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 or implied by the forward-looking statements. You should carefully read “Cautionary Considerations Regarding Forward-Looking Statements” for more information.
presentation basis
This discussion should be read in conjunction with the accompanying condensed consolidated financial statements and notes. Pursuant toSEC 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 sinceDecember 31, 2021 , the date of our Annual Report. Therefore, we encourage you to read this discussion and analysis in conjunction with the Annual Report.
Insight
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 of
products and services and allows us to create customized and integrated
solutions for our customers.
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During the three months endedSeptember 30, 2022 , we recorded net sales of$1,856.5 million , net income of$167.0 million and Adjusted EBITDA of$384.0 million . Net sales increased by 1.2%, which included 4.5% organic growth compared to the same period in 2021. 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.
Current factors and 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 impacted by acquisitions
We completed the acquisitions of Masterflex,Ritter GmbH , and RIM Bio in 2021. Masterflex is a leading global manufacturer of peristaltic pumps and aseptic single-use fluid transfer technologies.Ritter GmbH is focused on supplying high-quality liquid handling consumables used in a variety of molecular screening and diagnostic applications and as part of drug discovery and clinical trial testing in pharma and biotech applications. RIM Bio provides a complete range of single-use 2D bags, 3D bags, tank liners, bag assemblies and multi-bag manifolds used in the manufacturing of biologics including monoclonal antibodies (mAbs), vaccines, cell and gene therapies, and recombinant proteins.
Our results continue to be affected by the ongoing global coronavirus outbreak
The results for each of our three regions continue to be impacted by the COVID-19 pandemic for the three and nine months endedSeptember 30, 2022 , as described further in the "Results of operations" section below. For a discussion of the impact of the COVID-19 pandemic and associated economic disruptions, and the actual operational and financial impacts that we experienced throughDecember 31, 2021 , see "Part II-Item 7-Management's discussion and analysis of financial condition and results of operations" in the Annual Report. For additional discussion of the potential impact of the COVID-19 pandemic and associated economic disruptions on our results, see "The COVID-19 pandemic has adversely impacted, and continues to pose risks to, our business, operating results, cash flows and/or financial condition, the nature and extent of which could be material." included in "Part I-Item 1A-Risk factors" in the Annual Report.
We were impacted by supply chain constraints and inflationary pressures
We have experienced challenges in sourcing certain products and raw materials as a result of global supply chain disruptions and have experienced inflationary pressures across all of our cost categories. While we have implemented pricing and productivity measures to combat these pressures, they may continue to adversely impact our results.
Exchange rate fluctuations have an impact on our results
Our consolidated results of operations are comprised of many different functional currencies that translate into ourU.S. Dollar reporting currency. The movement of theU.S. Dollar against those functional currencies, particularly the Euro, has caused significant variability in our results and may continue to do so in the future. 27
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Key performance and financial condition indicators
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 we monitor are:
• Net sales, gross margin, operating profit and net profit or loss. These measures are described 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;" •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 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”;
•Free cash flow, which is a non-GAAP measure, is equal to our cash flow from operating activities, plus acquisition-related costs paid in the period, less capital expenditures. We believe that this measurement is useful to investors as it provides a view on the Company's ability to generate cash for use in financing or investing activities. This measurement is used by management for the same reason. A reconciliation of cash flows from operating activities, the most directly comparable GAAP financial measure, to free cash flows, is included in the section entitled "Liquidity and capital resources-Historical cash flows."
Operating results
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. 28
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Executive summary
Three months ended September 30,
(dollars in millions) 2022 2021 Change
Net sales $ 1,856.5 $ 1,834.3 $ 22.2
Gross margin 35.0 % 33.6 % 140 bps
Operating income $ 275.8 $ 237.2 $ 38.6
Net income 167.0 156.8 10.2
Adjusted EBITDA 384.0 359.2 24.8
Adjusted EBITDA margin 20.7 % 19.6 % 110 bps
Third quarter net sales growth was driven by our biopharma and advanced
technologies & applied materials end markets, as well as the impact of the
Masterflex acquisition that we completed in the prior year, partially offset by
unfavorable foreign currency impact and COVID-19 related headwinds. Commercial
excellence, growth of our proprietary materials and consumables product group
and sales of higher-margin products offered by recently acquired companies
contributed to expansion in both gross margin and Adjusted EBITDA margin.
Three months completed
Reconciliation of net sales growth and organic net sales growth
Three months ended September 30, Foreign
currency Organic net
(in millions) 2022 2021 Net sales growth impact M&A impact sales growth
Americas $ 1,123.2 $ 1,045.0 $ 78.2 $ (4.0) $ 30.5 $ 51.7
Europe 595.1 674.7 (79.6) (93.4) 7.1 6.7
AMEA 138.2 114.6 23.6 (9.1) 8.9 23.8
Total $ 1,856.5 $ 1,834.3 $ 22.2 $ (106.5) $ 46.5 $ 82.2
Net sales increased $22.2 million or 1.2%, which included $106.5 million or 5.8%
of unfavorable foreign currency impact and $46.5 million or 2.5% of M&A impact.
Organic growth was $82.2 million or 4.5% (7.8% when excluding the impact of
sales of COVID-19-related products in both periods, referred to herein as
COVID-19 related headwinds or tailwinds) and was primarily due to growth in our
proprietary products and services.
In the Americas , net sales increased $78.2 million or 7.5%, which included $4.0
million or 0.3% of unfavorable foreign currency impact and $30.5 million or 2.9%
of M&A impact. Organic growth in net sales was $51.7 million or 4.9% (8.8%
excluding COVID-19 headwinds). Additional information on organic net sales
growth by end market (with approximate percentage of total organic net sales for
the region) is as follows:
• Biopharma (55%) – Sales increased mid-single digit, primarily due to strong growth in proprietary materials sales in biopharmaceutical production, driven by our chemical and serum offerings, partially offset by lower sales of products related to COVID-19.
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• Healthcare (10%) – Sales were flat as strong growth in our medical grade silicone business was offset by lower COVID-19 related offerings for diagnostic tests.
•Education and government (15%) - Sales increased low single-digits primarily due to increases in lab chemicals and equipment & instrumentation to government customers, partially offset by lower sales of COVID-19 related offerings to university research customers.
•Advanced Technologies and Applied Materials (20%) – Sales increased double-digit due to strong sales to our semiconductor and electronics customers.
InEurope , net sales decreased$79.6 million or 11.8%, which included$93.4 million or 13.9% of unfavorable foreign currency impact and$7.1 million or 1.1% of M&A impact. Organic net sales increased$6.7 million or 1.0% (4.8% excluding COVID-19 headwinds). Additional information on organic net sales growth by end market (with approximate percentage of total organic net sales for the region) is as follows: •Biopharma (50%) - Sales grew low single-digits driven by double-digit growth in our production chemicals and single-use offerings, partially offset by lower sales of COVID-19 related offerings for vaccines, PPE and diagnostic testing.
•Healthcare (10%) – Sales increased double digit primarily due to strong growth in our medical grade silicone offering.
•Education & government (10%) - Sales declined high single-digits driven by decreased sales of equipment & instrumentation in the education end market and by COVID-19 related headwinds in the government end market.
• Advanced Technologies and Applied Materials (30%): Sales declined mid-single digit due to weaker industrial demand and headwinds from COVID-19.
In AMEA, net sales increased$23.6 million or 20.6%, which included$9.1 million or 8.0% of unfavorable foreign currency impact and$8.9 million or 7.8% of M&A impact. The organic increase in net sales was$23.8 million or 20.8% (15.1% excluding COVID-19 tailwinds). Additional information on organic net sales growth by end market (with approximate percentage of total organic net sales for the region) is as follows:
•Biopharma (50%) – Sales increased double-digit due to growth in sales of proprietary materials in biopharmaceutical production, driven by our chemicals and single-use product offerings.
•Advanced technologies & applied materials (40%) - Sales grew double-digits
primarily driven by growth of our proprietary offerings into the semiconductor
industry as well as strong industrial demand in the region.
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End of nine months
Reconciliation of net sales growth and organic net sales growth
Nine months ended September 30, Foreign
Net sales currency Organic net
(in millions) 2022 2021 growth impact M&A Impact sales growth
Americas $ 3,423.2 $ 3,149.9 $ 273.3 $ (8.8) $ 123.0 $ 159.1
Europe 1,899.3 1,991.1 (91.8) (204.1) 90.1 22.2
AMEA 394.9 337.5 57.4 (17.6) 41.1 33.9
Total $ 5,717.4 $ 5,478.5 $ 238.9 $ (230.5) $ 254.2 $ 215.2
Net sales increased $238.9 million or 4.4%, which included $230.5 million or
4.1% of unfavorable foreign currency impact and $254.2 million or 4.6% of M&A
impact. Organic growth in net sales was $215.2 million or 3.9% (7.1% excluding
COVID-19 headwinds).
In the Americas , net sales increased $273.3 million or 8.7%, which included $8.8
million or 0.3% of unfavorable foreign currency impact and $123.0 million or
3.9% of M&A impact. Organic growth in net sales was $159.1 million or 5.1% (8.2%
excluding COVID-19 headwinds) for reasons similar to the three month period.
In Europe , net sales decreased $91.8 million or 4.6%, which included $204.1
million or 10.2% of unfavorable foreign currency impact and $90.1 million or
4.5% of M&A impact. Organic growth in net sales was $22.2 million or 1.1% (5.2%
excluding COVID-19 headwinds) for reasons similar to the three month period as
well as modest growth in our advanced technologies & applied materials business.
In AMEA, net sales increased
Gross margin
Three months ended September 30, Nine months ended September 30,
2022 2021 Change 2022 2021 Change
Gross margin 35.0 % 33.6 % 140 bps 34.8 % 33.9 % 90 bps
Three and nine months ended
Gross margin for the three and nine months ended September 30, 2022 increased
140 basis points and 90 basis points, respectively, resulting primarily from
commercial excellence and favorable product mix in our proprietary materials
business, as well as a favorable impact from sales of higher gross margin
products from acquired companies.
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Operating income
Three months ended
September 30, Nine months ended September 30,
(in millions) 2022 2021 Change 2022 2021 Change
Gross profit $ 650.7 $ 615.9 $ 34.8 $ 1,988.3 $ 1,855.2 $ 133.1
Operating expenses 374.9 378.7 (3.8) 1,109.9 1,097.0 12.9
Operating income $ 275.8 $ 237.2 $ 38.6 $ 878.4 $ 758.2 $ 120.2
Three and nine months ended
Operating income increased primarily from higher gross profit, as previously
discussed. For the three months ended September 30, 2022 , we have lower
operating expenses driven by productivity and foreign currency impacts. On a
year to date basis, the increase in operating expenses is driven by an
additional $39.5 million in non-cash amortization expense related to intangible
assets generated in our 2021 acquisitions, as well as investments in our
workforce made over the course of 2021 and into 2022.
Net revenue
Three months ended
September 30, Nine months ended September 30,
(in millions) 2022 2021 Change 2022 2021 Change
Operating income $ 275.8 $ 237.2 $ 38.6 $ 878.4 $ 758.2 $ 120.2
Interest expense (67.3) (54.1) (13.2) (196.0) (156.6) (39.4)
Loss on extinguishment of debt (2.9) - (2.9) (10.8) (8.4) (2.4)
Other income, net 2.7 3.4 (0.7) 4.8 19.8 (15.0)
Income tax expense (41.3) (29.7) (11.6) (131.6) (134.4) 2.8
Net income $ 167.0 $ 156.8 $ 10.2 $ 544.8 $ 478.6 $ 66.2
Three months ended
Net income increased due to higher operating income, as previously discussed.
This growth was partially offset by higher interest expense driven by
incremental debt issued in the fourth quarter of 2021 to finance the Masterflex
acquisition, loss on extinguishment of our debt resulting from optional
prepayments on our term loans, and higher income tax expense driven by higher
income before income taxes and lower tax deductions resulting primarily from
fewer stock option exercises in 2022 compared to 2021.
End of nine months
Net income increased primarily due to higher operating income, as previously
discussed. This was partially offset by higher interest expense as a result of
incremental debt issued to finance the acquisitions completed in 2021, and lower
other income resulting from the absence of a one-time disgorgement penalty
payment that we received in 2021.
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Adjusted EBITDA and Adjusted EBITDA margin
For a reconciliation of Adjusted EBITDA to Net income, the most directly
comparable measure under GAAP, see "Reconciliations of non-GAAP financial
measures."
Three months ended September 30, Nine months ended September 30,
(dollars in millions) 2022 2021 Change 2022 2021 Change
Adjusted EBITDA:
Americas $ 262.3 $ 236.3 $ 26.0 $ 846.3 $ 740.0 $ 106.3
Europe 130.3 135.5 (5.2) 393.0 390.4 2.6
AMEA 35.7 29.5 6.2 101.1 80.5 20.6
Corporate (44.3) (42.1) (2.2) (129.2) (122.0) (7.2)
Total $ 384.0 $ 359.2 $ 24.8 $ 1,211.2 $ 1,088.9 $ 122.3
Adjusted EBITDA margin 20.7 % 19.6 % 110 bps 21.2 % 19.9 % 130 bps
Three months ended
Adjusted EBITDA increased $24.8 million or 6.9%, which included an unfavorable
foreign currency translation impact of $21.2 million or 5.9% and $19.6 million
or 5.5% from M&A. The remaining growth was $26.4 million or 7.3%.
In the Americas , Adjusted EBITDA grew $26.0 million or 11.0%, or 5.1% when
adjusted for unfavorable foreign currency translation impact and M&A. Higher
gross profit driven by commercial excellence and favorable mix related to sales
of our higher-margin proprietary products was partially offset by inflationary
factors and investments in our workforce made over the course of 2021 and into
2022.
In Europe , Adjusted EBITDA declined $5.2 million or 3.8%, but increased 9.0%
when adjusted for unfavorable foreign currency translation impact and M&A. The
increase was driven by higher gross profit resulting from favorable product mix
and commercial excellence. This increase was partially offset by inflationary
factors and investments in our workforce made over the course of 2021 and into
2022.
In AMEA, Adjusted EBITDA grew $6.2 million or 21.0%, or 14.2% when adjusted for
unfavorable foreign currency translation impact and M&A. Increases driven by
higher gross profit were partially offset by inflationary factors and losses on
foreign currency revaluations.
In Corporate, adjusted EBITDA decreased
End of nine months
Adjusted EBITDA increased$122.3 million or 11.2%, which included an unfavorable foreign currency translation impact of$44.0 million or 4.0% and$95.1 million or 8.7% from M&A. The remaining growth was$71.2 million or 6.5%. 33
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In theAmericas , Adjusted EBITDA grew$106.3 million or 14.4%, or 7.0% when adjusted for unfavorable foreign currency translation impact and M&A. Higher gross profit from commercial excellence and favorable product mix related to sales of our higher-margin proprietary products was partially offset by inflationary factors, including freight, and investments in our workforce made over the course of 2021 and into 2022. InEurope , Adjusted EBITDA grew$2.6 million or 0.7%, or 4.7% when adjusted for unfavorable foreign currency translation impact and M&A, due to higher gross profit from favorable product mix and commercial excellence. This was partially offset by inflationary factors, including freight, and investments in our workforce made over the course of 2021 and into 2022. In AMEA, Adjusted EBITDA grew$20.6 million or 25.6%, or 9.3% when adjusted for unfavorable foreign currency translation impact and M&A. Increases driven by higher gross profit were offset by inflationary factors, including freight.
In Corporate, adjusted EBITDA decreased
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Reconciliations of Non-GAAP Financial Measures
The following table presents the reconciliation of net income and adjusted EBITDA:
Three months ended
September 30, Nine months ended September 30,
(in millions) 2022 2021 2022 2021
Net income $ 167.0 $ 156.8 $ 544.8 $ 478.6
Interest expense 67.3 54.1 196.0 156.6
Income tax expense 41.3 29.7 131.6 134.4
Depreciation and amortization 100.6 100.0 304.8 275.1
Loss on extinguishment of debt 2.9 - 10.8 8.4
Net foreign currency (gain) loss from financing
activities (1.2) (0.8) (0.2) 1.2
Other stock-based compensation (benefit) expense (1.6) 1.6 (3.3) 2.9
Acquisition-related expenses1 - 3.2 - 27.8
Integration-related expenses2 6.4 7.9 13.6 8.4
Purchase accounting adjustments3 - 6.3 9.4 6.3
Restructuring and severance charges4 1.3 0.4 3.7 2.2
Receipt of disgorgement penalty5 - - - (13.0)
Adjusted EBITDA $ 384.0 $ 359.2 $ 1,211.2 $ 1,088.9
---------
1.Represents legal, accounting, investment banking and consulting fees incurred
related to the acquisition of acquired companies.
2.Represents non-recurring direct costs incurred with third parties 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.
3.Represents the non-cash reduction of contingent consideration related to the
Ritter acquisition and the amortization of the purchase accounting adjustments
to record inventory acquired from Masterflex and Ritter at fair value.
4.Reflects the incremental expenses incurred in the period related to
initiatives to increase profitability and productivity. Typical costs included
in this caption are employee severance, site-related exit costs, and contract
termination costs.
5.As described in note 12 to our unaudited interim financial statements.
Cash and capital resources
We fund short-term cash requirements primarily from operating cash flows. Most of our long-term financing is from indebtedness. For the three and nine months endedSeptember 30, 2022 , we generated$258.3 million and$638.0 million of cash from operating activities, ended the quarter with$265.6 million of cash and cash equivalents and our availability under our credit facilities was$556.1 million . We have no debt repayments due in the next twelve months other than required term loan payments of$31.7 million and receivables facility borrowing of$245.0 million . 35
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Liquidity
The following table presents our main sources of liquidity:
September 30, 2022
Receivables Revolving credit
(in millions) facility facility Total
Unused availability under credit facilities:
Capacity $ 300.0 $ 515.0 $ 815.0
Undrawn letters of credit outstanding (13.9) - (13.9)
Outstanding borrowings (245.0) - (245.0)
Unused availability $ 41.1 $ 515.0 $ 556.1
Cash and cash equivalents 265.6
Total liquidity $ 821.7
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.
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 September 30, 2022 .
At September 30, 2022 , $229.5 million or 86.4% of our $265.6 million in cash and
cash equivalents was held by our non-U.S. subsidiaries and may be subject to
certain taxes upon repatriation, primarily where foreign withholding taxes
apply.
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Historical cash flows
The following table presents a summary of cash provided by (used in) various
activities:
Nine months ended September 30,
(in millions) 2022 2021 Change
Operating activities: Net income$ 544.8 $ 478.6 66.2 Non-cash items1 350.5 347.1 3.4 Working capital changes2 (155.1) (175.1) 20.0 All other (102.2) 2.0 (104.2) Total$ 638.0 $ 652.6 $ (14.6) Investing activities$ (76.5) $ (1,238.2) $ 1,161.7 Cash paid for acquisitions, net of cash acquired (20.2) (1,168.9) 1,148.7 Capital expenditures (99.8) (71.1) (28.7) Cash proceeds from settlement of cross currency swap 42.5 - 42.5 Financing activities (567.1) 1,758.2 (2,325.3)
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1.Consists of typical non-cash charges including depreciation and amortization, stock based compensation expense, deferred income tax expense and others. 2.Includes changes to our accounts receivable, inventory, contract assets and accounts payable.
Cash flow from operating activities provided
Investing activities used$1,161.7 million less cash in 2022, reflecting the cash paid for acquisitions in the previous year as well as cash we received from the settlement of a cross currency swap in the third quarter of 2022. These items were offset by increased capital spending across the Company compared to the prior year. Financing activities used$2,325.3 million more cash in 2022 compared to the prior year. In 2021, financing activities provided$1,758.2 million of cash primarily due to issuances of new debt and secondary equity offerings to finance our acquisitions. In 2022, we used$567.1 million of cash primarily to pay down our term loans. 37
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Free cash flow
Nine months ended September 30,
(in millions) 2022 2021 Change
Net cash provided by operating activities $ 638.0 $ 652.6 $ (14.6)
Acquisition-related expenses paid - 24.6 $ (24.6)
Capital expenditures (99.8) (71.1) (28.7)
Free cash flow $ 538.2 $ 606.1 $ (67.9)
Free cash flow was $67.9 million lower in 2022 due to the changes in cash flows
from operating activities noted above and an increase in capital spending in
2022, principally reflecting growth-related expansions in our global supply
chain.
Debt
For more information on our indebtedness, see the section entitled “Liquidity” and note 9 of our unaudited condensed consolidated financial statements included in Part I, Item 1 – “Financial statements”.
New accounting standards
There are no new accounting standards that we expect will have a material impact on our financial condition or results of operations upon adoption.
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