capital expenditures | (26.1) | (26.4) | 0.3 | ||||||||||||||||||||
━━━━━━━━━
* Includes changes to our accounts receivable, inventory, contract assets and accounts payable balances.
Cash flows from operating activities increased $273.2 million in 2020 primarily due to an increase of operating income and reductions in cash paid for interest, income taxes and working capital.
Investing activities used $4.1 million more cash in 2020, reflecting consistent capital spending but fewer proceeds from the sale of capital assets.
Financing activities used $18.6 million more cash in 2020 primarily from the payment of dividends on our MCPS, offset by cash proceeds received from the exercise of stock options.
Indebtedness
For information about our indebtedness, refer to the section entitled “Liquidity” and note 11 to our unaudited condensed consolidated financial statements included in Part I, Item 1 — “Financial statements.”
New accounting standards
For information about new accounting standards, see note 3 to our unaudited condensed consolidated financial statements included in Part I, Item 1 — “Financial statements.”
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.
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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 of June 30, 2020. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2020, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, reported, accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
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) during the fiscal quarter ended June 30, 2020 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
In April 2018 the EPA notified us of potential liabilities under the Toxic Substances Control Act and the Emergency Planning and Community Right to Know Act that were identified in March 2017 and June 2017 inspections of our Phillipsburg, New Jersey facility. The alleged violations relate to our failure to timely file reports regarding the Phillipsburg facility. We have also become aware of additional potential liabilities under the Toxic Substances Control Act relating to failure to timely file reports regarding the Paris, Kentucky facility, and relating to export shipments of elemental mercury, which we have voluntarily disclosed to the EPA. We have taken steps to correct these errors and have filed amended reports. Through our cooperation with the EPA, we believe that we will settle the matter for less than $1 million.
For additional information regarding legal proceedings and matters, see note 10 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 on Form 10-K for the year ended December 31, 2019.
In light of developments relating to the coronavirus (COVID-19) pandemic occurring subsequent to the filing of our Annual Report, the Company is supplementing the risk factors discussed in
33
our Annual Report with the following risk factor, which should be read in conjunction with the risk factors contained in our Annual Report.
The scale and scope of the recent coronavirus (COVID-19) outbreak and resulting pandemic is unknown and is expected to adversely impact our business at least for the near term. The overall impact on our business, operating results, cash flows and/or financial condition could be material.
In December 2019, a novel coronavirus disease was reported and in January 2020, the World Health Organization (“WHO”) declared COVID-19 a Public Health Emergency of International Concern. On February 28, 2020, the WHO raised its assessment of the COVID-19 threat from high to very high at a global level due to the continued increase in the number of cases and affected countries, and on March 11, 2020, the WHO characterized COVID-19 as a pandemic. The COVID-19 pandemic has adversely affected global economies, financial markets and the overall environment in which we do business, and the extent to which it may impact our future results of operations and overall financial performance remains uncertain.
The scale and scope of the COVID-19 pandemic may heighten the potential adverse effects on our business, operating results, cash flows and/or financial condition described in the risk factors contained in our Annual Report on Form 10-K, including the impact of:
•Significant interruptions in the operations of our manufacturing or distribution centers and logistics providers for the reasons described below;
•Global and regional economic and political conditions on our production, supply chain, the overall demand for our products and the ability of our customers to purchase and/or pay for our products as a result of the pandemic’s impact on them; our ability to develop and produce new products and services in an effort to address medical and other requirements as a result of the pandemic;
•Changes in foreign laws, regulations and regulatory requirements;
•Limitations on our ability to enforce legal rights and remedies with third parties or partners outside the United States;
•The risk of regulatory enforcement actions, product defects or claims thereof;
•Our ability to pursue our growth strategies;
•Our strategy to pursue strategic acquisitions;
•Changes within the industries that we serve;
•Our ability to access raw materials for use in the products we manufacture; and
•The potential loss of customers or a reduction in orders from a significant number of customers.
34
In addition, COVID-19 is adversely affecting, and is expected to continue to adversely affect, certain elements of our business (including certain elements of our operations, supply chains and distribution systems) as a result of impacts associated with preventive and precautionary measures that we, other businesses, our communities and governments are taking. In an effort to halt the outbreak of COVID-19, countries throughout the world, including the United States, most European Union member states, India and China, have placed significant restrictions on travel and many businesses have announced extended closures. These restrictions extend to a number of locations where we have significant operations and include shelter in place or stay-at-home orders that require our employees in that area to work from home and avoid unnecessary travel. In addition to existing travel restrictions, jurisdictions may continue to close borders, impose prolonged quarantines and further restrict travel and business activity, which could significantly impact our ability to support our operations and customers, the ability of our employees to get to their workplaces to produce products and provide services and the availability of raw materials for production of our products, as well as significantly hamper our products from moving through the supply chain.
Further, in connection with the global outbreak and spread of COVID-19 and in an effort to increase the wider availability of needed medical and other supplies and products, we may elect to, or governments may require us to, allocate our products (for example pursuant to the U.S. Defense Production Act) in a way that adversely affects our regular operations and financial results, results in differential treatment of customers and/or adversely affects our reputation and customer relationships. In addition, unpredictable increases in demand for certain of our products could exceed our capacity to meet such demand, which could adversely affect our financial results and customer relationships and result in negative publicity.
The duration and extent of the impact from the COVID-19 pandemic depends on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus, the extent and effectiveness of containment actions and the impact of these and other factors on our employees, customers, suppliers and partners. Such impact on our business, operating results, cash flows and/or financial condition could be material.
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.
35
Item 6. Exhibits
| Exhibit no. | Exhibit description | Method of filing | ||||||||||||
| Previously filed as Exhibit 4.1 to the Current Report on Form 8-K on July 17, 2020 | ||||||||||||||
| Previously filed as Exhibit 10.1 to the Current Report on Form 8-K on July 14, 2020 | ||||||||||||||
| Filed herewith | ||||||||||||||
| Filed herewith | ||||||||||||||
| Furnished herewith | ||||||||||||||
| Furnished herewith | ||||||||||||||
| 101 | XBRL exhibits | Filed herewith | ||||||||||||
36
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: July 29, 2020 | By: | /s/ Steven Eck | |||||||||||||||
| Name: | Steven Eck | ||||||||||||||||
| Title: | Senior Vice President, Chief Accounting Officer (Principal Accounting Officer) | ||||||||||||||||
37
Exhibit 31.1
CERTIFICATION
I, Michael Stubblefield, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Avantor, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: July 29, 2020 | By: | /s/ Michael Stubblefield | ||||||||||||
Name: | Michael Stubblefield | |||||||||||||
Title: | President and Chief Executive Officer | |||||||||||||
Exhibit 31.2
CERTIFICATION
I, Thomas A. Szlosek, certify that:
1.I have reviewed this Quarterly Report on Form 10-Q of Avantor, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
| Date: July 29, 2020 | By: | /s/ Thomas A. Szlosek | ||||||||||||
Name: | Thomas A. Szlosek | |||||||||||||
Title: | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||||||||||||
Exhibit 32.1
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Avantor, Inc. (the “Company”) for the three months ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Michael Stubblefield, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: July 29, 2020 | By: | /s/ Michael Stubblefield | ||||||||||||
Name: | Michael Stubblefield | |||||||||||||
Title: | President and Chief Executive Officer | |||||||||||||
Exhibit 32.2
Certification Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Avantor, Inc. (the “Company”) for the three months ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Thomas A. Szlosek, Executive Vice President, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1)The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2)The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: July 29, 2020 | By: | /s/ Thomas A. Szlosek | ||||||||||||
Name: | Thomas A. Szlosek | |||||||||||||
Title: | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||||||||||||