Avantor Inc

1. Nature of operations and presentation of financial statements

We are a global manufacturer and distributor that provides products and services to customers in the biopharmaceutical, healthcare, education & government and advanced technologies & applied materials industries.

Basis of presentation

The accompanying condensed consolidated financial statements have been prepared pursuant to SEC regulations whereby certain information normally included in GAAP financial statements has been condensed or omitted. The financial information presented herein reflects all adjustments (consisting only of normal, recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results for interim periods are not necessarily indicative of the results to be expected for the full year.

We believe that the disclosures included herein are adequate to make the information presented not misleading in any material respect when read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report. Those audited consolidated financial statements include a summary of our significant accounting policies.

Principles of consolidation

All intercompany balances and transactions have been eliminated from the financial statements.

Use of estimates

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts reported throughout the financial statements. Actual results could differ from those estimates.

Segment Reporting

Effective January 1, 2024, we changed our operating model and reporting segment structure from three reportable segments to two reportable segments: Laboratory Solutions and Bioscience Production. This structure aligns with how our Chief Executive Officer, who is our chief operating decision maker, measures segment operating performance and allocates resources across our operating segments.

2. New accounting standards and climate change related update by SEC

Segment Reporting

In November 2023, the FASB issued Accounting Standards Update 2023-07, Improvements to Reportable Segment Disclosures, which amends the existing segment reporting guidance (ASC Topic 280) to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses that are regularly provided to the chief operating decision maker and included within each reported measure of segment profit or loss, an amount for other segment items by reportable segment and a description of its composition, the title and position of the chief operating decision maker and an explanation of how the chief operating decision maker uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources.

The amendments in this update are effective for fiscal years beginning after December 15, 2023, and interim periods within fiscal years beginning after December 15, 2024. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of this standard on our financial statement disclosures.

Income Taxes

In December 2023, the FASB issued Accounting Standards Update 2023-09, Improvements to Income Tax Disclosures, which amends the existing income taxes guidance (ASC Topic 740) to require additional disclosures surrounding annual rate reconciliation, income taxes paid and other income tax related disclosures.

The amendments in this update are effective for annual periods beginning after December 15, 2024. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of this standard on our financial statement disclosures.

Other

There were no new accounting standards that we expect to have a material impact on our financial position or results of operations upon adoption.

Adoption of rules to enhance and standardize climate-related disclosures for Investors

On March 6, 2024, the SEC adopted final rules to require registrants to disclose certain climate-related information in registration statements and annual reports.

On April 4, 2024, the SEC issued an order staying the final rules pending completion of judicial review of the petitions challenging the final rules. The order does not amend the compliance dates contemplated by the final rules, which are applicable to the Company for fiscal years beginning with the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2025. We are currently evaluating the impact of our pending adoption of these requirements on our financial statement disclosures.

3. Earnings per share

The following table presents the reconciliation of basic and diluted earnings per share for the three months ended March 31, 2024:

The following table presents the reconciliation of basic and diluted earnings per share for the three months ended March 31, 2023:

4. Segment financial information

As described in note 1, effective January 1, 2024, we changed our operating model and reporting segment structure intotwo reportable business segments: Laboratory Solutions and Bioscience Production. Corporate costs are managed on a standalone basis, certain of which are allocated to our reportable segments.

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

The following table presents information by reportable segment:

The amounts above exclude inter-segment activity because it is not material. All of the net sales for each segment are from external customers.

The following table presents the reconciliation of net income, the nearest measurement under GAAP, to Adjusted Operating Income :

1. Represents direct costs incurred with third parties and the accrual of a long-term retention incentive to integrate acquired companies. These expenses represent incremental costs and are unrelated to normal operations of our business. Integration expenses are incurred over a pre-defined integration period specific to each acquisition.

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

The following table presents net sales by product category:

5. Supplemental disclosures of cash flow information

The following table presents supplemental disclosures of cash flow information:

At March 31, 2024 and December 31, 2023, amounts included in restricted cash primarily represent funds held in escrow to satisfy a long-term retention incentive related to the acquisition of Ritter.

6. Inventory

The following table presents the components of inventory:

7. Goodwill and other intangible assets

Goodwill

As described in note 1, we reorganized our segment reporting structure effective January 1, 2024. The segment reporting reorganization also resulted in a change to our reporting units for the purpose of goodwill impairment testing. Our new reporting units are Manufactured Products, Buy Sell Production, NuSil, Buy Sell Lab, Proprietary Lab and Services. As a result of the reorganization, our goodwill was reassigned to the new reporting units making up our Laboratory Solutions and Bioscience Production reporting segments.

We have reassigned goodwill as of January 1, 2024 to align to our new segment structure by using a relative fair value approach. We tested goodwill for impairment immediately before and after the realignment; no impairment was identified.

The following table presents goodwill by our reportable segments, on the effective date of the change:

Other intangible assets

The following table presents the components of other intangible assets:

1. As of March 31, 2024 and December 31, 2023, accumulated impairment losses on Customer relationships were $65.9 million and on Other were $40.5 million totaling $106.4 million.

2. Commitments and contingencies

Our business involves commitments and contingencies related to compliance with environmental laws and regulations, the manufacture and sale of products and litigation. The ultimate resolution of contingencies is subject to significant uncertainty, and it is reasonably possible that contingencies could be decided unfavorably against us.

Environmental laws and regulations

Our environmental liabilities are subject to changing governmental policy and regulations, discovery of unknown conditions, judicial proceedings, method and extent of remediation, existence of other potentially responsible parties and future changes in technology. We believe that known and unknown environmental matters, if not resolved favorably, could have a material effect on our financial position, liquidity and profitability. Matters to be disclosed are as follows:

The New Jersey Department of Environmental Protection has ordered us to remediate groundwater conditions near our plant in Phillipsburg, New Jersey. At March 31, 2024, our accrued obligation under this order is $2.4 million, which is calculated based on expected cash payments discounted at rates ranging from 4.2% to 5.1% between 2024 and 2046. The undiscounted amount of that obligation is $3.8 million. We are indemnified against any losses incurred in this matter as stipulated through the agreement and guaranty referenced in our Annual Report.

In 2016, we assessed the environmental condition of our chemical manufacturing site in Gliwice, Poland. Our assessment revealed specific types of soil and groundwater contamination throughout the site. We are also monitoring the condition of a closed landfill on that site. These matters are not covered by our indemnification arrangement because they relate to an operation we subsequently acquired. At March 31, 2024, our balance sheet includes a liability of $1.1 million for remediation and monitoring costs. That liability is estimated primarily on discounted expected remediation payments and is not materially different from its undiscounted amount.

Manufacture and sale of products

Our business involves risk of product liability, patent infringement and other claims in the ordinary course of business arising from the products that we produce ourselves or obtain from our suppliers, as well as from the services we provide. Our exposure to such claims may increase to the extent that we expand our manufacturing operations or service offerings.

We maintain insurance policies to protect us against these risks, including product liability insurance. In many cases the suppliers of products we distribute have indemnified us against such claims. Our insurance coverage or indemnification agreements with suppliers may not be adequate in all pending or any future cases brought against us. Furthermore, our ability to recover under any insurance or indemnification arrangements is subject to the financial viability of our insurers, our suppliers and our suppliers’ insurers, as well as legal enforcement under the local laws governing the arrangements.

We have entered into indemnification agreements with customers of our self-manufactured products to protect them from liabilities and losses arising from our negligence, willful misconduct or sale of defective products. To date, we have not incurred material costs to defend lawsuits or settle claims related to these indemnification provisions.

Litigation

At March 31, 2024, 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.

9. Debt

The following table presents information about our debt:

1. SOFR includes credit spread adjustment.

Interest expense, net includes interest income of $17.9 million and $14.5 million for the three months ended March 31, 2024 and March 31, 2023, respectively. The interest income primarily relates to income on our interest rate swaps and cross currency swaps. Refer to note 14 to the unaudited consolidated financial statements for more information.

Credit facilities

The following table presents availability under our credit facilities:

Capacity under the receivables facility is calculated as the lower of eligible borrowing base or facility limit of $400.0 million. Eligible borrowing base is determined as total available accounts receivable less ineligible accounts receivable and other adjustments. At March 31, 2024, total available accounts receivable under the receivables facility were $538.3 million.

Senior secured credit facilities

On April 2, 2024, we amended the credit agreement to reprice the U.S. Dollar term loan under our senior secured credit facilities. Pursuant to the agreement, the interest rate applicable to the U.S. Dollar term loan reduced from SOFR plus a spread of 2.25% per annum to SOFR plus a spread of 2.00% per annum. The principal amount of U.S. Dollar term loan outstanding immediately prior to the amendment and the outstanding principal amount of U.S. Dollar term loan immediately following the amendment each totaled $772.4 million. The final stated maturity of the U.S. Dollar term loan remains November 6, 2027. The costs to complete the amendment were not material.

During the quarter ended March 31, 2024, we made prepayments of $10.0 million on our U.S. dollar term loan B-5 that matures on November 6, 2027 and prepayments of $190.6 million on our Euro term loan B-4 that matures on June 10, 2028. In connection with these prepayments, we expensed $2.5 million of previously unamortized deferred financing costs as a loss on extinguishment of debt.

Debt covenants

Our debt agreements include representations and covenants that we consider usual and customary, and our receivables facility and senior secured credit facilities include a financial covenant that becomes applicable for periods in which we have drawn more than 35% of our revolving credit facility under the senior secured credit facilities. In this circumstance, we are not permitted to have combined borrowings on our senior secured credit facilities and secured notes in excess of a pro forma net leverage ratio, as defined in our credit agreements. As we had not drawn more than 35% of our revolving credit facility in this period, this covenant was not applicable at March 31, 2024.

10. Accumulated other comprehensive income or loss

The following table presents changes in the components of AOCI:

The reclassifications effects shown above were immaterial to the financial statements and were made to either cost of sales, SG&A expense or interest expense depending upon the nature of the underlying transaction. The income tax effects in the three months ended March 31, 2024 on foreign currency translation were due to our net investment hedge and cross-currency swap discussed in note 14.

11. Stock-based compensation

The following table presents the components of stock-based compensation expense:

At March 31, 2024, unvested awards under our plans have remaining stock-based compensation expense of $116.4 million to be recognized over a weighted average period of 1.9 years.

Stock options

The following table presents information about outstanding stock options:

During the three months ended March 31, 2024, we granted stock options that have a contractual life often years and will vest annually over three years, subject to the recipient continuously providing service to us through such date.

RSUs

The following table presents information about unvested RSUs:

During the three months ended March 31, 2024, we granted RSUs that will vest annually over three years, subject to the recipient continuously providing service to us throughout the vesting period. Certain of those awards contain performance and market conditions that impact the number of shares that will ultimately vest. We recorded expense on such awards of $2.1 million and $2.3 million for the three months ended March 31, 2024 and March 31, 2023, respectively.

12. Other income or expense, net

The following table presents the components of other income or expense, net:

13. Income taxes

The following table presents the relationship between income tax expense and income before income taxes:

Income tax expense in the quarter is based upon the estimated income for the full year. The composition of the income in different countries and adjustments, if any, in the applicable quarterly periods influences our expense.

The relationship between pre-tax income and income tax expense is affected by the impact of losses for which we cannot claim a tax benefit, non-deductible expenses, and other items that increase tax expense without a relationship to income, such as withholding taxes and changes with respect to uncertain tax positions.

The change in the effective tax rate for the three months ended March 31, 2024 when compared to the three months ended March 31, 2023, is primarily due to valuation allowances against deferred tax assets not expected to be realized.

14. Derivative and hedging activities

Hedging instruments:

We engage in hedging activities to reduce our exposure to foreign currency exchange rates and interest rates. Our hedging activities are designed to manage specific risks according to our strategies, as summarized below, which may change from time to time. Our hedging activities consist of the following:

•Economic hedges —We are exposed to changes in foreign currency exchange rates on certain of our euro-denominated term loans and notes that move inversely from our portfolio of euro-denominated intercompany loans. The currency effects for these non-derivative instruments are recorded through earnings in the period of change and substantially offset one another;

•Other hedging activities —Certain of our subsidiaries hedge short-term foreign currency denominated business transactions, external debt and intercompany financing transactions using foreign currency forward contracts. These activities were not material to our consolidated financial statements.

Cash flow hedges of interest rate risk

Our objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in AOCI and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in AOCI related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $17.0 million will be reclassified as a reduction to interest expense.

As of March 31, 2024, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:

Effect of cash flow hedge accounting on AOCI

The table below presents the effect of cash flow hedge accounting on AOCI for the three months ended March 31, 2024 and March 31, 2023.

Effect of cash flow hedge accounting on the income statement

The table below presents the effect of our derivative financial instruments on the statement of operations for the three months ended March 31, 2024 and March 31, 2023.

Net investment hedges

We are exposed to fluctuations in foreign exchange rates on investments we hold in foreign entities, specifically our net investment in Avantor Holdings B.V., a EUR-functional-currency consolidated subsidiary, against the risk of changes in the EUR-USD exchange rate.

For derivatives designated as net investment hedges, the gain or loss on the derivative is reported in AOCI as part of the cumulative translation adjustment. Amounts are reclassified out of AOCI into earnings when the hedged net investment is either sold or substantially liquidated.

As of March 31, 2024, we had the following outstanding foreign currency derivatives that were used to hedge net investments in foreign operations:

Effect of net investment hedges on AOCI and the income statement

The table below presents the effect of our net investment hedges on AOCI and the statement of operations for the three months ended March 31, 2024 and March 31, 2023.

The Company did not reclassify any other deferred gains or losses related to cash flow hedges from accumulated other comprehensive income (loss) to earnings for the three months ended March 31, 2024 and March 31, 2023.

The table below presents the fair value of our derivative financial instruments as well as their classification on the Balance Sheet as of March 31, 2024 and December 31, 2023:

Non-derivative financial instruments which are designated as hedging instruments:

We designated all of our outstanding €400.0 million 3.875% senior unsecured notes, issued on July 17, 2020, and maturing on July 15, 2028, as a hedge of our net investment in certain of our European operations. For instruments that are designated and qualify as net investment hedges, the foreign currency transactional gains or losses are reported as a component of AOCI. The gains or losses would be reclassified into earnings upon a liquidation event or deconsolidation of a hedged foreign subsidiary.

Net investment hedge effectiveness is assessed based upon the change in the spot rate of the foreign currency denominated debt. The critical terms of the foreign currency notes match the portion of the net investments designated as being hedged. At March 31, 2024, the net investment hedge was equal to the designated portion of the European operations and was considered to be perfectly effective.

The accumulated gain related to the foreign currency denominated debt designated as net investment hedges classified in the foreign currency translation adjustment component of AOCI was $20.0 million and $9.3 million as of March 31, 2024 and December 31, 2023, respectively.

The amount of (gain) loss related to the foreign currency denominated debt designated as net investment hedges classified in the foreign currency translation adjustment component of other comprehensive income or loss for the three months ended March 31, 2024 and March 31, 2023 are presented below:

15. 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.

The following table presents the gross amounts, which exclude unamortized deferred financing costs, and the fair values of debt instruments:

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.