S-1 1 d698870ds1.htm FORM S-1 Form S-1
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As filed with the Securities and Exchange Commission on February 8, 2019

Registration No. 333-                

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Avantor, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   3826   82-2758923

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

 

 

Radnor Corporate Center

Building One, Suite 200

100 Matsonford Road

Radnor, PA 19087

Telephone: (610) 386-1700

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Justin M. Miller, Esq.

Executive Vice President, General Counsel

Avantor, Inc.

Radnor Corporate Center

Building One, Suite 200

100 Matsonford Road

Radnor, PA 19087

Telephone: (610) 386-1700

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

With copies to:

 

Joseph H. Kaufman, Esq.

Ryan Bekkerus, Esq.

Simpson Thacher & Bartlett LLP

425 Lexington Avenue

New York, New York 10017

(212) 455-2000

 

Patrick O’Brien, Esq.

John Sorkin, Esq.

Rachel Phillips, Esq.

Ropes & Gray LLP

1211 Avenue of the Americas

New York, NY 10036

(617) 951-7000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement is declared effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box:  ☐

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 7(a)(2)(B) of the Securities Act.  ☐

 

 

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of
Securities to be Registered
 

Proposed

Maximum
Aggregate

Offering Price(1)(2)

  Amount of
Registration Fee(2)

Common stock, par value $0.01 per share

  $100,000,000   $12,120

 

 

(1)

Estimated solely for the purpose of calculating the registration fee under Rule 457(o) of the Securities Act of 1933, as amended.

(2)

Includes the offering price of any additional shares that the underwriters have the option to purchase to cover over-allotments, if any.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

Subject to Completion, dated February 8, 2019.

            Shares

 

 

LOGO

Avantor, Inc.

Common Stock

 

 

This is an initial public offering of shares of our common stock. We are offering                shares of our common stock.

Prior to this offering, there has been no public market for our common stock. We estimate that the initial public offering price per share will be between $                and $                . See “Underwriting (Conflicts of Interest)” for a discussion of the factors to be considered in determining the initial offering price. We intend to apply to list our common stock on                under the symbol “                .”

Investing in shares of our common stock involves significant risks. See “Risk Factors” beginning on page 18.

 

 

Neither the Securities and Exchange Commission nor any other regulatory body has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

 

 

 

     Per Share      Total  

Initial public offering price

   $                    $                

Underwriting discounts and commissions(1)

   $        $    

Proceeds, before expenses, to us

   $        $    

 

(1)

We have agreed to reimburse the underwriters for certain expenses. See “Underwriting (Conflicts of Interest).”

We have granted the underwriters the option to purchase up to an additional                shares of our common stock from us at the initial public offering price, less the underwriting discounts and commissions.

 

 

The underwriters expect to deliver the shares of common stock to purchasers on or about                    , 2019.

 

 

Joint Book-Running Managers

 

Goldman Sachs & Co. LLC   J.P. Morgan

 

 

The date of this prospectus is                    , 2019.

 


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TABLE OF CONTENTS

 

     Page  

Market and Industry Data

     i  

Trademarks, Tradenames and Service Marks

     ii  

Basis of Presentation

     ii  

Presentation of Certain Financial Measures

     ii  

About This Prospectus

     iii  

Summary

     1  

Risk Factors

     18  

Special Note Regarding Forward-Looking Statements

     46  

Use of Proceeds

     48  

Dividend Policy

     49  

Capitalization

     50  

Dilution

     52  

Selected Condensed Historical Financial Data

     54  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     55  

Business

     82  

Management

     109  

Principal Stockholders

     139  

Certain Relationships and Related Party Transactions

     142  

Description of Indebtedness

     144  

Description of Capital Stock

     150  

Shares Eligible for Future Sale

     159  

Certain United States Federal Income and Estate Tax Consequences to Non-U.S. Holders

     162  

Underwriting (Conflicts of Interest)

     165  

Legal Matters

     170  

Experts

     170  

Where You Can Find More Information

     170  

Index to Financial Statements

     F-1  

 

 

Through and including                    , 2019 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to a dealer’s obligation to deliver a prospectus when acting as an underwriter and with respect to an unsold allotment or subscription.

We and the underwriters (and any of our or their affiliates) have not done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who obtain this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the shares of common stock and the distribution of this prospectus outside of the United States.

MARKET AND INDUSTRY DATA

This prospectus includes market and industry data and forecasts that we have derived from independent consultants, publicly available information, various industry publications, other published industry sources and our internal data and estimates. Independent consultant reports, industry publications and other published industry sources generally indicate that the information contained therein was obtained from sources believed to be reliable.

 

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Our internal data and estimates are based upon information obtained from trade and business organizations and other contacts in the markets in which we operate and our management’s understanding of industry conditions. Although we believe that such information is reliable, we have not had this information verified by any independent sources. Similarly, our internal research is based upon our understanding of industry conditions, and such information has not been verified by any independent sources. Any estimates underlying such market-derived information and other factors could cause actual results to differ materially from those expressed in the independent parties’ estimates and in our estimates.

TRADEMARKS, TRADENAMES AND SERVICE MARKS

We own or have rights to trademarks or trade names that we use in conjunction with the operation of our business and that appear in this prospectus. This prospectus also contains trademarks, service marks, trade names and copyrights of other companies which, to our knowledge, are the property of their respective owners. Solely for convenience, trademarks and trade names referred to in this prospectus may appear without the ® or symbols, but the absence of such symbols does not indicate the registration status of the trademarks and is not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the right of the applicable licensor to such trademarks and trade names.

BASIS OF PRESENTATION

Unless otherwise indicated or the context otherwise requires, references in this prospectus to the “Company,” “we,” “us” and “our” refer to Avantor, Inc. and its consolidated subsidiaries.

In accordance with generally accepted accounting principles in the United States (“GAAP”), we have included the financial results of VWR Corporation (“VWR”) since the acquisition of VWR on November 21, 2017 (the “VWR Acquisition”). In addition, on September 30, 2016, we merged with NuSil Acquisition Corp, NuSil Technology LLC and its subsidiaries (“NuSil”). Since both NuSil and our predecessor were controlled by New Mountain Capital, our historical financial statements have been combined with NuSil’s into a single comparative presentation for all periods presented. For more information about this basis of presentation, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1 to the audited annual financial statements included elsewhere in this prospectus.

PRESENTATION OF CERTAIN FINANCIAL MEASURES

Certain financial measures presented in this prospectus, including Adjusted EBITDA and Management EBITDA, are not recognized under GAAP. Adjusted EBITDA and Management EBITDA have been presented in this prospectus as supplemental measures of financial performance that are not required by, or presented in accordance with GAAP. These non-GAAP financial measures are included in this prospectus because they are key metrics used by management to assess our financial performance. We use these measures to supplement GAAP measures of performance in order to evaluate the effectiveness of our business strategies, to make budgeting decisions, and to compare our performance against that of other peer companies using similar measures. We believe such measures are frequently used by analysts, investors and other interested parties to evaluate companies in our industry and are helpful supplemental measures to provide additional insight in evaluating a company’s core operational performance as they exclude costs that do not relate to the underlying operation of their business and include cost savings that are expected to occur.

Adjusted EBITDA and Management EBITDA are non-GAAP measures of our financial performance and should not be considered as alternatives to net income or loss as a measure of financial performance or any other performance measures derived in accordance with GAAP, nor should they be construed as an inference that our future results will be unaffected by unusual or other items. Additionally, Adjusted EBITDA and Management EBITDA are not intended to be a measure of free cash flow for management’s discretionary use, as they do not reflect certain cash requirements such as tax payments, debt service requirements, capital expenditures and certain other cash costs that may recur in the future, Adjusted EBITDA and Management EBITDA contain certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working

 

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capital needs and cash costs to replace assets being depreciated and amortized. Management compensates for these limitations by relying on our GAAP results in addition to using Adjusted EBITDA and Management EBITDA. Our presentation of Adjusted EBITDA and Management EBITDA is not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.

In calculating Adjusted EBITDA and Management EBITDA, we make certain adjustments that are based on assumptions and estimates that may prove to have been inaccurate. Accordingly, you should not view our presentation of these adjustments as a projection that we will achieve these benefits but rather only as an indication of our current expectations.

For definitions of Adjusted EBITDA and Management EBITDA and reconciliations to the most directly comparable measure under GAAP, see “Summary—Summary Historical Financial and Other Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Reconciliation of Non-GAAP Financial Measures and Other Financial Data—Reconciliation of Non-GAAP Financial Measures.”

ABOUT THIS PROSPECTUS

We and the underwriters (and any of our or their affiliates) have not authorized anyone to provide any information or to make any representations other than those contained in this prospectus or in any free writing prospectuses filed with the Securities and Exchange Commission. We and the underwriters (and any of our or their affiliates) take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This prospectus is an offer to sell only the shares offered hereby, but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this prospectus is current only as of its date.

Certain monetary amounts, percentages and other figures included in this prospectus have been subject to rounding adjustments. Accordingly, figures shown as totals in certain tables may not be the arithmetic aggregation of the figures that precede them, and figures expressed as percentages in the text may not total 100% or, as applicable, when aggregated may not be the arithmetic aggregation of the percentages that precede them.

 

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SUMMARY

This summary highlights selected information contained elsewhere in this prospectus, but it does not contain all of the information that you should consider before deciding to invest in our common stock. You should carefully read the entire prospectus, including the information presented under the sections entitled “Risk Factors” and “Special Note Regarding Forward-Looking Statements” and the financial statements and the notes thereto, included elsewhere in this prospectus, before making an investment decision. This summary containing forward-looking statements that involves risks and uncertainties.

Company Overview

We are a leading global provider of mission critical products and services to customers in the biopharma, healthcare, education & government, and advanced technologies & applied materials industries. Our comprehensive offerings, which include materials & consumables, equipment & instrumentation and services & specialty procurement, are relied upon by our customers, often on a recurring basis, because they are frequently specified into their research, development and production processes. These processes are commonly organized into “workflows” that define the activities our customers perform each day. We collaborate closely with our customers to enable them to develop new innovative products, lower their development and production costs, improve product or process performance characteristics, and enhance the safety and reliability of the drugs, devices, and other products they produce. In addition to relying on our products, many customers depend upon our services. Some of these services are performed by approximately 1,400 of our associates that are co-located with certain customers, working side-by-side with their scientists every day. Our local presence combined with our global infrastructure enable and promote successful relationships with our customers and connect us to over 240,000 of their locations in over 180 countries. Our mission is to set science in motion to create a better world.

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. Selected offerings sold to our customers in discovery, research, development and production processes include:

 

   

Materials & consumables: Ultra-high purity chemicals and reagents, lab products and supplies, highly specialized formulated silicone materials, customized excipients, customized single-use assemblies, process chromatography resins and columns, analytical sample prep kits and education and microbiology and clinical trial kits;

 

   

Equipment & instrumentation: Filtration systems, virus inactivation systems, incubators, analytical instruments, evaporators, ultra-low-temperature freezers, biological safety cabinets and critical environment supplies; and

 

   

Services & specialty procurement: Onsite lab and production, clinical, equipment, procurement and sourcing and biopharmaceutical material scale-up and development services.

We have deep expertise in developing, customizing, manufacturing and supplying products for a wide variety of workflows, allowing us to provide tailored solutions throughout the lifecycle of our customers’ products. In aggregate, we provide approximately six million products, including products we make as well as products from approximately 4,000 core suppliers across the globe. We manufacture products that meet or exceed the demanding requirements of our customers across a number of highly-regulated industries. Our high-purity and ultra-high purity products, such as our J.T.Baker and SeaStar brand chemicals, are trusted by life sciences and electronic materials customers around the world and can be manufactured at purity levels as stringent as one part-per-trillion. Similarly, our NuSil brand of high-purity, customized silicones has been trusted for more than thirty years by leading medical device manufacturers and aerospace companies.



 

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We complement our products with a range of value-added services. Each day, our onsite service associates work side-by-side with our customers to support their workflows. This close proximity to our customers and their workflows allows our associates to develop insights into how to serve them better. In certain cases, customers choose to fully leverage our value-added services and expertise by outsourcing specialized workflows entirely to us, further connecting us to their operations and allowing us to identify new business opportunities. We believe our growing services offering is a competitive advantage that further differentiates us from our competitors, deepens our relationships with current customers and enhances our ability to reach new ones.

We employ a differentiated innovation model that is informed by our embedded relationships with our customers and enables us to anticipate and align our innovation efforts with our customers’ priorities. We engage with our customers early in their product development cycles through our 300-person innovation team to advance our customers’ programs from research and discovery through development and commercialization. At each step of our customers’ workflows, we share our scientific and workflow expertise to help deliver incremental and sustainable improvements to existing customer products and processes. These projects include enhancing product purity and therefore its performance characteristics, improving product packaging and streamlining workflows. Our strategic initiatives include the development of new products in emerging areas of science such as cell and gene therapy. We currently have approximately 1,400 innovation projects with our customers that address process improvements for existing products and potential significant new opportunities for us to support.

We are a strategic partner to a diverse and sophisticated customer base with stringent quality and regulatory demands. Our ability to customize products and processes at scale while meeting these quality and regulatory requirements and the embedded nature of our business model have made us an integral part of our customers’ development programs and broader supply chain. We are incorporated in over 800 of our customers’ master access files (“MAF”) and drug master files (“DMF”) that are registered with regulatory authorities around the world. Additionally, we are able to meet the exacting quality and regulatory requirements of our advanced technologies & applied materials customers, including semiconductor manufacturers, by providing materials at purity levels as stringent as one part-per-trillion. We have developed long-standing relationships with a global customer base, and generated approximately 35% of our revenues for the nine months ended September 30, 2018 from customers with whom we have 15+ year relationships. In total, in 2018 we believe we served established leaders and emerging innovators across each of the industries we serve:

 

 

LOGO

The combination of our innovation centers and manufacturing facilities empowers us to support our customers from the earliest stages of their product innovation to commercial manufacturing, and provides us multiple opportunities to serve as a critical partner to them. Our eight regional innovation centers located in five different countries (including four currently operating in the Asia, Middle East and Africa (“AMEA”) region and a fifth which we expect to be operational in mid-2019), allow us to efficiently support the product development needs of our diverse customer base. In addition, we have 27 manufacturing facilities, 13 of which are Current Good Manufacturing Practices (“cGMP”) compliant and 12 of which are regulated by the U.S. Food and Drug Administration (“FDA”) or comparable foreign regulatory authorities. Led by our globally recognized VWR brand, we have approximately 150 sales and distribution centers strategically located to promote supply chain efficiency,



 

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enabling us to deliver orders virtually anywhere in the world, often within 24 to 48 hours. We employ approximately 3,800 sales and sales support professionals around the world who are focused on serving our customers through a local presence. Our professionals’ comprehensive industry-specific knowledge is supplemented by our leading online customer platform which affords current and potential customers a rich, informative and customized user experience and allows us to better address a global customer base. Many customers choose to directly integrate their ordering activity with our online platform. We have over 2,500 integrated connections with our customers and approximately 1,000 integrated connections with our suppliers to simplify and expedite their transactions with us. In 2018, approximately 45% of our customer orders came from our online platform.

We recorded net sales of $4,390.4 million, net loss of $33.6 million and Adjusted EBITDA of $710.0 million for the nine months ended September 30, 2018. We generated revenue growth of approximately 10% for the nine months ended September 30, 2018 as compared to the same period in the prior year on a combined basis, and approximately 85% of our revenues were from offerings which we consider to be recurring in nature. For the definition of Adjusted EBITDA, and a reconciliation of Adjusted EBITDA to net income or loss, please see “—Summary Historical Financial and Other Data.”

Our Competitive Strengths

Our customer-centric business model, combined with our deep understanding of our customers’ workflows, allows us to differentiate ourselves in the marketplace and is at the core of our competitive advantage. We believe the following competitive strengths provide the foundation for our position as the partner of choice for mission critical products and services to our customers:

Trusted Partner With Deep Customer Relationships. Our end-to-end integrated workflow platform and our ability to partner at every stage of research, development and commercialization have led to deep, embedded customer relationships. Approximately 1,400 of our associates are co-located with certain customers, working side-by-side with their scientists every day. We have collaborated with and supported many of our strategic global accounts for decades, and approximately 35% of our revenue for the nine months ended September 30, 2018 was generated by customers with whom we have maintained relationships for over 15 years. Regardless of company size or development stage, our customers seek a partner with innovative and comprehensive product offerings, superior quality, advanced manufacturing and skilled technical services to support all of their research, development and commercialization needs. Based on our expertise and experience in these areas, we believe we are a critical partner for our customers.

Customized Offerings to Address Our Customers’ Evolving Needs. We work closely with our customers to provide highly customized formulations across a variety of workflows. Our customization capabilities span the entire spectrum of core customer requirements, including purity, composition, blending, kitting, form factor, packaging, lot size and specialized certifications. Our ability to rapidly customize and innovate has led to significant adoption of our products as we and our customers seek to improve productivity and establish new processes. Our highly specialized and customized development, manufacturing and servicing capabilities also allow us to continue to pursue customized solutions in emerging and innovative therapeutic areas such as cell and gene therapies.

Depth And Breadth of Product and Service Offerings. Our comprehensive portfolio of materials & consumables, equipment & instrumentation and services & specialty procurement enables us to serve some of the most demanding and challenging areas of science. We offer more than six million distinct products that are often required by our customers in many of their most important processes. Our portfolio includes products valued for their exacting purity and performance specifications, some of which we manufacture to purity levels as stringent as one part-per-trillion. In addition, we offer our customers comprehensive value-added services and innovative services needed in the laboratory. We are dedicated to bringing new digital



 

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insights and capabilities to our customers as we collaborate to cultivate the “lab of the future”—a lab capable of generating and digesting vast amounts of data with IoT devices.

Quality and Regulatory Expertise Drives Customer Loyalty. We serve industries that are subject to rigorous quality, performance and reliability regulations. Our customers rely on us to navigate these requirements while also facilitating their innovation and manufacturing efforts. We have submitted and maintain over 800 MAFs and DMFs with the FDA and comparable local regulatory authorities in nine countries, which simplifies our customers’ medical product approval processes by allowing them to reference our products as part of their own applications. Our 13 cGMP facilities and 19 ISO-certified distribution facilities create a manufacturing and distribution network that is designed to meet stringent quality and regulatory requirements. Our quality expertise is highly valued, including in semiconductor manufacturing, where customer demands for precision frequently exceed those in pharmaceuticals, biologics and medical devices. Our manufacturing expertise allows us to utilize the same manufacturing line for all stages of development and commercialization thus reducing customer regulatory burdens as their products progress from the laboratory to full scale production. This differentiated approach allows our customers to bring their products to market faster and more efficiently, and allows us to typically maintain our position over the life of the product given the regulatory requirements, as well as the costs and risks involved in substituting our products.

Customer-Centric Innovation Framework. We employ a differentiated innovation model that is informed by our embedded relationships with our customers and enables us to anticipate and align our innovation efforts with our customers’ priorities. We take a portfolio approach to our activities and focus on both incremental and breakthrough innovation. We will continue to serve the most successful established and emerging companies through:

 

   

Proprietary Product Innovations. We engage with our customers throughout their product lifecycles, including during initial discovery and development activities, to create materials and solutions that meet stringent specifications. We currently have approximately 1,400 innovation projects with our customers that address process improvements for existing products and potential significant new opportunities for us to support.

 

   

Third-Party Product Innovations. We are an important channel for thousands of specialized manufacturers of complex and sophisticated scientific products. Because we are already embedded in key customer workflows and are widely trusted among a broad collection of emerging and established suppliers, we are able to accelerate market acceptance and growth of promising third-party innovations.

 

   

Data and Research Analytics. We are actively engaged in developing advanced, innovative data integration and analytical solutions to support the vast amounts of data being generated by our customers. By relying on our data capabilities and insights, we will allow our customers to continue to focus on their core competencies while also participating in the benefits derived from analyzing and utilizing data.

Global Scale, Strategic Locations and Specialized Infrastructure. We are strategically located close to our global customers to drive supply chain efficiency, minimize customer lead times and navigate a complex network of regulatory requirements. Our global footprint consists of over 200 facilities located in over 30 countries and allows us to deliver our extensive portfolio of products and services to customers nearly anywhere in the world and generally within 24 to 48 hours. We have the expertise and government licenses to manage multiple controlled environments globally, enabling us to safely and in a compliant manner handle highly regulated chemicals and other materials.

Attractive Financial Profile and Scalable Operating Platform. We believe we have an attractive business model due to our scale, resilient and recurring revenue base, demonstrated operating leverage, and



 

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strong cash flow generation. We generated revenue growth of approximately 10% for the nine months ended September 30, 2018, as compared to the same period in the prior year on a combined basis. The cost of our products is often a small percentage of the overall cost of our customers’ workflow, resulting in a resilient business profile. Additionally, for the nine months ended September 30, 2018, approximately 85% of our sales were from our materials & consumables and services & specialty procurement offerings which we consider to be recurring. By employing the Avantor Business System (“ABS”), a disciplined approach to continuously unlocking operational efficiencies, we have a demonstrated track record of improving profitability and driving cash flow generation. Our platform is further enhanced by a highly disciplined approach to M&A that has historically contributed incremental revenue growth of approximately 1% to 2% per year by targeting businesses that enhance our workflow solutions, increase our technical capabilities and extend our global reach.

World-Class Leadership with Proven Ability to Execute at Scale. Our 13-member senior executive team has extensive experience within the life sciences and advanced technologies & applied materials industries globally, and possesses a wide network of industry relationships. Our management team has a proven track record of delivering stable revenue growth, executing on investment plans, achieving margin expansion and driving continuous improvement of global enterprises. Our management team is supported by approximately 12,000 associates around the world who have extensive scientific and commercial experience and enable us to provide our customers with tailored expertise and service.

Our Growth Strategies

We intend to capitalize on our world-class platform and distinctive competitive strengths as we pursue the following growth strategies:

Increase Integration of Our Products and Services Into Customers’ Workflows. Our extensive and long-term relationships with our customers and our embedded position in their workflows provide us with unique insights into their activities and understanding of additional products and services that we could offer to them. We translate these insights and understanding, together with our focus on workflows, into a convenient one-stop solution for our customers resulting in a growing volume of business.

Develop New Products and Services. We are continuously expanding our portfolio to provide our customers with additional solutions and further expand our addressable markets. Specifically, we are focusing our efforts to expand our portfolio in:

 

   

Bioproduction. We are broadening our range of process ingredients, serums, reagents, excipients, chromatography resins and single-use assemblies for use in the fast-growing bioproduction sector.

 

   

Custom Manufactured Products. We are continuing to partner with our customers to create materials and solutions that meet the unique and stringent specifications for their current and future products. We currently have approximately 1,400 customer-directed projects in development at our innovation centers located around the world.

 

   

New Products in High Growth Areas. We are working closely with our sales force and our customers’ R&D teams to understand emerging technologies and regulatory and industry standards that will become critical workflows in high growth industries. This close coordination with customers allows us to make targeted investments in the development of innovative products and solutions, bringing new products and services to market rapidly.

 

   

Service Offerings. We are expanding upon our traditional services, such as specialty procurement, to offer additional innovative, flexible and customized solutions to our global strategic customers. We will continue to expand the scope of our service offerings and increase the complexity, precision and value of our offerings.



 

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Digital Capabilities. As the volume, velocity, and variety of data generated by our customers continue to expand, the ability to organize and analyze this data for actionable insight has become increasingly critical to our customers. Based on the insights we gain as strategic partners, we are building a broad suite of technology-enabled offerings tailored to our customers’ objectives to increase productivity and effectiveness of their research and manufacturing workflows.

Expand in Geographies Expected to Have Outsized Growth. We are focused on expanding our geographic reach and believe certain emerging economies, including China, Southeast Asia and Eastern Europe, offer a strong opportunity for growth. Local demand for our products and solutions in these regions is being driven by increasingly stringent quality and regulatory requirements, the expansion of our customers’ presence, an inadequate local supplier base and a significant increase in local government investment to support innovation in the industries we serve. We have invested in targeted geographies and intend to capitalize on our local presence and ability to attract new customers and follow existing ones into new geographies.

Continually Enhance Our Global Online Platform. We are continually improving and expanding our multi-lingual online sales platform in order to deliver our complete portfolio of offerings across all workflows. We will focus on enhancing our online platform in order to improve search engine effectiveness, simplify and personalize the user experience though enhancements to our vwr.com website, and capture greater wallet share at existing customers and business from new customers. Using advanced analytics, we have also developed digital tools and marketing programs to increase the utility and stickiness of our platform, improve order conversion rates and share better insights with our customers regarding their needs and purchasing behaviors.

Increase Commercial Excellence and Operational Efficiency to Drive Margin Expansion. Operational discipline has been a core business focus at Avantor and VWR historically and continues to be our priority across manufacturing, sales and operational processes. The ABS is fundamental to our operational growth strategy to drive continuous improvement by improving efficiency throughout our supply chain and increasing our overall productivity. This approach will continue to be a key component in our margin expansion plans going forward and will help drive profitability and cash generation.

Pursue Strategic Acquisitions to Expand our Platform. We have a strong track record of successfully identifying, completing and integrating strategic acquisitions. Our broad platform, global infrastructure and diversified customer base allow us to generate growth and operating leverage through such acquisitions. We intend to continue to pursue opportunistic acquisitions in our existing and adjacent customer segments to accelerate our entry into high-growth markets and geographies as well as add capabilities and workflow solutions.

Industry Overview

We operate primarily in the biopharma, healthcare, education & government and advanced technologies & applied materials industries. We estimate our total addressable market within these industries to be approximately $70 billion in the aggregate in 2018. We expect the total addressable market we serve will grow approximately 5% annually from 2018 to 2020. Our customers are sophisticated, science-driven businesses working across highly technical industries that require innovation and adherence to the most demanding technical and regulatory requirements.

The following are some of the market forces affecting our customers and driving growth within our industries:

 

   

Favorable Demographic and Epidemiologic Trends. Healthcare demand is increasing rapidly across most of the world, driven principally by aging populations, an increased prevalence of chronic diseases and improved access to healthcare.

 

   

Strong Funding and Externalization of Drug Discovery. Research and development (“R&D”) activities are accelerating with approximately $200 billion of investment in life sciences being



 

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deployed each year by a variety of sources, including governments, startups and large pharmaceutical companies. We have seen an increasing trend in R&D outsourcing among both small and large pharmaceutical companies, who are focused on driving efficiencies in their processes and aim to focus on their key strengths and value generating activities.

 

   

Proliferation of R&D and Development of New Therapeutic Modalities. The rapid, accelerating pace of scientific innovation in the industries we serve is propelling heightened investment in complex and novel research, including new biologic and therapeutic modalities.

 

   

Emergence of Biosimilars. Biosimilars are rapidly emerging alongside small and large molecule drugs. Based on our evaluation of third-party data, we estimate biosimilar sales will exceed $25 billion by 2020.

 

   

Digital Transformation of Science. The rapid adoption of technologies such as big data and analytics and cloud based solutions represents a meaningful opportunity to automate and optimize mission critical operations and drive competitive differentiation.

 

   

Positive Research and Development Trends in Advanced Technologies & Applied Materials. Continued demand for Internet of Things (“IoT”) devices and groundbreaking technological advancements, including artificial intelligence and autonomous cars, are driving demand for improved chip designs that often have smaller feature sizes. These new chips will increase the need for ultra-high purity materials, in higher volumes, that are used in the semiconductor manufacturing processes. In addition, the aerospace & defense industry continues to utilize new technologies and features, which has driven growth of spending in this industry.

The following is a summary of the industries we serve:

 

   

Biopharma. Our offerings are used by biopharmaceutical companies, biotechnology companies, biosimilar companies, generic drug companies and contract manufacturing organizations (“CMOs”) of all sizes to specifically address their development and manufacturing needs during each phase of a drug’s lifecycle, from research and development to commercialization. We are well-positioned to support the emerging needs of science, providing solutions for both traditional small molecule sectors and the growing, more complex large molecule sector. We estimate that our addressable portion of the biopharma industry for 2018 was approximately $30 billion and will grow approximately 7% from 2018 to 2020.

 

   

Healthcare. Healthcare consists of medical implants, drug delivery devices, non-implantable devices (the “medical device industry”) and diagnostic tools and consumables (the “diagnostics industry”). Our offerings include high-purity silicones used in the manufacture of medical implantable devices, including aesthetic and reconstructive implants, pacemakers and cochlear implants. Our high-purity silicones are also frequently specified into non-implantable medical devices, such as medical-grade tubing, balloons and bladders. Also, we provide medical-grade silicones expertise to customize sustained drug-release devices for our pharmaceutical and biologics customers. We estimate that our addressable portion of the healthcare industry for 2018 was approximately $9 billion and will grow approximately 5% from 2018 to 2020.

 

   

Education & Government. The education & government industry consists of government sponsored research across multiple areas of discovery, including basic and applied science. Our offerings are used by academic institutions and government sponsored organizations to address their needs for continued education and testing and research activities that includes areas such as agriculture and environmental. We estimate that our addressable portion of the education & government industry for 2018 was approximately $15 billion and will grow approximately 3% from 2018 to 2020.



 

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Advanced Technologies & Applied Materials. We have a comprehensive product line of solutions and high-purity acids and solvents used in the manufacture of semiconductors and other high precision electronic applications. We also offer an extensive line of specialty space-grade silicone materials to the aerospace & defense industry. These highly customized materials are used in extreme environments, and include adhesives, sealants, coatings and other inputs for various aircraft, satellite and space applications. We estimate that our addressable portion of the advanced technologies & applied materials industry for 2018 was approximately $15 billion and will grow approximately 4% from 2018 to 2020.

Risks Related to Our Business and Our Industry, Regulation and Our Offering

Investing in our common stock involves substantial risk, and our ability to successfully operate our business is subject to numerous risks. Some of the more significant challenges and risks related to our business include the following:

 

   

our ability to implement our growth strategy, both domestically and internationally, while maintaining our commercial operations and administrative activities;

 

   

our ability to anticipate and respond to changing industry trends;

 

   

our ability to continue to successfully value and integrate acquired businesses, including NuSil and VWR;

 

   

our products’ satisfaction of applicable quality criteria, specifications and performance standards; and

 

   

our high degree of leverage, our ability to incur more debt and access additional capital, and our ability to generate cash to service our indebtedness and to fund our other liquidity needs.

Any of the factors set forth under “Risk Factors” may limit our ability to successfully execute our business strategy. You should carefully consider all of the information set forth in this prospectus and, in particular, should evaluate the specific factors set forth under “Risk Factors” in deciding whether to invest in our common stock.

Corporate History and Information

Our 115 year legacy began in 1904 with the founding of the J.T. Baker Chemical Company. In 2010, Avantor was acquired by affiliates of New Mountain Capital, LLC ("New Mountain Capital"), our sponsor, from Covidien plc. Since then, we have expanded through a series of large acquisitions across the globe. In 2016, we acquired NuSil, a leading supplier of high-purity silicone products for the medical device industry that was founded in 1985. In 2017, we also acquired VWR, a global manufacturer and distributor of laboratory and production products and services founded in 1852 that now represents the primary ordering platform for our customers. Avantor, Inc. was incorporated in Delaware in May 2017 in anticipation of the VWR Acquisition.



 

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Our principal executive offices are located at the Radnor Corporate Center, Building One, Suite 200, 100 Matsonford Road, Radnor, Pennsylvania 19087 and our telephone number is (610) 386-1700. Our website is www.avantorinc.com. Information contained on our website or that can be accessed through our website is not part of, and is not incorporated by reference in, this prospectus.

Our Sponsor

New Mountain Capital is a New York-based investment firm that currently manages private equity, public equity and credit funds with over $20.0 billion in aggregate assets under management, including capital commitment and equity raised for New Mountain Partners V. Its private equity platform emphasizes business building and growth, rather than debt, as it pursues long-term capital appreciation. New Mountain Capital seeks out what it believes to be the highest quality growth leaders in carefully selected acyclical segments that have “defensive growth” characteristics and then works intensively with management to build the value of these companies.



 

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The Offering

 

Common stock offered by us

                shares.

 

Option to purchase additional shares of common stock

We have granted the underwriters an option for a period of 30 days from the date of this prospectus to             purchase up to additional shares of common stock, less underwriting discounts and commissions.

 

Common stock outstanding after this offering

                shares (or                 shares if the underwriters exercise in full their option to purchase additional shares of common stock).

 

Use of proceeds

We estimate that the net proceeds to us from this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $             million (or approximately $             million if the underwriters exercise in full their option to purchase additional shares of common stock), assuming an initial public offering price of $             per share (which is the midpoint of the estimated offering price range shown on the cover page of this prospectus). For a sensitivity analysis as to the offering price and other information, see “Use of Proceeds.”

 

  We intend to use the net proceeds to us from this offering to redeem outstanding shares of Existing Senior Preferred Stock (as defined herein), with any remaining net proceeds used for general corporate purposes. Certain affiliates of Goldman Sachs & Co. LLC, an underwriter in this offering, will receive more than 5% of the net proceeds of this offering as a result of their holding a substantial portion of our Existing Senior Preferred Stock.

 

Dividend policy

We do not currently anticipate paying any dividends on our common stock immediately following this offering. We expect to retain all future earnings for use in the operation and expansion of our business. Following this offering and upon repayment of certain outstanding indebtedness, we may reevaluate our dividend policy. Any decision to declare and pay dividends in the future will be made at the sole discretion of our Board of Directors and will depend on various factors. See “Dividend Policy.”

 

Risk factors

See “Risk Factors” for a discussion of risks you should carefully consider before deciding to invest in our common stock.

 

Conflicts of interest

Certain affiliates of Goldman Sachs & Co. LLC (i) will receive more than 5% of the net proceeds of this offering due to the redemption of outstanding shares of our Existing Senior Preferred Stock with the net proceeds of this offering, (ii) own greater than 10% of our outstanding preferred stock and (iii) currently have two director appointees on our Board and, following this offering will have the right to continue to appoint one director to our board pursuant to



 

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rights under the Stockholders Agreement, as well as other rights. See “Certain Relationships and Related Party Transactions.” Therefore, Goldman Sachs & Co. LLC is deemed to have a conflict of interest within the meaning of Rule 5121 of the Financial Industry Regulatory Authority, Inc. (“Rule 5121”). Accordingly, this offering is being conducted in accordance with Rule 5121, which requires, among other things, that a “qualified independent underwriter” participate in the preparation of, and exercise the usual standards of “due diligence” with respect to, the registration statement and this prospectus. J.P. Morgan Securities LLC has agreed to act as a qualified independent underwriter for this offering and to undertake the legal responsibilities and liabilities of an underwriter under the Securities Act of 1933, as amended (the “Securities Act”), specifically including those inherent in Section 11 thereof. J.P. Morgan Securities LLC will not receive any additional fees for serving as a qualified independent underwriter with this offering. We have agreed to indemnify J.P. Morgan Securities LLC against liabilities incurred in connection with acting as a qualified independent underwriter, including liabilities under the Securities Act. For more information, see “Underwriting (Conflicts of Interest).”

 

Proposed ticker symbol

“                 .”

Unless otherwise indicated or the context otherwise requires, all information in this prospectus reflects and assumes the following:

 

   

no exercise by the underwriters of their option to purchase additional shares of common stock from us;

 

   

issuance of                 shares of common stock issuable upon conversion of the Existing Junior Convertible Preferred Stock based on an initial offering price of $             per share of common stock (which is the midpoint of the estimated offering price range shown on the cover page of this prospectus). Conversion of the Existing Junior Convertible Preferred Stock into shares of common stock will occur automatically 90 days after consummation of this offering. The number of shares of common stock received upon conversion of the Existing Junior Convertible Preferred Stock will be fixed at the number of shares stated above unless the volume-weighted average trading price of our common stock for a period of 30 trading days (the “30-day VWAP”) prior to the conversion date is less than $        , in which case additional shares of common stock would be issued in an amount sufficient to provide holders with common stock equal to the value of the liquidation preference of the Existing Junior Convertible Preferred Stock divided by the 30-day VWAP (the “Conversion Adjustment Shares”). See “Description of Capital Stock—Preferred Stock—Existing Junior Convertible Preferred Stock”;

 

   

an initial offering price of $             per share of common stock (which is the midpoint of the estimated offering price range shown on the cover page of this prospectus); and

 

   

the                  -for-                  stock split that we intend to effectuate with respect to our shares of common stock immediately prior to the effectiveness of the registration statement of which this prospectus forms a part.

Additionally, the number of shares of our common stock to be outstanding after this offering is based on                  shares of our common stock outstanding as of December 31, 2018 and does not reflect:

 

   

         shares of common stock that may be issued upon exercise of outstanding warrants at a weighted average exercise price of $0.01 per share;



 

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                shares of common stock that may be issued pursuant to future awards under the Vail Plan or our 2019 Equity Incentive Plan (each as defined below) to be in effect following this offering; and

 

   

                 shares of common stock that may be issued upon the exercise of outstanding options at an average weighted exercise price of $             or the vesting of restricted stock units issued under the Legacy Avantor Plan (as defined below) and/or the Vail Plan.



 

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Summary Historical Financial and Other Data

The following tables set forth our summary historical consolidated financial data as of the dates and for the periods indicated. The summary historical consolidated financial data as of December 31, 2016 and 2017 and for the years ended December 31, 2015, 2016 and 2017 is derived from our audited consolidated financial statements and related notes thereto included elsewhere in this prospectus. The summary historical consolidated balance sheet data as of December 31, 2015, is derived from our audited consolidated financial statements and related notes thereto not included in this prospectus. The summary historical consolidated financial data as of September 30, 2018 and for the nine months ended September 30, 2017 and 2018 is derived from our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflect all normal recurring adjustments necessary for the fair statement of our consolidated results for these periods. The results for any interim period are not necessarily indicative of the results that may be expected for the full year. Additionally, our historical results are not necessarily indicative of the results expected for any future period.

In accordance with GAAP, we have included the financial results of VWR since the VWR Acquisition on November 21, 2017. In addition, on September 30, 2016, we merged with NuSil. Since both NuSil and our predecessor were controlled by New Mountain Capital, our historical financial statements have been combined with NuSil’s into a single comparative presentation for all periods presented. For more information about this basis of presentation, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1 to the audited annual financial statements included elsewhere in this prospectus.

You should read the information contained in this table in conjunction with “Capitalization,” “Selected Condensed Historical Financial Data,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the accompanying notes and our unaudited consolidated financial statements and the accompanying notes, each included in this prospectus.



 

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     Year ended December 31,     Nine months ended September 30,  
(in millions, except per share data)    2015     2016     2017           2017                 2018        

Statement of operations data

          

Net sales

   $ 636.9     $ 691.3     $ 1,247.4     $ 517.7     $ 4,390.4  

Cost of sales

     374.7       371.6       814.6       278.1       3,003.4  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     262.2       319.7       432.8       239.6       1,387.0  

Selling, general and administrative expenses

     200.6       281.5       449.7       172.5       1,071.9  

Fees to New Mountain Capital

     1.0       28.3       193.5       13.5       0.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating (loss) income

     60.6       9.9       (210.4     53.6       314.2  

Interest expense

     (30.6     (80.3     (257.3     (109.3     (388.7

Other (expense) income, net

     (0.2     (0.2     7.5       11.6       7.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income taxes

     29.8       (70.6     (460.2     (44.1     (67.5

Income tax (expense) benefit

     (17.1     (10.1     314.9       24.2       33.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     12.7       (80.7     (145.3     (19.9     (33.6

Net loss attributable to noncontrolling interests

     (8.9     (38.3     (32.6     (12.5     —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to Avantor, Inc.

     21.6       (42.4     (112.7     (7.4     (33.6

Accumulation of yield on series A preferred stock

     —         —         (27.8     —         (198.4

Adjustment of series A preferred stock to redemption value

     —         —         (274.4     —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) available to common stockholders of Avantor, Inc.

   $ 21.6     $ (42.4   $ (414.9   $ (7.4   $ (232.0
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per share:

          

Basic

   $ 0.71     $ (1.39   $ (13.73   $ (0.24   $ (8.75

Diluted

     0.64       (1.39     (13.73     (0.24     (8.75

Weighted average shares outstanding:

          

Basic

     30.5       30.5       30.2       30.7       26.5  

Diluted

     33.5       30.5       30.2       30.7       26.5  


 

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     Year ended December 31,     Nine months ended September 30,  
(in millions)    2015     2016     2017           2017                 2018        

Balance sheet data (as of period end)

          

Cash and cash equivalents

   $ 51.9     $ 62.9     $ 185.4       $ 171.8  

Total assets

     1,150.4       1,135.8       10,446.5         10,118.3  

Total long-term debt and capital leases, including current portion

     428.7       1,296.1       7,117.8         6,995.1  

Total liabilities

     726.7       1,646.4       9,476.9         9,226.7  

Total redeemable equity

     —         —         3,589.8         3,788.2  

Avantor, Inc. stockholders’ deficit

     (737.9     (374.9     (2,620.2       (2,896.6

Equity (deficit) of noncontrolling interest

     123.6       (135.7     —           —    

Total stockholders’ deficit

     (614.3     (510.6     (2,620.2       (2,896.6

Cash flow data

          

Net cash provided by (used in) operating activities

   $ 124.6     $ 72.9     $ (167.5   $ (20.5   $ 130.6  

Net cash used in investing activities

     (35.4     (29.9     (6,676.0     (92.7     (23.2

Net cash (used in) provided by financing activities

     (87.6     (43.5     6,965.0       99.6       (115.9

Other data

          

Adjusted EBITDA(1)

   $ 158.8     $ 220.7     $ 289.5     $ 174.7     $ 710.0  

 

(1)

We define Adjusted EBITDA as net income (loss) before interest, taxes and depreciation and amortization as further adjusted to eliminate the impact of certain costs related to this offering, our reorganization and other items that we do not consider in our evaluation of our ongoing operating performance from period to period as discussed further below and to remove the impact of noncontrolling interest. We believe Adjusted EBITDA is frequently used by analysts, investors and other interested parties to evaluate companies in our industry and is a helpful supplemental measure to provide additional insight in evaluating a company’s core operational performance as it excludes costs that do not relate to the underlying operation of their business.

Adjusted EBITDA is a non-GAAP measure of our financial performance and should not be considered as an alternative to net income (loss) as a measure of financial performance, or any other performance measure derived in accordance with GAAP, nor should it be construed as an inference that our future results will be unaffected by unusual or other items. Additionally, Adjusted EBITDA is not intended to be a measure of free cash flow for management’s discretionary use, as it does not reflect certain cash requirements such as tax payments, debt service requirements, capital expenditures and certain other cash costs that may recur in the future. Adjusted EBITDA contains certain other limitations, including the failure to reflect our cash expenditures, cash requirements for working capital needs and cash costs to replace assets being depreciated and amortized. Management compensates for these limitations by relying on our GAAP results in addition to using Adjusted EBITDA. Our presentation of Adjusted EBITDA is not necessarily comparable to other similarly titled captions of other companies due to different methods of calculation.



 

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The following table sets forth a reconciliation of net income (loss), the most directly comparable GAAP performance measure, to Adjusted EBITDA, using data derived from our consolidated financial statements, in each case for the periods indicated:

 

     Year ended December 31,     Nine months ended
September 30,
 
(dollars in millions)    2015     2016     2017         2017             2018      

Net income (loss).

   $ 12.7     $ (80.7   $ (145.3   $ (19.9   $ (33.6

Interest expense

     30.6       80.3       257.3       109.3       388.7  

Income tax expense (benefit)

     17.1       10.1       (314.9     (24.2     (33.9

Depreciation and amortization

     60.7       60.3       99.2       47.5       303.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

   $ 121.1     $ 70.0     $ (103.7   $ 112.7     $ 624.7  

Adjustments:

          

Net foreign currency (gain) loss from financing activities(a)

     (0.1     0.4       5.5       (0.4     0.2  

Gain on derivative instruments(b)

     —         —         (9.6     (8.5     —    

Other share-based compensation expense(c)

     15.8       86.6       26.6       —         —    

Restructuring and severance charges(d)

     8.6       11.1       29.6       5.2       57.1  

Purchase accounting related adjustments(e)

     7.1       4.5       41.8       (1.0     2.8  

Sponsor transaction fees(f)

     —         27.3       192.5       12.5       —    

Executive departures(g)

     3.1       —         —         —         2.4  

Impairment charges(h)

     0.7       —         5.0       —         1.9  

VWR transaction expenses(i)

     —         —         43.6       3.9       0.4  

VWR integration and planning expenses(j)

     —         —         30.1       22.5       19.4  

Other transaction and integration expenses(k)

     2.5       11.5       25.0       24.7       1.1  

Debt refinancing fees(l)

     —         4.7       3.1       3.1       —    

Environmental remediation costs(m)

     —         4.6       —         —         —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 158.8     $ 220.7     $ 289.5     $ 174.7     $ 710.0  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

  (a)

Represents remeasurement of various foreign-denominated borrowings into functional currencies. Our U.S. subsidiaries carry a significant amount of euro-denominated debt, and many of our subsidiaries borrow and lend with each other in foreign currencies. For the nine months ended September 30, 2018 and the year ended December 31, 2017, the foreign currency gains were primarily caused by €190 million of unhedged intercompany loans receivable.

  (b)

For the 2017 periods, represents changes in the fair value of foreign currency forward contracts used to hedge pre-acquisition changes in the value of VWR’s euro-denominated loans.

  (c)

Represents expenses related to remeasuring legacy NuSil awards at fair value on a recurring basis and modification of share-based awards caused by the legal-entity restructurings in November 2017 and September 2016. These expenses fluctuated significantly across the periods due to the increases in the value of our business following business combinations.

  (d)

The following table presents restructuring and severance charges by plan:

 

     Year ended December 31,      Nine months ended
September 30,
 
(in millions)      2015          2016          2017            2017              2018      

Global value capture program

   $ —        $ —        $ 17.5      $ —        $ 54.8  

Other

     8.6        11.1        12.1       
5.2
 
     2.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8.6      $ 11.1      $ 29.6      $ 5.2      $ 57.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 


 

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See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Factors and Current Trends Affecting Our Business and Results of Operations—We are implementing a significant global value capture program” for additional information about the global value capture program. Other includes three smaller plans for VWR, NuSil and legacy Avantor and other non-plan initiatives.

  (e)

Represents reversals of the short-term impact of purchase accounting adjustments on earnings, the most significant of which was the increase to cost of sales that resulted from valuing VWR’s inventory at fair value in purchase accounting. Also includes the earnings impact of remeasuring contingent consideration to fair value on a recurring basis.

  (f)

Represents transaction fees paid to New Mountain Capital. Pursuant to the terms of their advisory agreement with us, New Mountain Capital earned a fee equal to 2% of the value of each of our three debt refinancings and the VWR Acquisition. See “Certain Relationships and Related Party Transactions.”

  (g)

Represents severance payments made to former executives that were not part of an approved restructuring program.

  (h)

For the nine months ended September 30, 2018, represents the write-off of property, plant and equipment related to a legacy research and development facility. For the year ended December 31, 2017, represents the write-off of property, plant and equipment and inventory related to a discontinued product line.

  (i)

Represents direct expenses incurred to consummate the VWR Acquisition.

  (j)

Represents expenses incurred related to planning and integration of VWR.

  (k)

The following table presents the components of other transaction and integration expenses:

 

     Year ended December 31,      Nine months ended
September 30,
 
(in millions)      2015          2016          2017            2017              2018      

Unconsummated equity offering

   $ —        $ 5.0      $ 19.9      $ 19.9      $ —    

NuSil-related integration expenses

     —          3.4        5.1        4.8        —    

Other transaction expenses

     2.5        3.1        —          —          1.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2.5      $ 11.5      $ 25.0      $ 24.7      $ 1.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

  (l)

Represents non-capitalized fees incurred to refinance our debt in March 2017, September 2016 and June 2016, excluding transaction fees paid to New Mountain Capital.

  (m)

Represents establishment of a multi-year environmental remediation liability to remediate soil and groundwater conditions at our Gliwice, Poland manufacturing facility.



 

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RISK FACTORS

An investment in our common stock involves a high degree of risk. You should carefully consider the risks described below, together with the other information in this prospectus, before deciding whether to purchase our common stock. If any of the risks described below actually occur, our business, financial condition, results of operations or prospects could be materially adversely affected. In any such case, the trading price of our common stock could decline and you could lose all or part of your investment.

Risks Related to Our Business and Our Industry

Significant interruptions in our operations could harm our business, financial condition and results of operations.

Manufacturing, distribution and logistics problems can and do arise, and any such problems could have a significant impact on our operating results. Accordingly, any significant disruptions to the operations of our manufacturing or distribution centers or logistics providers for any reason, including labor relations issues, power interruptions, severe weather, fire or other circumstances beyond our control could cause our operating expenses to increase without coverage or compensation or seriously harm our ability to fulfill our customers’ orders or deliver products on a timely basis, or both. We must also maintain sufficient production capacity in order to meet anticipated customer demand, which carries fixed costs that we may not be able to offset if orders slow, which would adversely affect our operating margins. If we are unable to manufacture our products consistently, in sufficient quantities, and on a timely basis, our net sales, gross margins and our other operating results will be materially and adversely affected. Prompt shipment of our products is also very important to our business. We have experienced problems with or delays in our production, shipping and logistics capabilities that resulted in delays in our ability to ship finished products, and there can be no assurance that we will not encounter such problems in the future. If we experience significant delays in our manufacturing, shipping or logistics processes, we could damage our customer relationships, cause disruption to our customers and adversely affect our business, financial condition and operating results.

We compete in highly competitive markets. Failure to compete successfully could adversely affect our business, financial condition and results of operations.

We face competition across our products and the markets in which we operate. We compete on several fronts, both domestically and internationally, including competing with other companies that provide similar offerings. Competition is driven by proprietary technologies and know-how, capabilities, consistency of operational performance, quality, supply chain control, price, value and speed. Our competitors range from regional companies, which may be able to more quickly respond to customers’ needs because of geographic proximity, to large multinational companies, which may have greater financial, marketing, operational, and research and development resources than we do. Such greater resources may allow our competitors to respond more quickly with new, alternative or emerging technologies.

In addition, consolidation trends in the biopharma and healthcare industries have served to create fewer customer accounts and to concentrate purchasing decisions for some customers, resulting in increased pricing pressures. The entry into the market by manufacturers in low-cost manufacturing locations also creates increased pricing and competitive pressures, particularly in developing markets, which may impede our goal to increase penetration in such markets. Failure to anticipate and respond to competitors’ actions may adversely affect our results of operations and financial condition.

Our operations are also subject to the effects of global competition, including potential competition from specialty materials manufacturers in low-cost manufacturing locations. These risks, individually or in the aggregate, could have an adverse effect on our results of operations and financial condition. The occurrence or allegation of these types of risks may adversely affect our business, performance, prospects, value, financial condition, and results of operations.

 

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It may be difficult for us to implement our strategies for improving growth.

We plan to continue expanding our commercial sales operations and scope and complexity of our business both domestically and internationally, while maintaining our commercial operations and administrative activities. For example, we intend to pursue the following growth strategies: (i) increase integration of our products and services into customers’ workflows; (ii) develop new products and services; (iii) expand in geographies expected to have outsized growth; (iv) continue to enhance our global online platform; (v) increase commercial excellence and operational efficiency to drive margin expansion; and (vi) pursue strategic acquisitions to expand our platform. See “Business—Our Growth Strategies.” However, our ability to manage our business and conduct our global operations while also pursuing the aforementioned growth strategies requires considerable management attention and resources and is subject to the challenges of supporting a rapidly growing business in an environment of multiple languages, cultures and customs, legal and regulatory systems, alternative dispute systems and commercial markets.

Our failure to implement these strategies in a cost-effective and timely manner could have an adverse effect on our business, results of operations and financial condition.

Part of our growth strategy is to pursue strategic acquisitions, which will subject us to a variety of risks that could harm our business.

As part of our business strategy, we intend to continue to review, pursue and complete selective acquisition opportunities. There can be no assurances that we will be able to complete suitable acquisitions for a variety of reasons, including the identification of and competition for acquisition targets, the need for regulatory approvals, the inability of the parties to agree to the structure or purchase price of the transaction and the inability to finance the transaction on commercially acceptable terms. In addition, any completed acquisition will subject us to a variety of other risks, including:

 

   

we will need to allocate substantial operational, financial and management resources in integrating new businesses, technologies and products, and management may encounter difficulties in integrating the operations, personnel or systems of the acquired businesses;

 

   

acquisitions may have an adverse effect on our business relationships with existing or future suppliers and other business partners, in particular, to the extent we consummate acquisitions that vertically integrate portions of our business;

 

   

we may assume substantial actual or contingent liabilities, known and unknown;

 

   

acquisitions may not meet our expectations of future financial performance;

 

   

we may experience delays or reductions in realizing expected synergies;

 

   

we may incur substantial unanticipated costs or encounter other problems associated with acquired businesses or devote time and capital investigating a potential acquisition and not complete the transaction;

 

   

we may be unable to achieve our intended objectives for the transaction; and

 

   

we may not be able to retain the key personnel, customers and suppliers of the acquired business.

In addition, we may be unable to maintain uniform standards, controls, procedures and policies as we attempt to integrate the acquired businesses, and this may lead to operational inefficiencies. These factors related to our acquisition strategy, among others, could have an adverse effect on our business, financial condition and results of operations.

Our business, financial condition and results of operations may be harmed if our customers discontinue or spend less on research, development and production and other scientific endeavors.

Our direct and end customers include biopharmaceutical, biomaterials, diagnostics, electronics, aerospace and defense and research companies, which includes laboratories, universities, government agencies and public

 

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and private research institutions. Many factors, including public policy spending priorities, available resources and product and economic cycles, have a significant effect on the capital spending policies of these entities. Fluctuations in the research and development budgets of our customers could have a significant effect on the demand for our products. Our customers determine their research and development budgets based on several factors, including the need to develop new products, continued availability of governmental and other funding, competition and the general availability of resources. If research and development budgets are reduced, the impact could eventually adversely affect our overall business.

The customers we serve have and will continue to experience significant industry-related changes that could adversely affect our business.

Many of the customers we serve have experienced significant industry-related changes in the last several years and are expected to continue to experience significant changes, including reductions in governmental payments for biopharmaceutical products, expirations of significant patents, adverse changes in legislation or regulations regarding the delivery or pricing of general healthcare services or mandated benefits, and increased requirements on quality. General industry changes include:

 

   

development of large and sophisticated group purchasing organizations and on-line “auction” sites that increase competition for and reduce spending on laboratory products;

 

   

consolidation of biopharmaceutical companies resulting in a rationalization of research expenditures;

 

   

increased regulatory scrutiny over drug production requiring safer raw materials;

 

   

customers’ purchasing the products that we supply directly from our suppliers; and

 

   

significant reductions in development and production activities.

Some of our customers have implemented or may in the future implement certain measures described above in an effort to control and reduce costs. The ability of our customers to develop new products to replace sales decreases attributable to expirations of significant patents, along with the impact of other past or potential future changes in the industries we serve, may result in our customers significantly reducing their purchases of products from us or the prices they are willing to pay for those products. While we believe we are able to adapt our business to maintain existing customer relationships and develop new customer relationships if we are unsuccessful or untimely in these efforts, our results of operations may suffer.

We may be adversely affected by global and regional economic and political conditions.

We conduct operations around the globe. The prospects, strength and sustainability of the current environment remain uncertain as does the possibility of an economic downturn in the United States and other countries. The uncertainty or deterioration of the global economic environment could adversely affect us. Customers or suppliers may experience cash flow problems and as a result, customers may modify, delay or cancel plans to purchase our products and services and suppliers may significantly and rapidly increase their prices or reduce their output. Any inability of current and/or potential customers to purchase and/or pay for our products due to, among other things, declining economic conditions as a result of inflation, rising interest rates, changes in spending patterns at biopharmaceutical, biotechnology, research, diagnostic, electronics, aerospace and defense companies and the effects of governmental initiatives to manage economic conditions may have a negative impact on our consolidated results of operations, financial condition and cash flows. Overall demand for our products could be reduced as a result of a global economic recession or political unrest, especially in such areas as the biopharma, healthcare, education & government and advanced technologies & applied materials industries.

Sales and earnings could also be affected by our ability to manage the risks and uncertainties associated with the application of trade protection measures, regional political instability, war, terrorist activities, severe or prolonged adverse weather conditions and natural disasters as well as health epidemics and pandemics.

 

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We may not be able to integrate mergers or acquisitions successfully into our existing business, or realize anticipated cost savings or synergies, if any, from those transactions, which could adversely affect our business.

Our ability to realize the benefits we anticipate from our mergers and acquisitions activities, including anticipated cost savings and additional sales opportunities, will depend in large part upon whether we are able to integrate such businesses efficiently and effectively. Integration is an ongoing process and we may not be able to fully integrate such businesses smoothly or successfully and the process may take longer than expected. Further, the integration of certain operations and the differences in operational culture following mergers and acquisitions activity will continue to require the dedication of significant management resources, which may distract management’s attention from day-to-day business operations. There may also be unasserted claims or assessments that we failed or were unable to discover or identify in the course of performing due diligence investigations of target businesses. If we are unable to successfully integrate the operations of acquired businesses into our business, including with respect to our ongoing integration of VWR and NuSil, we may be unable to realize the sales growth, synergies and other anticipated benefits we expect to achieve as a result of such transactions and our business, results of operations and cash flow could be adversely affected.

Our offerings are highly complex, and, if our products do not satisfy applicable quality criteria, specifications and performance standards, we could experience lost net sales, delayed or reduced market acceptance of our products, increased costs and damage to our reputation.

The high-purity materials and customized solutions we offer are highly exacting and complex due to demanding customer specifications and stringent regulatory and industry requirements. Our operating results depend on our ability to execute and, when necessary, improve our global quality control systems, including our ability to effectively train and maintain our employees with respect to quality control. See “Business—Quality and Regulatory.” A failure of our global quality control systems could result in problems with facility operations or preparation or provision of defective or non-compliant products. In each case, such problems could arise for a variety of reasons, including equipment malfunction, failure to follow specific protocols and procedures, problems with raw materials, or environmental factors and damage to, or loss of, manufacturing operations. Although many of our products are tested prior to shipment, defects or errors nevertheless occur and we have product recalls from time to time. Such problems could affect production of a particular batch or series of batches of products, requiring the destruction of such products or a halt of facility production altogether. Nearly all of our products are subsequently incorporated into products sold to end users by our customers, and we have no control over the manufacture and production of such products.

Our success depends on our customers’ confidence that we can provide reliable, high-quality products. We believe that customers in our target markets are likely to be particularly sensitive to product defects and errors. Our reputation and the public image of our products and technologies may be impaired if our products fail to perform as expected or fail to meet applicable quality criteria, specifications or performance standards. If our products experience, or are perceived to experience, a material defect or error, this could result in loss or delay of net sales, damaged reputation, diversion of development resources, and increased insurance or warranty costs, any of which could harm our business. Such defects or errors could also result in our inability to timely deliver products to our customers, which in turn could cause disruption to our customers’ production of their products, narrowing the scope of the use of our products and ultimately hindering our or their success in relevant markets. Even after any underlying concerns or problems are resolved, any lingering concerns in our target markets regarding our technology, product defects or performance standards could continue to result in lost net sales, delayed market acceptance and damaged reputation, among other things. If problems in preparation or manufacture of a product or failures to meet required quality standards for that product or other product defects are not discovered before such product is released to our customers, we may be subject to adverse regulatory and legal actions, including recalls, product seizures, injunctions to halt manufacture and distribution, restrictions on our operations, civil sanctions, including monetary sanctions, and criminal actions. In addition, such problems or failures subject us to other litigation claims, including claims from our customers for reimbursement for the cost

 

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of lost or damaged raw materials or end products, disposal of defective products, production line clean out, and consequential damages, the cost of which could be significant.

The loss of a significant number of customers or a reduction in orders from a significant number of customers could reduce our net sales and harm our operating results.

Our operating results could be negatively affected by the loss of revenue from a significant number of our customers, including direct distributors and end users. Though we often include pricing and volume incentives in our contracts, our customers are generally not obligated to purchase any fixed quantities of products, and they may stop placing orders with us at any time. If a significant number of customers purchase fewer of our products, defer orders or fail to place additional orders with us, our sales could decline, and our operating results may not meet our expectations. In addition, if those customers order our products, but fail to pay on time or at all, our liquidity and operating results could be adversely affected.

Our contracts generally do not contain minimum purchase requirements and we sell primarily on a purchase order basis. Therefore, our sales are subject to demand variability by our clients, has fluctuated historically and may continue to fluctuate, sometimes materially from year to year and even from quarter to quarter. The level and timing of orders placed by these clients vary for a variety of reasons, individual customer strategies, the introduction of new technologies, the desire of our clients to reduce their exposure to any single supplier and general economic conditions. If we are unable to anticipate and respond to the demands of our clients, we may lose clients because we have an inadequate supply of raw materials with which to manufacture our products or insufficient capacity in our sites, or in the alternative, we may have excess inventory or excess capacity, either of which may have a material adverse effect on our business, financial position and operating results.

Though we do generate a portion of our net sales from long-term contracts, the majority of these contracts are non-exclusive and do not require a minimum purchase volume. These customers therefore generally have no obligation to assign a specific amount of work pursuant to the agreements themselves. Consequently, projected expenditures by customers under long-term contracts are not assured. This makes it difficult to estimate our customers’ demand for our products and our raw material needs. In addition, though we believe customers in our markets display a significant amount of loyalty to their supplier of a particular product, we may not be able to renew a contract on favorable pricing terms if our competitors reduce their prices in order to procure business, or if a customer is insistent that we lower the price charged under the contract being renewed in order to retain the contract. The loss of sales obtained through long-term contracts or the reduced profitability of such sales could adversely affect our results of operations, cash flows and liquidity.

We are subject to risks associated with doing business globally, which may harm our business.

We have global operations and derive a portion of our net sales from customers outside the United States. Accordingly, our international operations or those of our international customers could be substantially affected by a number of risks arising with operating an international business, including:

 

   

limitations on repatriation of earnings;

 

   

taxes on imports;

 

   

the possibility that unfriendly nations or groups could boycott our products;

 

   

general economic and political conditions in the markets we operate in;

 

   

foreign currency exchange rate fluctuations;

 

   

potential increased costs associated with overlapping tax structures;

 

   

potential increased reliance on third parties within less developed markets;

 

   

potential trade restrictions, tariffs and exchange controls;

 

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more limited protection for intellectual property rights in some countries;

 

   

difficulties and costs associated with staffing and managing foreign operations;

 

   

unexpected changes in regulatory requirements;

 

   

difficulties in complying with a wide variety of foreign laws and regulations;

 

   

the risk that certain governments may adopt regulations or take other actions that would have a direct adverse impact on our business and market opportunities, including nationalization of private enterprise;

 

   

violations of anti-bribery and anti-corruption laws, such as the United States Foreign Corrupt Practices Act, or the “FCPA”;

 

   

violations of economic sanctions laws, such as the regulations enforced by the U.S. Department of The Treasury’s Office of Foreign Assets Control, or “OFAC”;

 

   

longer accounts receivable cycles in certain foreign countries, whether due to cultural differences, exchange rate fluctuation or other factors;

 

   

the credit risk of local customers and distributors;

 

   

limitations on our ability to enforce legal rights and remedies with third parties or partners outside the United States;

 

   

import and export licensing requirements and other restrictions, such as those imposed by OFAC, the Bureau of Industry and Security, or “BIS,” the Directorate of Defense Trade controls, or “DDTC, ” and comparable regulatory agencies and policies of foreign governments; and

 

   

changes to our distribution networks.

Changes in exchange rates can adversely affect our net sales, profits and cash flows.

We report our consolidated financial results in U.S. dollars. Approximately 44% of net sales for the nine months ended September 30, 2018 were generated from operations outside the United States and denominated in foreign currencies (principally the British Pound Sterling, Canadian dollar, euro, Indian Rupee and the Chinese Renminbi). Fluctuations in the relative values of currencies occur from time to time and could adversely affect our operating results. Specifically, during times of a strengthening U.S. dollar, our reported international sales and earnings will be reduced because the local currency will convert into fewer U.S. dollars. In addition, currency fluctuations may affect the comparability of our results of operations between financial periods.

Further, we have a substantial amount of euro denominated indebtedness. Fluctuations in the exchange rate between U.S. dollars and euros may have a material adverse effect on our ability to repay such indebtedness.

Our business depends on our ability to use and access information systems, and any failure to successfully maintain these systems or implement new systems to handle our changing needs could materially harm our operations.

We depend on standardized procedures and multiple information systems, including our online customer portal and distribution and enterprise resource systems, for our operations, customer service and quality and safety procedures. We utilize commercially available third-party technology solutions, software and software systems with some proprietary configurations. In the past we have stored data using third-party cloud services and we plan to do so in the future. Our information systems are subject to damage or interruption from power outages, computer and telecommunications failures, computer viruses, security breaches, vandalism, catastrophic events and human error. If our information systems are damaged, fail to work properly or otherwise become unavailable, we may incur substantial costs to repair or replace them, and we may experience a loss of critical

 

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information, customer disruption and interruptions or delays in our ability to perform essential functions and implement new and innovative services. If the cloud service providers we may use were to experience unplanned downtime, delays or other issues delivering data to our information technology systems, this could significantly and adversely impact business operations. A compromise of our information systems or those with which we interact could harm our reputation and expose us to regulatory actions and claims from customers and other persons, any of which could adversely affect our business, financial position and results of operations.

In addition, we may not have the necessary resources to enhance existing information systems or implement new systems where necessary to handle our increasing volume and changing needs, and may experience unanticipated delays, complications and expenses in implementing and integrating our systems. Any interruptions in operations would adversely affect our ability to properly allocate resources and timely deliver our products, which could result in customer dissatisfaction. The failure to successfully implement and maintain information systems could have an adverse effect on our ability to obtain new business, retain existing business and maintain or increase our sales and profit margins.

Furthermore, we rely on information technology systems to process, transmit, store, and protect electronic information, including confidential customer, supplier, employee or other business information. For example, a significant portion of the communications between our personnel, customers, and suppliers depends on information technology. Through our online customer portal, we collect and store confidential information that customers provide in order to, among other things, purchase products and services and register on our website. Our information technology systems may be vulnerable to a variety of interruptions due to events beyond our control, including, but not limited to, natural disasters, terrorist attacks, telecommunications failures, computer viruses, hackers, and other security issues. We have technology and information security processes and disaster recovery plans in place to mitigate our risks to these vulnerabilities. However, these measures may not be adequate to ensure that our operations will not be disrupted, should such an event occur.

In recent years, information security risks have generally increased because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyberattacks. In addition to exploiting technical vulnerabilities, the perpetrators of cyberattacks may seek to gain access to user credentials through “phishing” and “spear phishing” attacks. A failure in or breach of our operational or information systems, or those of our third-party service providers, as a result of cyberattacks or information security breaches, regardless of whether the failure or breach is attributable to a vulnerability in our systems, could disrupt our business and/or our supply chain, result in the improper disclosure or misuse of our or our customers’ confidential or proprietary information, damage our reputation, subject us to claims and/or increase our costs. We may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities.

The General Data Protection Regulation (“GDPR”), which went into effect in the European Union (“EU”) on May 25, 2018, applies to the collection, use, retention, security, processing, and transfer of personally identifiable information of residents of countries in the European Economic Area. The GDPR created a range of new compliance obligations, and imposes significant fines and sanctions for violations.

Any failure, or perceived failure, by us to comply with the GDPR, or with any applicable regulatory requirements or orders, including but not limited to privacy, data protection, information security, or consumer protection-related privacy laws and regulations, in one or more jurisdictions within the EU or elsewhere, could: result in proceedings or actions against us by governmental entities or individuals; subject us to significant fines, penalties, and/or judgments; require us to change our business practices; limit access to our products and services in certain countries, incur substantial costs (even if we ultimately prevail) or otherwise adversely affect our business.

 

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Our inability to protect our intellectual property could adversely affect our business. In addition, third parties may claim that we infringe their intellectual property, and we could suffer significant litigation or licensing expenses as a result.

We rely on a variety of intellectual property rights (including patents, trademarks, copyrights and trade secrets) to protect our proprietary technology and products. We place considerable emphasis on obtaining patent or maintaining trade secret protection for significant new technologies, products and processes because of the length of time and expense associated with bringing new products and processes through the development process and to the market. Our success depends, in part, on our ability to develop and maintain trade secrets, or obtain and enforce patent protection, for our products and processes both in the United States and internationally.

We rely on trade secrets and proprietary know-how to protect our products and processes, in part, by confidentiality agreements with our customers, collaborators, employees and consultants. We cannot be certain, however, that these agreements will not be breached, including a breach by a customer or collaborator involving reverse-engineering of our products or the use or disclosure of our trade secrets or know-how, or that adequate remedies will be available in the event of any breach. We cannot guarantee that our trade secrets and other proprietary and confidential information will not be disclosed or that competitors will not otherwise gain access to or independently develop our trade secrets. If a competitor lawfully obtained or independently developed any of our trade secrets, we would have no right to prevent such competitor from using that technology or information to compete with us. Monitoring unauthorized uses and disclosures is difficult, and we do not know whether the steps we have taken to protect our proprietary technologies will be effective. Furthermore, enforcing a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the outcome is unpredictable, in part because some courts both within and outside the United States may be less willing or unwilling to protect trade secrets. Any misappropriation, disclosure or independent development of our trade secrets could harm our competitive position.

We own numerous U.S. and foreign patents and patent applications, and we expect to file additional applications, as appropriate, for patents covering certain of our products and processes. Patents may not be issued for any pending or future patent applications owned by or licensed to us, and the claims allowed under any issued patents may not be sufficiently broad to protect our technology. Any issued patents owned by or licensed to us may be challenged, invalidated or circumvented, and the rights under these patents may not provide us with competitive advantages. In addition, competitors may design around our technology or develop competing technologies. Intellectual property rights may also be unavailable or limited in some foreign countries, which could make it easier for competitors to capture increased market position. Moreover, pursuing patent protection in all jurisdictions would be prohibitively expensive, and we will not have the benefit of any such protection in jurisdictions where we do not pursue and obtain patents. We could incur substantial costs to defend ourselves in suits brought against us or in suits in which we may assert our patent rights against others. An unfavorable outcome of any such litigation could adversely affect our business and results of operations.

We actively manage our portfolio of trademarks including by maintaining registrations for long-standing trademarks and applying to obtain trademark registrations for new brands. We cannot guarantee that any application for registration will be granted in any given jurisdiction, or that third parties will not challenge our existing rights. We also police certain trademarks against infringement by third parties. Our efforts to defend and enforce our trademarks may be unsuccessful against competitors or other third parties and we may not have adequate remedies against infringements. Due to our focus on branded products, we consider our trademarks to be valuable assets.

We may need to spend significant resources monitoring and enforcing our intellectual property rights and we may not be able to prove infringement by third parties. Our competitive position may be harmed if we cannot enforce our intellectual property rights. In some circumstances, we may choose to not pursue enforcement for business reasons. In addition, competitors might avoid infringement by designing around our intellectual property rights or by developing non-infringing competing technologies. Intellectual property rights and our

 

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ability to enforce them may be unavailable or limited in some countries, which could make it easier for competitors to capture market share and could result in lost revenues.

We may be subject to claims that former employees, collaborators or other third parties have an interest in our patents or other intellectual property as an inventor or co-inventor, or that an employee, consultant, or other third party performed work for us that conflicts with that person’s obligations to a third party. While it is generally our policy to require our employees and contractors who may be involved in the creation, conception or development of intellectual property to execute agreements assigning such intellectual property to us, we may be unsuccessful in executing such an agreement with each party who, in fact, creates, conceives or develops intellectual property that we regard as our own, or a court may determine that such agreement was insufficient to assign such intellectual property to us. In some cases, when we perform certain services for a customer, the customer may own rights in resulting intellectual property, if any, generated in the course of performing those services. Disputes may arise with respect to such arrangements and our, and the customer’s, rights in such intellectual property. Litigation may be necessary to defend against any of these and other claims challenging inventorship or ownership. If we fail in defending or asserting any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Even if we are successful in defending or asserting such claims, litigation could result in substantial costs and be a distraction to management and other employees.

We cannot be certain that our products and our business do not or will not infringe the intellectual property rights of a third party. Third parties may assert claims against us to the effect that we are infringing on their intellectual property rights. Such claims are costly, regardless of their merit, divert the attention of management, and outcomes are uncertain, all of, which could adversely affect our business, financial condition and results of operations. In addition, parties making these claims could secure a judgment awarding substantial damages, as well as injunctive or other equitable relief against us and those to whom we have sold the allegedly infringing products, which could require us to design around the infringement, and/or effectively block our ability to make, use, sell, distribute, or market our products in the United States or other countries. In the event that a claim relating to intellectual property is asserted against us, or third parties not affiliated with us hold pending or issued patents that relate to our products or technology, we may seek licenses to such intellectual property or challenge those patents. However, we may be unable to obtain these licenses on commercially reasonable terms, if at all, and our challenge of the patents may be unsuccessful. Our failure to obtain the necessary licenses or other rights could prevent the sale, manufacture, or distribution of our products and, therefore, could adversely affect our business, financial condition and results of operations.

Our trademarks are valuable assets and if we are unable to protect them from infringement our business prospects may be harmed.

Our brands, particularly our J.T.Baker, NuSil and VWR brands, are valuable assets. Therefore, we actively manage our trademark portfolio, including by maintaining registrations for long-standing trademarks and applying to obtain trademark registrations for new brands. We also police our trademark portfolio against infringement. Our efforts to protect and defend our trademarks may fall short or be unsuccessful against competitors or other third parties for a variety of reasons. To the extent that third parties or distributors sell products that are counterfeit versions of our branded products, our customers could inadvertently purchase products that are inferior. This could cause them to refrain from purchasing our brands in the future and in turn could impair our brand equity and adversely affect our sales.

We are subject to product liability and other claims in the ordinary course of business.

Our business involves risk of product liability (including, without limitation, with respect to our products used to manufacture drugs and for research, our silicone-based products including those used by our customers as raw materials to make medical implantable devices, and our diagnostic products including those used to screen for disease or disorder), intellectual property claims and other claims in the ordinary course of business arising

 

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from the products that we source from various manufacturers or produce ourselves. Furthermore, there may be product liability risks that are unknown or which become known in the future. Substantial, complex or extended litigation on any claim could cause us to incur significant costs and distract our management. For example, lawsuits by governmental authorities, employees, shareholders, suppliers, collaborators, distributors, customers, competitors or others with protected intellectual property could be very costly and substantially disrupt our business. Our exposure to such claims may increase as we seek to increase the geographic scope of our sourcing and sales activities and to the extent that we expand our manufacturing operations. We maintain insurance policies and in some cases, our suppliers, customers and predecessors of acquired companies have indemnified us against certain claims. We cannot assure you that our insurance coverage or indemnification agreements will be available 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 terms and conditions of such insurance or indemnification agreement, as well as the financial viability of our and such third parties’ insurers, as well as legal enforcement under the local laws governing these arrangements. Insurance coverage in general or coverage for certain types of liabilities, such as product liability in developing markets, may not be readily available for purchase or cost-effective for us to purchase. Furthermore, many of our insurance policies are subject to high deductibles and retentions, and we do not maintain insurance for product liability across all of our product lines or for product recalls. Accordingly, we could be subject to uninsured and unindemnified future liabilities requiring us to provide additional reserves to address such liabilities. An unfavorable result in a case for which adequate insurance or indemnification is not available could adversely affect our business, financial condition and results of operations.

We are also involved in various disputes, litigation and regulatory matters incidental to and in the ordinary course of our business, including employment matters, commercial disputes, government compliance matters, environmental matters, and other matters arising out of the normal conduct of our business. We intend to vigorously defend ourselves in such matters. While the impact of this litigation has or may be immaterial, there can be no assurance that the impact of the pending and any future claims will not be material to our business, financial condition or results of operations in the future.

We must develop new products, adapt to rapid and significant technological change and respond to introductions of new products by competitors to remain competitive.

We sell our products in industries that are characterized by significant technological changes, frequent new product and technology introductions and enhancements, and evolving industry standards. As a result, our customers’ needs are rapidly evolving. If we do not appropriately innovate and invest in new technologies, our offerings may become less desirable in the markets we serve, and our customers could move to new technologies offered by our competitors or make products themselves. Though we believe customers in our markets display a significant amount of loyalty to their supplier of a particular product, we also believe that because of the initial time investment required by many of our customers to reach a purchasing decision for a new product, it may be difficult to regain that customer once the customer purchases a product from a competitor. Without the timely introduction of new products, services and enhancements, our offerings will likely become less competitive over time, in which case our competitive position, net sales and operating results could suffer. Accordingly, we focus significant efforts and resources on the development and identification of new technologies, products and services that are attractive to and gain acceptance in the markets we serve and further broaden our offerings. To the extent we fail to timely introduce new and innovative products or services, adequately predict our customers’ needs or fail to obtain desired levels of market acceptance, our business may suffer.

Our business, financial condition and results of operations depend upon the availability of raw materials.

Our operations depend upon our ability to obtain high-quality raw materials meeting our specifications and other requirements at reasonable prices, including various APIs, components, compounds, excipients, and other raw materials, many of which are sole-sourced due to market or customer demands. Our ability to maintain an adequate supply of such materials and components could be impacted by the availability and price of those raw

 

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materials and maintaining relationships with key suppliers. While we may seek to minimize the impact of price increases and potential shortages by, among other things, entering into long-term supply agreements, increasing our own prices and implementing cost-saving measures, our earnings and cash flows could be adversely affected in the event these measures are insufficient to cover our costs. Our dependency upon regular deliveries from particular suppliers of components and raw materials means that interruptions or stoppages in such deliveries could adversely affect our operations until arrangements with alternate suppliers, to the extent any alternate suppliers acceptable to us and, if applicable, to our customers, even exist. If this occurs, we could expend substantial expense and time in re-establishing relationships with third-party suppliers that meet the appropriate quality, cost and regulatory requirements needed for commercially viable manufacture of our products or in re-designing our products to incorporate different components and raw materials that are available from third-party suppliers. If we are unable to obtain the materials we need at reasonable prices or at all, we may not be able to produce certain of our products at a marketable price or at all. If our supply of raw materials and key components is adversely affected, we could impact our customers’ ability to produce their products, damage our relationship with current and prospective customers and our operating results and financial condition could be adversely affected.

Moreover, we are dependent upon the ability of our suppliers to provide materials and components that meet our specifications, quality standards, other applicable criteria, and delivery schedules. Our suppliers’ failure to provide expected raw materials or components that meet such criteria could adversely affect production schedules and contract profitability.

The continued supply of materials from our suppliers is subject to a number of risks including:

 

   

the destruction of or damage to our suppliers’ facilities or their distribution infrastructure;

 

   

work stoppages or strikes by our suppliers’ employees;

 

   

the failure of our suppliers to provide materials of the requisite quality or in compliance with strict specifications;

 

   

the failure of essential equipment at our suppliers’ plants;

 

   

the failure of our suppliers to satisfy U.S. and international import and export control laws for goods that we purchase from them;

 

   

the failure of our suppliers to meet regulatory standards, including cGMP, where applicable;

 

   

the failure, shortage or delay in the delivery of raw materials to our suppliers;

 

   

contractual amendments and disputes with our suppliers; and

 

   

inability of our suppliers to perform as a result of the weakened global economy or otherwise.

If we experience problems with suppliers, we may not be able to find acceptable alternatives, and any such alternatives could result in increased costs for us and possible forward losses on certain contracts. Even if acceptable alternatives are found, the process of locating and securing such alternatives might be disruptive to our business, might lead to termination of our supply agreements with our customers, and might disrupt the operations of our customers leading to potential claims.

Our business, financial condition and results of operations depend upon maintaining our relationships with suppliers.

We offer products from a wide range of suppliers. While there is generally more than one source of supply for most of the categories of third-party materials & consumables and equipment & instrumentation that we sell, we currently do not manufacture the majority of our products and are dependent on these suppliers for access to those products.

 

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Our ability to sustain our gross margins has been, and will continue to be, dependent in part upon our ability to obtain favorable terms from our suppliers. These terms may change from time to time, and such changes could adversely affect our gross margins over time. In addition, our results of operations and cash flows could be adversely impacted by the acceleration of payment terms to our suppliers and/or the imposition of more restrictive credit terms and other contractual requirements.

Some of our competitors are increasing their manufacturing operations both internally and through acquisitions of manufacturers, including manufacturers that supply products to us. In addition, we manufacture certain products that may compete directly with products we source from our suppliers. To date, we have not experienced an adverse impact on our ability to continue to source products from manufacturers that have been vertically integrated or otherwise compete with us, although there is no assurance that we will not experience such an impact in the future.

The loss of one or more of our large suppliers, including as a result of consolidation, a material reduction in their supply of products or provision of services to us, extended disruptions or interruptions in their operations or material changes in the terms we obtain from them, could have a material adverse effect on our business, financial condition and results of operations.

Our use of chemicals and chemical processes is subject to inherent risk.

We use chemical ingredients in the manufacture of certain of our products. Due to the nature of the manufacturing process itself, there is a risk of incurring liability for damages caused by or during the storage or manufacture of both the chemical ingredients and the finished products. The processes used in certain of our facilities typically involve large volumes of solvents and chemicals, creating the potential for fires, spills and other safety or environmental impacts. If any of these risks materialize, it could result in significant remediation and other costs, potential adverse regulatory actions and liabilities, any of which could have an adverse effect on our business, results of operations and financial condition.

In addition, the manufacturing, use, storage, and distribution of chemicals are subject to threats including terrorism. We have several high-risk chemical facilities that possess materials that could be stolen and used to make weapons. We could also be subject to an attack on our high-risk facilities that could cause a significant number of deaths and injuries. As a result, many people, including our employees, could be harmed. Such an occurrence could also harm the environment, our reputation and disrupt our operations.

We are highly dependent on our senior management and key employees. Competition for our employees is intense, and we may not be able to attract and retain the highly skilled employees that we need to support our business and our intended future growth.

Our success largely depends on the skills, experience and continued efforts of our management, including our Chief Executive Officer and our senior leadership. The replacement of any member of our management team would likely involve the expenditure of significant time and financial resources, and the loss of any such individual may significantly delay or prevent the achievement of our business objectives. As we continue to grow, our success also depends on our ability to attract, motivate and retain highly qualified individuals. Competition for senior management and other key personnel in our industry is intense, and the pool of suitable candidates is limited. If qualified personnel become scarce or difficult to attract or retain in our industry for compensation-related or other reasons, we could experience higher labor, recruiting or training costs. Further, new hires may require significant training and time before they achieve full productivity and may not become as productive as we expect. The failure to attract, retain and properly motivate members of our senior management team and other key employees, or to find suitable replacements for them in the event of death, illness or their desire to pursue other professional opportunities, could have a negative effect on our operating results.

 

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We may incur impairment charges on our goodwill and other intangible assets with indefinite lives that would reduce our earnings.

We are required under generally accepted accounting principles to test goodwill and non-amortizable intangible assets for impairment at least annually and to review our amortizable intangible assets, including other assets acquired through merger and acquisition activity, for impairment when events or changes in circumstance indicate the carrying value may not be recoverable.

Factors that could lead to impairment of goodwill, non-amortizable intangible assets, and amortizable intangible assets in the future (including goodwill or assets acquired via acquisitions) include significant adverse changes in the business climate and actual or projected operating results and declines in the financial condition of our business. We have recorded and may be required in the future to record additional charges to earnings if our goodwill, non-amortizable intangible assets, and amortizable intangible assets or other assets become impaired. Any such charge would adversely impact our financial results.

Significant developments stemming from the domestic U.S. and international political climate could have an adverse effect on us.

The Trump administration has called for substantial changes to trade agreements, such as the North American Free Trade Agreement (“NAFTA”), and has raised the possibility of imposing significant increases on tariffs on goods imported into the United States, particularly from China and Mexico. For example, throughout 2018, the Trump administration and China have been levying taxes on their respective imports. The administration has also indicated an intention to request Congress to make significant changes, replacement or elimination of the Patient Protection and Affordable Care Act, (the “PPACA”) and government negotiation/regulation of drug prices paid by government programs. In December 2017, the Tax Cuts and the Jobs Act of 2017 (the “TCJA”), which reduced the PPACA’s tax penalty for individuals that do not have health insurance to $0, among other policy changes. There are other changes in U.S. social, political, regulatory and economic conditions or laws and policies governing the health care system and drug prices, foreign trade, manufacturing, and development and investment in the territories and countries where we or our customers operate could adversely affect our operating results and our business.

Additionally, in June 2016, the United Kingdom held a referendum and voted in favor of leaving the European Union, or “EU” and in March 2017, the government of the United Kingdom formally initiated the withdrawal process. This referendum has created political and economic uncertainty, particularly in the United Kingdom and the EU, and this uncertainty may last for years. Our business could be affected during this period of uncertainty, and perhaps longer, by the impact of the United Kingdom’s referendum. In addition, our business could be negatively affected by new trade agreements between the United Kingdom and other countries, including the United States, by the possible imposition of trade or other regulatory barriers in the United Kingdom and if the government of the United Kingdom does not reach a deal with the EU with respect to the United Kingdom’s exit from the EU by March 29, 2019, the scheduled exit date. These possible negative impacts, and others resulting from the United Kingdom’s actual or threatened withdrawal from the EU, may adversely affect our operating results and our customers’ businesses.

Our reputation, ability to do business and financial statements may be impaired by improper conduct by any of our employees, agents or business partners.

We cannot provide assurance that our internal controls and compliance systems will always protect us from acts committed by employees, agents or business partners of ours (or of businesses we acquire or partner with) that would violate U.S. and/or non-U.S. laws, including the laws governing payments to government officials, bribery, fraud, kickbacks and false claims, pricing, sales and marketing practices, conflicts of interest, competition, export and import compliance, money laundering and data privacy. In particular, the FCPA, the U.K. Bribery Act and similar anti-bribery laws in other jurisdictions generally prohibit companies and their

 

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intermediaries from making improper payments for the purpose of obtaining or retaining business, and we operate in many parts of the world that have experienced corruption to some degree. Any such improper actions or allegations of such acts could damage our reputation and subject us to civil or criminal investigations in the United States and in other jurisdictions and related shareholder lawsuits, could lead to substantial civil and criminal, monetary and nonmonetary penalties and could cause us to incur significant legal and investigatory fees. In addition, the government may seek to hold us liable as a successor for violations committed by companies in which we invest or that we acquire. We also rely on our suppliers to adhere to our supplier standards of conduct, and material violations of such standards of conduct could occur that could have a material effect on our business, reputation and financial statements.

The indemnification provisions of acquisition agreements by which we have acquired companies may not fully protect us and as a result we may face unexpected liabilities.

Certain of the acquisition agreements by which we have acquired companies require the former owners to indemnify us against certain liabilities related to the operation of the company before we acquired it. In most of these agreements, however, the liability of the former owners is limited and certain former owners may be unable to meet their indemnification responsibilities. We cannot assure you that these indemnification provisions will protect us fully or at all, and as a result we may face unexpected liabilities that adversely affect our financial statements.

Government or private civil antitrust actions could harm our business, results of operations, financial condition and cash flows.

The antitrust laws prohibit, among other things, any joint conduct among competitors that would lessen competition in the marketplace. We believe that we are in compliance with the legal requirements imposed by the antitrust laws. However, a governmental or private civil action alleging the improper exchange of information, or unlawful participation in price maintenance or other unlawful or anticompetitive activity, even if unfounded, could be costly to defend and could harm our business, results of operations, financial condition, and cash flows.

Changes in tax law relating to multinational corporations could adversely affect our tax position.

The U.S. Congress, government agencies in non-U.S. jurisdictions where we and our affiliates do business, and the Organisation for Economic Co-operation and Development (“OECD”) have recently focused on issues related to the taxation of multinational corporations. One example is in the area of “base erosion and profit shifting,” where profits are claimed to be earned for tax purposes in low-tax jurisdictions, or payments are made between affiliates from a jurisdiction with high tax rates to a jurisdiction with lower tax rates. The OECD has released several components of its comprehensive plan to create an agreed set of international rules for addressing base erosion and profit shifting.

Due to the potential for changes to tax laws and regulations or changes to the interpretation thereof (including regulations and interpretations pertaining to the TCJA), the ambiguity of tax laws and regulations, the subjectivity of factual interpretations, the complexity of our intercompany arrangements, uncertainties regarding the geographic mix of earnings in any particular period, and other factors, our estimates of effective tax rate and income tax assets and liabilities may be incorrect and our financial statements could be adversely affected; please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion of additional factors that may adversely affect our effective tax rate and decrease our profitability in any period. The impact of the factors referenced in the first sentence of this paragraph may be substantially different from period-to-period.

In addition, the amount of income taxes we pay is subject to ongoing audits by U.S. federal, state and local tax authorities and by non-U.S. tax authorities, such as the audits described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements. If audits result in

 

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payments or assessments different from our reserves, our future results may include unfavorable adjustments to our tax liabilities and our financial statements could be adversely affected. Any further significant changes to the tax system in the United States or in other jurisdictions (including changes in the taxation of international income as further described below) could adversely affect our financial statements.

Certain of our businesses rely on relationships with collaborative partners and other third parties for development, supply and marketing of certain products and potential products, and such collaborative partners or other third parties could fail to perform sufficiently.

We believe that for certain of our businesses, success in penetrating target markets depends in part on their ability to develop and maintain collaborative relationships with other companies. Relying on collaborative relationships is risky because, among other things, our collaborative partners may (1) not devote sufficient resources to the success of our collaborations; (2) fail to obtain regulatory approvals necessary to continue the collaborations in a timely manner; (3) be acquired by other companies and terminate our collaborative partnership or become insolvent; (4) compete with us; (5) disagree with us on key details of the collaborative relationship; (6) have insufficient capital resources; and (7) decline to renew existing collaborations on acceptable terms. Because these and other factors may be beyond our control, the development or commercialization of our products involved in collaborative partnerships may be delayed or otherwise adversely affected. If we or any of our collaborative partners terminate a collaborative arrangement, we may be required to devote additional resources to product development and commercialization or we may need to cancel some development programs, which could adversely affect our business and financial statements.

Risks Related to Regulation

We are required to comply with a wide variety of laws and regulations, and are subject to regulation by various federal, state and foreign agencies, and our failure to comply with existing and future regulatory requirements could adversely affect our results of operations and financial condition.

We compete in markets in which we and our customers are subject to federal, state, local, international and transnational laws and regulations, including the operating, quality and security standards of the FDA, various state health departments, the Department of Health and Human Services, or “DHHS,” similar bodies of the EU and its member states and other comparable agencies around the world, and, in the future, any changes to such laws and regulations could adversely affect us. We develop, configure and market our products to meet customer needs driven by those regulations. Among other rules affecting us, we are subject to laws and regulations concerning cGMP and product safety. Our subsidiaries may be required to register for permits and/or licenses with, and may be required to comply with, the laws and regulations of the FDA, the DHHS, the Drug Enforcement Administration, or “DEA,” foreign agencies including the European Medicines Agency, or “EMA,” and other various state health departments and/or comparable state and foreign agencies as well as certain accrediting bodies depending upon the types of operations and locations of distribution and sale of the products manufactured or services provided by those subsidiaries. Any significant change in regulations could reduce demand for our products or increase our expenses. For example, many of our products are marketed to the biopharma industry for use in discovering, developing and manufacturing drugs, or are sold as raw materials or components to drug device manufacturers or for use in the manufacture of implantable devices. Changes in the domestic or foreign regulation of drug discovery, development or manufacturing processes or medical device manufacturing processes, or adverse findings concerning any health effects associated with these products, could have an adverse effect on the demand for these products and could also result in legal liability and claims.

Our operations are subject to a broad array of regulatory requirements globally. In particular, certain portions of our business must satisfy domestic and international standards in the medical, biopharmaceutical and other health sciences areas involving products and technologies which impact human health and safety. In addition, some of our operations must meet governmental requirements in terms of contracting, sourcing, financial accounting standards, product testing and reporting. We are required to comply with economic

 

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sanctions laws, which may affect our transactions with certain customers, business partners and other persons and entities. There are also business operations that produce products regulated by import/export regulations because their actual or potential use is considered sensitive and involves substantial licensing and record-keeping obligations. In addition, we are registered with the DDTC, as a manufacturer and exporter of goods controlled by the International Traffic in Arms Regulations, or “ITAR,” and we are subject to strict export control and prior approval requirements related to these goods. Our failure to comply with ITAR and other export control laws and regulations, as well as economic sanctions, could result in penalties, loss, or suspension of contracts or other consequences. Any of these could adversely affect our operations and financial condition. Failure by us or by our customers to meet one or more of these various regulatory obligations could have adverse consequences in the event of material non-compliance. Compliance with relevant sanctions and export control laws could restrict our access to, and increase the cost of obtaining, certain products and at times could interrupt our supply of imported inventory or our ability to service certain customers. See “—Violation of government regulations or quality programs could harm demand for our products or services.” Conversely, compliance with these regulatory obligations may require us to incur significant expenses.

Although we believe that we comply in all material respects with applicable laws and regulations, there can be no assurance that a regulatory agency or tribunal would not reach a different conclusion concerning the compliance of our operations with applicable laws and regulations. In addition, there can be no assurance that we will be able to maintain or renew existing permits, licenses or other regulatory approvals or obtain, without significant delay, future permits, licenses or other approvals needed for the operation of our businesses. Any noncompliance by us with applicable laws and regulations or the failure to maintain, renew or obtain necessary permits and licenses could have an adverse effect on our results of operations and financial condition. Furthermore, loss of a permit, license or other approval in any one portion of our business may have indirect consequences in other portions of our business if regulators or customers, for example cease doing business with such other portion due to fears that such loss is a sign of broader concerns about our ability to deliver products or services of sufficient quality.

Violation of government regulations or quality programs could harm demand for our products or services.

Some of our testing procedures and products, as well as some of the products manufactured by our customers which incorporate our products, are regulated by the FDA, the EMA and other comparable local, state, federal, foreign and transnational regulatory authorities. As applicable, we and our customers may be required to comply with laws and regulations enforced by the FDA and comparable state and foreign agencies. Failure to comply with these laws and regulations can lead to agency action, including warning letters, product recalls, product seizures, monetary sanctions, injunctions to halt manufacturing or distribution, restrictions on our operations, withdrawal of existing or denial of pending approvals, permits or registrations, including those relating to products or facilities, debarment consent decrees and civil and criminal sanctions. To the extent these agencies were to take enforcement action, such action may be publicly available, and such publicity could harm our ability to sell these regulated products globally and may harm our reputation. In addition, such actions could limit the ability of our customers to obtain regulatory clearance or approval for their products in the United States or abroad and/or our customers may incur significant costs in obtaining or maintaining such regulatory clearances or approvals in the United States or abroad. In addition, any such failure relating to the products we provide exposes us to direct and third-party product liability claims as well as contractual claims from our customers, including claims for reimbursement for lost or damaged products, as well as potential recall liability, which costs could be significant. Customers may also claim loss of profits due to lost or delayed sales, although our direct contracts with end customers typically place limits on such claims. There can be no assurance that any such contractual limitation will be applicable or sufficient or fully enforced in any given situation.

Additionally, some of our customers use our products in the manufacturing or testing processes for their drug and medical device products, and such end-products may be regulated by the FDA under pharmaceutical cGMP, for drugs and Quality System Regulations, or “QSR,” for medical devices or by the Centers for Medicare and Medicaid Services, or “CMS,” under the Clinical Laboratory Improvement Amendments, or “CLIA,”

 

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regulations. The customer is ultimately responsible for all compliance requirements relating to the manufacture and sale of their end-products; however, our customers rely on us to provide products in compliance with laws and regulations enforced by the FDA and comparable state and foreign agencies. Should any non-compliance be related to the products we sell, we could lose sales and customers and be exposed to liability claims.

Many of our facilities are either FDA-registered or the international equivalent or cGMP manufacturing sites. As such, these facilities are subject to periodic inspections by the FDA and/or foreign regulatory authorities to determine compliance with applicable regulations. Any failure to comply with these regulations could require us to implement costly remedial measures, institute product recalls, cease manufacturing products or commence manufacturing at an alternative facility, if available, until such issues are remediated. In addition, certain of our facilities are certified to International Organization for Standardization, or “ISO,” or international equivalents, including ISO 13485, ISO 9001, AS9100, ISO 22000 and/or ISO 14001. These standards are voluntary quality management system standards, the maintenance of which indicates to customers certain quality and operational norms. Customers may rely on contractual assurances that we make with respect to ISO certificates to transact business. Failure to comply with these ISO standards can lead to observations of non-compliance or even suspension of ISO or AS certifications or EC Declarations of Conformity Certificates by the registrar. If we were to lose ISO or AS certifications or EC Declarations of Conformity, we could lose sales and customers to competitors or other suppliers. We are also subject to periodic inspections or audits by our customers. If these audits or inspections identify issues or the customer perceives there are issues, the customer may decide to cease purchasing products from us which could adversely affect our business.

If we violate a government-mandated or voluntary quality program, we may incur additional expense to come back into compliance with such government mandated or voluntary standards. That expense may be material and we may not have anticipated that expense in our financial forecasts. Our financial results could suffer as a result of such increased expenses.

We are subject to environmental, health and safety laws and regulations, and costs to comply with such laws and regulations, or any liability or obligation imposed under such laws or regulations, could negatively impact our business, financial condition and results of operations.

We are subject to a broad range of foreign, federal, state and local environmental, health and safety laws and regulations, including those of the U.S. Environmental Protection Agency, or the “EPA,” and the U.S. Occupational Safety & Health Administration, or “OSHA,” and equivalent local, state, and foreign regulatory agencies in each of the jurisdictions in which we operate. These laws and regulations govern, among other things: air emissions; wastewater discharges; the manufacturing, handling, disposal and transport of hazardous materials and solid waste; the manufacturing, processing and selling of chemical substances; the investigation and remediation of soil and groundwater contamination and otherwise relating to health and safety of our employees; and the protection of the environment and natural resources. Further, as our global operations have involved and continue to involve the manufacturing, handling, transport and distribution of materials that are, or could be classified as toxic or hazardous, there is a risk of contamination and environmental damage inherent in our operations and the products we manufacture, handle, transport and distribute. Our environmental, health and safety liabilities and obligations may result in significant capital expenditures and other costs, which could negatively impact our business, financial condition and results of operations. We may be fined or penalized by regulators for failing to comply with environmental, health and safety laws and regulations. For example, the EPA inspected our Phillipsburg, New Jersey facility in March 2017 and June 2017, and in April 2018 notified us of potential liabilities under the Toxic Substances Control Act and the Emergency Planning and Community Right to Know Act, and proposed that we pay civil penalties. See “Business—Legal Proceedings.” In addition, contamination resulting from our current or past operations or from past uses of land that we own or operate may trigger investigation or remediation obligations, which may have an adverse effect on our business, financial condition and results of operations.

We cannot be certain that identification of presently unidentified environmental, health and safety conditions, new regulations, more vigorous enforcement by regulatory authorities or other unanticipated events

 

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will not arise in the future and give rise to additional environmental liabilities, business interruptions, compliance costs or penalties which could have an adverse effect on our business, financial condition and results of operations. In addition, environmental, health and safety laws and regulations are constantly evolving and it is not possible to predict accurately the effect they, or any new regulations or legislation may have in future periods.

We currently incur costs and may incur additional costs related to remediation of alleged environmental damage associated with past or current waste disposal practices or other hazardous materials handling at property that we currently own or operate, or formerly owned or operated, or facilities to which we arranged for the disposal of hazardous substances. Our liabilities arising from past or future releases of, or exposures to, hazardous substances may exceed our estimates or adversely affect our financial statements and reputation and we may be subject to additional claims for cleanup or other environmental claims in the future based on our past, present or future business activities, or that we will be able to recover any costs under any indemnifications that we have. For additional information regarding environmental matters, see Note 13 to the audited financial statements and Note 9 to the unaudited financial statements included elsewhere in this prospectus.

Risks Related to Our Indebtedness

Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt or contractual obligations.

Through our subsidiaries, we have a substantial amount of indebtedness, which requires us to make significant interest and principal payments. As of September 30, 2018, we had indebtedness totaling approximately $7,243.4 million outstanding and an additional $500.0 million of borrowing capacity under the Revolving Facilities (as defined below) (without giving effect to $29.5 million of letters of credit outstanding under the Revolving Facilities as of September 30, 2018). Our high level of debt could have important consequences to us including the following:

 

   

making it more difficult for us to satisfy our debt or contractual obligations;

 

   

exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our Senior Secured Credit Facilities (as defined below), are at variable rates of interest;

 

   

restricting us from making strategic acquisitions or causing us to make non-strategic divestitures;

 

   

requiring us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, which would reduce the funds available for working capital, capital expenditures, investments, acquisitions and other general corporate purposes;

 

   

limiting our flexibility in planning for, or reacting to, changes in our business, future business opportunities and the industry in which we operate;

 

   

placing us at a competitive disadvantage compared to any of our less leveraged competitors;

 

   

increasing our vulnerability to a downturn in our business and both general and industry-specific adverse economic conditions; and

 

   

limiting our ability to obtain additional financing at a favorable cost of borrowing, or at all, or to dispose of assets to raise funds, to fund future working capital, capital expenditures, investments, acquisitions or other general corporate requirements.

Any of the above-listed factors could have an adverse effect on our business, financial condition and results of operations and our ability to meet our payment obligations.

 

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Our debt agreements contain restrictions on our ability to operate our business and to pursue our business strategies, and our failure to comply with, cure breaches of, or obtain waivers for covenants could result in an acceleration of the due date of our indebtedness.

The agreements governing our Senior Secured Credit Facilities, the Notes and the A/R Facility contain and agreements governing future debt issuances may contain covenants that restrict our ability to finance future operations or capital needs, to respond to changing business and economic conditions or to engage in other transactions or business activities that may be important to our growth strategy or otherwise important to us. The agreements governing our existing indebtedness restrict, subject to certain exceptions, among other things, Avantor Funding, Inc.’s ability and the ability of its subsidiaries to:

 

   

incur additional indebtedness and guarantee indebtedness;

 

   

create or incur liens;

 

   

make investments and loans;

 

   

engage in mergers, consolidations or sales of all or substantially all of our assets;

 

   

pay dividends or make other distributions, in respect of, or repurchase or redeem, capital stock;

 

   

prepay, redeem or repurchase certain debt;

 

   

engage in certain transactions with affiliates;

 

   

sell or otherwise dispose of assets;

 

   

sell stock of our subsidiaries;

 

   

enter into agreements restricting our and our subsidiaries ability to pay dividends; and

 

   

amend, modify, waive or supplement certain subordinated indebtedness to the extent such amendments would be materially adverse to lenders.

In addition, any future financing arrangements entered into by us or any of our subsidiaries may contain similar restrictions. As a result of these covenants and restrictions, through our subsidiaries we are and will be limited in how we conduct our business, and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. In addition, Avantor Funding, Inc. is required to maintain specified financial ratios and satisfy other financial condition tests. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.” The terms of any future indebtedness we or our subsidiaries may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants.

Our or our subsidiaries’ failure to comply with the restrictive covenants described above as well as others contained in our or our subsidiaries’ future debt instruments from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their maturity. If we are forced to refinance these borrowings on less favorable terms or cannot refinance these borrowings, our results of operations and financial condition could be adversely affected. If we were unable to repay or otherwise refinance these borrowings, the lenders under our Senior Secured Credit Facilities and/or the collateral agent under our Senior Secured Notes could proceed against the collateral granted to them to secure such indebtedness, which could force us into bankruptcy or liquidation. Any such acceleration may also constitute a termination event under our A/R Facility, which could result in the amount outstanding under that facility becoming due and payable. Any acceleration of amounts due under the Credit Agreement or Secured Indenture (as defined herein), or the exercise by the applicable lenders or agent of their rights under the related security documents, would likely have a material adverse effect on our business.

 

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Despite our current level of indebtedness, we and our subsidiaries will still be able to incur substantially more debt.

We and our subsidiaries may be able to incur significant additional indebtedness in the future. Although the Credit Agreement and the Indentures contain restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of qualifications and exceptions, and the additional indebtedness incurred in compliance with these restrictions could be substantial. If new debt is added to our current debt levels, the related risks that we now face could intensify.

We may be unable to generate sufficient cash flow to satisfy our significant debt service obligations, which could have a material adverse effect on our business, financial condition and results of operations.

Our ability to service our indebtedness and to refinance our indebtedness will depend on our ability to generate cash in the future and is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. If our business does not generate sufficient cash flow from operations, in the amounts projected or at all, or if future borrowings are not available to us in amounts sufficient to fund our other liquidity needs, our business, financial condition and results of operations could be materially adversely affected.

If we cannot generate sufficient cash flow from operations to service our indebtedness in the future, we may need to refinance all or a portion of our indebtedness on or before maturity, sell assets, delay capital expenditures or seek additional equity. The terms of our existing or future debt agreements may also restrict us from effecting any of these alternatives. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. Further, changes in the credit and capital markets, including market disruptions and interest rate fluctuations, may increase the cost of financing, make it more difficult to obtain favorable terms, or restrict our access to these sources of future liquidity. In addition, any failure to make required payments on our outstanding indebtedness would likely result in a reduction of our credit rating, which could harm our ability to incur additional indebtedness on commercially reasonable terms or at all. Our inability to generate sufficient cash flow to satisfy our debt service obligations, or to refinance or restructure our obligations on commercially reasonable terms or at all, could have a material adverse effect on our business, financial condition and results of operations, as well as on our ability to satisfy our obligations in respect of our indebtedness.

An increase in interest rates may negatively impact our operating results and financial condition.

Certain of our borrowings, including borrowings under our Senior Secured Credit Facilities and our A/R Facility, to the extent the interest rate is not fixed, are at variable rates of interest. An increase in interest rates would have a negative impact on our results of operations by causing an increase in interest expense.

Our total interest expense, net, was $388.7 million for the nine months ended September 30, 2018 and $257.3 million for the year ended December 31, 2017.

Our ability to repay our indebtedness is affected by the cash flow generated by our subsidiaries.

Our subsidiaries own substantially all of our assets and conduct substantially all of our operations. Accordingly, repayment of our indebtedness will be dependent on the generation of cash flow by our subsidiaries and their ability to make such cash available to us, by dividend, debt repayment or otherwise. Our subsidiaries may not be able to, or may not be permitted to, make distributions to enable us or Avantor Funding, Inc. to make payments in respect of our indebtedness. Each subsidiary is a distinct legal entity and, under certain circumstances, legal and contractual restrictions may limit our ability to obtain cash from our subsidiaries. While the Credit Agreement and the Indentures limit the ability of our subsidiaries to incur consensual restrictions on their ability to pay dividends or make other intercompany payments to us, these limitations are subject to certain qualifications and exceptions.

 

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Risks Related to this Offering and Ownership of Our Common Stock

No market currently exists for our common stock, and an active, liquid trading market for our common stock may not develop, which may cause shares of our common stock to trade at a discount from the initial offering price and make it difficult to sell the shares of common stock you purchase.

Prior to this offering, there has not been a public trading market for shares of our common stock. We cannot predict the extent to which investor interest in us will lead to the development of a trading market or how active and liquid that market may become. If an active and liquid trading market does not develop or continue, you may have difficulty selling your shares of our common stock at an attractive price or at all. The initial public offering price per share of common stock will be determined by negotiations between us and the underwriters, and may not be indicative of the price at which shares of our common stock will trade in the public market after this offering. The market price of our common stock may decline below the initial offering price and you may not be able to sell your shares of our common stock at or above the price you paid in this offering, or at all.

You will incur immediate and substantial dilution.

Prior stockholders have paid substantially less per share of our common stock than the price in this offering. The initial public offering price per share of our common stock will be substantially higher than the net tangible book deficit per share of outstanding common stock prior to completion of this offering. Based on our net tangible book deficit for the nine months ended September 30, 2018, and upon the issuance and sale of              shares of our common stock by us at an initial public offering price of $             per share (which is the midpoint of the estimated offering price range shown on the cover page of this prospectus), if you purchase our common stock in this offering, you will pay more for your shares than the amounts paid by our existing stockholders for their shares and you will suffer immediate dilution of approximately $             per share (including giving effect to the conversion of our Existing Junior Convertible Preferred Stock at the midpoint of the estimated range shown on the cover of this prospectus). Dilution is the amount by which the offering price paid by purchasers of our common stock in this offering will exceed the as adjusted net tangible book value (deficit) per share of our common stock upon completion of this offering. If the underwriters exercise their option to purchase additional shares, or if outstanding options to purchase our common stock are exercised, you will experience additional dilution. You may experience additional dilution if the 30-day VWAP used to calculate the conversion of the Existing Junior Convertible Preferred Stock is less than $                , in which case Conversion Adjustment Shares would be issued to holders of the Existing Junior Convertible Preferred Stock upon conversion of such shares. You may also experience additional dilution upon future equity issuances or upon the exercise of our outstanding warrants held by holders of our Existing Senior Preferred Stock, exercise of options to purchase our common stock or the settlement of restricted stock units granted to our employees, executive officers and directors under the Legacy Avantor Plan, the Vail Plan and the 2019 Equity Incentive Plan. See “Dilution.”

Our stock price may change significantly following this offering, and you may not be able to resell shares of our common stock at or above the price you paid or at all, and you could lose all or part of your investment as a result.

We and the underwriters will negotiate to determine the initial public offering price. You may not be able to resell your shares at or above the initial public offering price due to a number of factors such as those listed in “—Risks Related to Our Business” and the following:

 

   

results of operations that vary from the expectations of securities analysts and investors;

 

   

results of operations that vary from those of our competitors;

 

   

changes in expectations as to our future financial performance, including financial estimates and investment recommendations by securities analysts and investors;

 

   

changes in economic conditions for companies in our industry;

 

   

changes in market valuations of, or earnings and other announcements by, companies in our industry;

 

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declines in the market prices of stocks generally, particularly those of companies in our industry;

 

   

additions or departures of key management personnel;

 

   

strategic actions by us or our competitors;

 

   

announcements by us, our competitors or our suppliers of significant contracts, price reductions, new products or technologies, acquisitions, joint marketing relationships, joint ventures, other strategic relationships or capital commitments;

 

   

dilution as a result of the conversion of our Existing Junior Convertible Preferred Stock;

 

   

changes in preference of our customers;

 

   

changes in general economic or market conditions or trends in our industry or the economy as a whole;

 

   

changes in business or regulatory conditions;

 

   

future sales of our common stock or other securities;

 

   

investor perceptions of or the investment opportunity associated with our common stock relative to other investment alternatives;

 

   

the public’s response to press releases or other public announcements by us or third parties, including our filings with the SEC;

 

   

announcements relating to litigation or governmental investigations;

 

   

guidance, if any, that we provide to the public, any changes in this guidance or our failure to meet this guidance;

 

   

the development and sustainability of an active trading market for our stock;

 

   

changes in accounting principles; and

 

   

other events or factors, including those resulting from informational technology system failures and disruptions, natural disasters, war, acts of terrorism or responses to these events.

Furthermore, the stock market may experience extreme volatility that, in some cases, may be unrelated or disproportionate to the operating performance of particular companies. These broad market and industry fluctuations may adversely affect the market price of our common stock, regardless of our actual operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock is low.

In the past, following periods of market volatility, stockholders have instituted securities class action litigation. If we were to become involved in securities litigation, it could have a substantial cost and divert resources and the attention of executive management from our business regardless of the outcome of such litigation.

Because we have no current plans to pay cash dividends on our common stock, you may not receive any return on investment unless you sell your common stock for a price greater than that which you paid for it.

We have no current plans to pay cash dividends on our common stock. The declaration, amount and payment of any future dividends on our common stock will be at the sole discretion of our Board of Directors. Our Board of Directors may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, including restrictions under our credit agreements and other indebtedness we may incur, and such other factors as our Board of Directors may deem relevant. See “Dividend Policy.”

 

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As a result, you may not receive any return on an investment in our common stock unless you sell our common stock for a price greater than your purchase price.

We are a holding company with no operations of our own and, as such, we depend on our subsidiaries for cash to fund all of our operations and expenses, including future dividend payments, if any.

Our operations are conducted entirely through our subsidiaries and our ability to generate cash to meet our debt service obligations or to make future dividend payments, if any, is highly dependent on the earnings and the receipt of funds from our subsidiaries via dividends or intercompany loans. We do not currently expect to declare or pay dividends on our common stock for the foreseeable future; however, to the extent that we determine in the future to pay dividends on our common stock, the agreements governing our indebtedness restrict the ability of our subsidiaries to pay dividends or otherwise transfer assets to us. See Notes 14 and 26 to the audited financial statements included elsewhere in this prospectus.

If securities analysts do not publish research or reports about our business or if they downgrade our stock or our sector, our stock price and trading volume could decline.

The trading market for our common stock will rely in part on the research and reports that industry or financial analysts publish about us or our business. We do not control these analysts. Furthermore, if one or more of the analysts who do cover us downgrade our stock or our industry, or the stock of any of our competitors, or publish inaccurate or unfavorable research about our business, the price of our stock could decline. If one or more of these analysts stop covering us or fail to publish reports on us regularly, we could lose visibility in the market, which in turn could cause our stock price or trading volume to decline.

We will incur significantly increased costs and become subject to additional regulations and requirements as a result of becoming a public company, and our management will be required to devote substantial time to new compliance matters, which could lower our profits or make it more difficult to run our business.

As a public company, we will incur significant legal, regulatory, finance, accounting, investor relations and other expenses that we have not incurred as a private company, including costs associated with public company reporting requirements. As a result of having publicly traded common stock, we will also be required to comply with, and incur costs associated with such compliance with, the Sarbanes-Oxley Act of 2002, or the Sarbanes-Oxley Act, and the Dodd-Frank Wall Street Reform and Consumer Protection Act, or the Dodd-Frank Act, as well as rules and regulations implemented by the SEC and the exchange on which we list our shares. The expenses incurred by public companies generally for reporting and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly. Our management will need to devote a substantial amount of time to ensure that we comply with all of these requirements, diverting the attention of management away from revenue-producing activities. These laws and regulations also could make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our Board of Directors, our board committees or as our executive officers. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.

Failure to comply with requirements to design, implement and maintain effective internal control over financial reporting could have a material adverse effect on our business and stock price. We have identified a material weakness and significant deficiencies in our internal control over financial reporting.

As a privately-held company, we were not required to evaluate our internal control over financial reporting in a manner that meets the standards of publicly traded companies required by Section 404(a) of the Sarbanes-Oxley Act, or “Section 404.”

 

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As a public company, we will have significant requirements for enhanced financial reporting and internal controls. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. If we are unable to establish or maintain appropriate internal financial reporting controls and procedures, it could cause us to fail to meet our reporting obligations on a timely basis, result in material misstatements in our consolidated financial statements and harm our results of operations. In addition, we will be required, pursuant to Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting in the second annual report following the completion of this offering. This assessment will need to include disclosure of any material weaknesses identified by our management in our internal control over financial reporting. The rules governing the standards that must be met for our management to assess our internal control over financial reporting are complex and require significant documentation, testing and possible remediation. Testing and maintaining internal controls may divert our management’s attention from other matters that are important to our business. In addition, our independent registered public accounting firm will be required to issue an attestation report on the effectiveness of our internal control over financial reporting in the second annual report following the completion of this offering.

In connection with the implementation of the necessary procedures and practices related to internal control over financial reporting, we may identify deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, we may encounter problems or delays in completing the remediation of any deficiencies identified by our independent registered public accounting firm in connection with the issuance of their attestation report.

For the year ended December 31, 2016, we identified a material weakness in our internal control over financial reporting relating to processes and controls over properly accounting for transactions of a complex or non-routine nature. The material weakness was identified as the primary cause of errors relating to the accounting for deferred income taxes and proper allocation of attributes of certain subsidiaries between us and noncontrolling interests recorded in connection with the NuSil merger and the internal reorganization effected in anticipation of the NuSil merger. This weakness resulted in a misstatement of our previously issued September 30, 2016 financial statements. For the year ended December 31, 2017, we identified three additional significant deficiencies in our internal control over financial reporting. Although we took measures to remediate these issues in 2017 and 2018 and believe the material weakness was remedied as of December 31, 2017, these measures may not be sufficient to avoid similar weaknesses or deficiencies in the future.

Our testing, or the subsequent testing by our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses which could result in a material misstatement of our annual or quarterly consolidated financial statements or disclosures that may not be prevented or detected.

We may not be able to conclude on an ongoing basis that we have effective internal control over financial reporting in accordance with Section 404 or our independent registered public accounting firm may not issue an unqualified opinion. If either we are unable to conclude that we have effective internal control over financial reporting or our independent registered public accounting firm is unable to provide us with an unqualified opinion, investors could lose confidence in our reported financial information, which could have a material adverse effect on the trading price of our common stock.

Future sales, or the perception of future sales, by us or our existing stockholders in the public market following this offering could cause the market price for our common stock to decline.

After this offering, the sale of shares of our common stock in the public market, or the perception that such sales could occur, including sales by our existing stockholders and holders of our Existing Junior Convertible Preferred Stock, could harm the prevailing market price of shares of our common stock. These sales, or the

 

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possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

Upon completion of this offering, we will have a total of                 shares of our common stock outstanding (                 shares if the underwriters exercise in full their option to purchase additional shares). Upon the conversion of our Existing Junior Convertible Preferred Stock 90 days after the closing of this offering, we will have an additional                 shares of our common stock outstanding. The number of shares of common stock issuable upon the conversion of our Existing Junior Convertible Preferred Stock could increase depending on the 30-day VWAP. See “Description Of Capital Stock—Preferred Stock—Existing Junior Convertible Preferred Stock.” Of the outstanding shares, the                 shares sold in this offering (or                  shares if the underwriters exercise in full their option to purchase additional shares) will be freely tradable without restriction or further registration under the Securities Act, except that any shares held by our affiliates, as that term is defined under Rule 144 of the Securities Act, or Rule 144, including our directors, executive officers and other affiliates (including affiliates of New Mountain Capital and affiliates of Goldman Sachs & Co. LLC (“Goldman Sachs”)), may be sold only in compliance with the limitations described in “Shares Eligible for Future Sale.”

The                  shares of common stock held by affiliates of New Mountain Capital, affiliates of Goldman Sachs and certain of our directors and executive officers after this offering and the conversion of our Existing Junior Convertible Preferred Stock, representing         % of the total outstanding shares of our common stock following this offering, will be “restricted securities” within the meaning of Rule 144 and subject to certain restrictions on resale. Restricted securities may be sold in the public market only if they are registered under the Securities Act or are sold pursuant to an exemption from registration such as Rule 144, as described in “Shares Eligible for Future Sale.”

In connection with this offering, we, our directors and executive officers and certain holders of our outstanding common stock prior to this offering will sign lock-up agreements with the underwriters that will, subject to certain exceptions, restrict the disposition of, or hedging with respect to, the shares of our common stock or securities convertible into or exchangeable for shares of common stock, each held by them for 180 days following the date of this prospectus, except with the prior written consent of                 . See “Underwriting (Conflicts of Interest)” for a description of these lock-up agreements.                 , on behalf of the underwriters, may, in their sole discretion, release all or some portion of the shares subject to the 180 day lock-up agreements prior to the expiration of such period.

Upon the expiration of the lock-up agreements described above, all of such                 shares will be eligible for resale in a public market, subject, in the case of                 shares held by our affiliates, to volume, manner of sale and other limitations under Rule 144. We expect that affiliates of New Mountain Capital and affiliates of Goldman Sachs may be considered affiliates based on their respective expected share ownership (consisting of approximately                 shares and                 shares, respectively, including shares issuable upon conversion of the Existing Junior Convertible Preferred Stock, but not any Conversion Adjustment Shares), as well as their board nomination rights. Certain other of our stockholders may also be considered affiliates at that time.

In addition, pursuant to a registration rights agreement, New Mountain Capital, affiliates of Goldman Sachs and certain other stockholders have the right, subject to certain conditions, to require us to register the sale of their shares of our common stock under the Securities Act. See “Certain Relationships and Related Party Transactions—Registration Rights Agreement.” By exercising its registration rights and selling a large number of shares, New Mountain Capital and these affiliates of Goldman Sachs could cause the prevailing market price of our common stock to decline. Certain of our other stockholders have “piggyback” registration rights with respect to future registered offerings of our common stock. Following completion of this offering, the shares covered by registration rights would represent approximately         % of our total common stock outstanding (or         % if the underwriters exercise in full their option to purchase additional shares). Registration of any of these outstanding shares of common stock would result in such shares becoming freely tradable without compliance with Rule 144 upon effectiveness of the registration statement. See “Shares Eligible for Future Sale.”

 

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As soon as practicable following this offering, we intend to file one or more registration statements on Form S-8 under the Securities Act to register all shares of our common stock subject to outstanding stock options and the shares of our common stock subject to issuance under the Legacy Avantor Plan, the Vail Plan and our 2019 Equity Incentive Plan to be adopted in connection with this offering. Any such Form S-8 registration statements will automatically become effective upon filing. Accordingly, shares registered under such registration statements will be available for sale in the open market, subject to limitations in the stockholders agreement. See “Certain Relationships and Related Party Transactions—Stockholders Agreement.” We expect that the initial registration statement on Form S-8 will cover                 shares of our common stock.

As restrictions on resale end, or if the existing stockholders exercise their registration rights, the market price of our shares of common stock could drop significantly if the holders of these shares sell them or are perceived by the market as intending to sell them. These factors could also make it more difficult for us to raise additional funds through future offerings of our shares of common stock or other securities.

In the future, we may also issue our securities in connection with investments or acquisitions. The amount of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock. Any issuance of additional securities in connection with investments or acquisitions may result in additional dilution to you.

Risk of Concentration of Shareholder Control

Certain of our shareholders, including affiliates of New Mountain Capital and affiliates of Goldman Sachs have significant influence over us as a result of their share ownership. This concentration could lead to conflicts of interest and difficulties for non-insider investors effecting corporate changes, and could adversely affect our Company’s share price. Our two largest shareholders (and their affiliates), acting together, will hold approximately     % of our issued and outstanding shares upon the completion of this offering (giving effect to the conversion of our Existing Junior Convertible Preferred Stock, but not any Conversion Adjustment Shares) and have the ability to influence all matters submitted to our shareholders for approval (including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets). Accordingly, this concentration of ownership may have the effect of delaying, deferring or preventing a change in control of our Company, impeding a merger, consolidation, takeover or other business combination involving us or discouraging a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could have a material adverse effect on the market price of our shares. The issuance of stock options and warrants could lead to greater concentration of share ownership among insiders and could lead to dilution of share ownership which could lead to depressed share prices. In addition, New Mountain Capital and shareholders affiliated with Goldman Sachs may have different interests than investors in this offering.

Anti-takeover provisions in our organizational documents could delay or prevent a change of control.

Certain provisions of our amended and restated certificate of incorporation and amended and restated bylaws may have an anti-takeover effect and may delay, defer or prevent a merger, acquisition, tender offer, takeover attempt, or other change of control transaction that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders.

These provisions will provide for, among other things:

 

   

a classified board of directors, as a result of which our Board of Directors will be divided into three classes, with each class serving for staggered three-year terms;

 

   

the ability of our Board of Directors to issue one or more series of preferred stock;

 

   

advance notice requirements for nominations of directors by stockholders and for stockholders to include matters to be considered at our annual meetings;

 

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certain limitations on convening special stockholder meetings;

 

   

the removal of directors only for cause and only upon the affirmative vote of the holders of at least 6623% of the shares of common stock entitled to vote generally in the election of directors if New Mountain Capital and their affiliates cease to beneficially own at least     % of shares of common stock entitled to vote generally in the election of directors; and

 

   

that certain provisions may be amended only by the affirmative vote of at least 6623% of shares of common stock entitled to vote generally in the election of directors if New Mountain Capital and their affiliates cease to beneficially own at least     % of shares of common stock entitled to vote generally in the election of directors.

These anti-takeover provisions could make it more difficult for a third party to acquire us, even if the third party’s offer may be considered beneficial by many of our stockholders. As a result, our stockholders may be limited in their ability to obtain a premium for their shares. See “Description of Capital Stock.”

Our Board of Directors will be authorized to issue and designate shares of our preferred stock in additional series without stockholder approval.

Our amended and restated certificate of incorporation will authorize our Board of Directors, without the approval of our stockholders, to issue                 shares of our preferred stock, subject to limitations prescribed by applicable law, rules and regulations and the provisions of our amended and restated certificate of incorporation, as shares of preferred stock in series, to establish from time to time the number of shares to be included in each such series and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The powers, preferences and rights of these additional series of preferred stock may be senior to or on parity with our common stock, which may reduce its value.

Our amended and restated certificate of incorporation will provide, subject to limited exceptions, that the Court of Chancery of the State of Delaware will be the sole and exclusive forum for certain stockholder litigation matters, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers, employees or stockholders.

Our amended and restated certificate of incorporation will provide, subject to limited exceptions, that unless we consent to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for any (i) derivative action or proceeding brought on behalf of our company, (ii) action asserting a claim of breach of a fiduciary duty owed by any director, officer, or other employee or stockholder of our company to us or our stockholders, creditors or other constituents, (iii) action asserting a claim against us or any of our directors or officers arising pursuant to any provision of the Delaware General Corporation Law, or the DGCL, or our amended and restated certificate of incorporation or our amended and restated bylaws or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware, or (iv) action asserting a claim against us or any director or officer of the Company governed by the internal affairs doctrine.

Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and consented to the forum provisions in our amended and restated certificate of incorporation. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or any of our directors, officers, other employees or stockholders which may discourage lawsuits with respect to such claims. Alternatively, if a court were to find the choice of forum provision contained in our amended and restated certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could harm our business, operating results and financial condition.

 

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Affiliates of Goldman Sachs & Co. LLC, an underwriter in this offering, will have an interest in this offering beyond customary underwriting discounts and commissions.

Certain affiliates of Goldman Sachs & Co. LLC, an underwriter in this offering, (i) will receive more than 5% of the net proceeds of this offering due to the redemption of outstanding shares of our Existing Senior Preferred Stock with the net proceeds of this offering, (ii) own greater than 10% of our outstanding preferred stock and (iii) currently have two director appointees on our Board and, following this offering will have the right to continue to appoint one director to our board pursuant to rights under the Stockholders Agreement, as well as other rights. See “Certain Relationships and Related Party Transactions.” As such, Goldman Sachs & Co. LLC is deemed to have a “conflict of interest” under Rule 5121 of the Financial Industry Regulatory Authority Inc., or Rule 5121. Accordingly, this offering will be made in compliance with the applicable provisions of Rule 5121. This rule requires, among other things, that a “qualified independent underwriter” has participated in the preparation of, and has exercised the usual standards of “due diligence” with respect to, the registration statement, J.P. Morgan Securities LLC, or JP Morgan, has agreed to act as qualified independent underwriter for this offering and to undertake the legal responsibilities and liabilities of an underwriter under the Securities Act. J.P. Morgan Securities LLC will not receive any additional fees for serving as qualified independent underwriter in connection with this offering. Although JP Morgan has, in its capacity as qualified independent underwriter, participated in due diligence and the preparation of this prospectus and the registration statement of which this prospectus forms a part, this may not adequately address all potential conflicts of interest. We have agreed to indemnify JP Morgan against liabilities incurred in connection with acting as qualified independent underwriter, including liabilities under the Securities Act. Pursuant to FINRA Rule 5121, Goldman Sachs & Co. LLC will not confirm sales of securities to any account over which it exercises discretionary authority without the prior written approval of the customer. See “Underwriting (Conflicts of Interest)” for additional information.

 

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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains certain forward-looking statements and information relating to us that are based on the beliefs of our management as well as assumptions made by, and information currently available to, us. These statements include, but are not limited to, statements about our strategies, plans, objectives, expectations, intentions, expenditures and assumptions and other statements contained in or incorporated by reference in this prospectus that are not historical facts. When used in this document, words such as “may,” “will,” “should,” “intend,” “potential,” “continue,” “anticipate,” “believe,” “estimate,” “expect,” “plan” and “project” and similar expressions as they relate to us are intended to identify forward-looking statements. These statements reflect our current views with respect to future events, are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. Further, certain forward-looking statements are based upon assumptions as to future events that may not prove to be accurate.

The forward-looking statements in this prospectus are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our business, financial condition and results of operations. Moreover, neither we nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements, including such statements taken from third-party industry and market reports. See “Market and Industry Data.” You should understand that the following important factors, in addition to those discussed herein under the caption “Risk Factors,” 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 impacts from conditions affecting 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, including NuSil, and VWR;

 

   

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;

 

   

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;

 

   

the fact that we are subject to product liability and other claims in the ordinary course of business;

 

   

our ability to develop new products responsive to the markets we serve;

 

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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 substantial 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.

These forward-looking statements involve known and unknown risks, inherent uncertainties and other factors, which may cause our actual results, performance, time frames or achievements to be materially different from any future results, performance, time frames or achievements expressed or implied by the forward-looking statements. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. Actual results and the timing of certain events may differ materially from those contained in these forward-looking statements.

Many of these factors are macroeconomic in nature and are, therefore, beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, our actual results, performance or achievements may vary materially from those described in this prospectus as anticipated, believed, estimated, expected, intended, planned or projected. We discuss many of these risks in greater detail under the heading “Risk Factors.” Unless required by United States federal securities laws, we neither intend nor assume any obligation to update these forward-looking statements, which speak only as of their dates.

 

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USE OF PROCEEDS

We estimate that the net proceeds to us from this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us, will be approximately $            million (or approximately $            million if the underwriters exercise in full their option to purchase additional shares of common stock), assuming an initial public offering price of $            per share (which is the midpoint of the estimated offering price range shown on the cover page of this prospectus).

We intend to use the net proceeds to us from this offering to redeem outstanding shares of our Existing Senior Preferred Stock, with any remaining proceeds used for general corporate purposes.

A $1.00 increase (decrease) in the assumed initial public offering price of $            per share, based on the mid-point of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) the net proceeds to us from this offering by approximately $            million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. An increase (decrease) of 1,000,000 shares from the expected number of shares to be sold by us in this offering, assuming no change in the assumed initial public offering price per share, the mid-point of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease) our net proceeds from this offering by $             million. To the extent we raise more proceeds in this offering than currently estimated, we will redeem additional amounts of our Existing Senior Preferred Stock. To the extent we raise less proceeds in this offering than currently estimated, we will reduce the amount of our Existing Senior Preferred Stock that will be redeemed with the net proceeds from this offering.

Certain affiliates of Goldman Sachs & Co. LLC, an underwriter in this offering, will receive at least 5% of the net proceeds in this offering as a result of their holding a substantial portion of our Existing Senior Preferred Stock.

 

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DIVIDEND POLICY

We do not currently anticipate paying any dividends on our common stock immediately following this offering and currently expect to retain all future earnings for use in the operation and expansion of our business. Following this offering and upon repayment of certain outstanding indebtedness, we may reevaluate our dividend policy. The declaration, amount and payment of any future dividends on our common stock will be at the sole discretion of our Board of Directors, which may take into account general and economic conditions, our financial condition and results of operations, our available cash and current and anticipated cash needs, capital requirements, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by us to our stockholders or by our subsidiaries to us, including restrictions under our credit agreements and other indebtedness we may incur, and such other factors as our Board of Directors may deem relevant. If we elect to pay such dividends in the future, we may reduce or discontinue entirely the payment of such dividends at any time.

Because a significant portion of our operations is through our subsidiaries, our ability to pay dividends depends in part on our receipt of cash dividends from our operating subsidiaries, which may further restrict our ability to pay dividends as a result of the laws of their jurisdiction of organization, agreements of our subsidiaries or covenants under any existing and future outstanding indebtedness we or our subsidiaries incur. In addition, Avantor Funding’s ability to pay dividends to us is limited by covenants in its outstanding indebtedness. See “Description of Indebtedness” for a description of the restrictions on Avantor Funding’s ability to pay dividends to us.

 

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CAPITALIZATION

The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2018:

 

   

on an actual basis;

 

   

as adjusted to give effect to the following transactions related to the offering:

 

   

the sale of                shares of our common stock in this offering at the assumed initial offering price of $                per share (the midpoint of the estimated offering price range on the cover page of this prospectus), after deducting underwriting discounts, commissions and estimated offering expenses; and

 

   

the application of the net proceeds as described in “Use of Proceeds”; and

 

   

as further adjusted to give effect to the full conversion of the Existing Junior Convertible Preferred Stock at the midpoint of the estimated offering price range shown on the cover page of this prospectus, which will occur automatically 90 days after completion of this offering.

You should read the information in this table in conjunction with our financial statements and the notes to those statements appearing in this prospectus, as well as the information under the headings “Use of Proceeds,” “Selected Condensed Historical Financial Data” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

     As of September 30, 2018  
(in millions, except for share amounts)    Actual     As
Adjusted
     As Further
Adjusted
 

Cash and cash equivalents(1)

   $ 171.8     $                    $                
  

 

 

   

 

 

    

 

 

 

Debt:

       

Total debt, gross

   $ 7,243.4     $        $    

Less: unamortized deferred financing fees

     (248.3     
  

 

 

   

 

 

    

 

 

 

Total debt

     6,995.1       
  

 

 

   

 

 

    

 

 

 

Redeemable equity:

       

Existing Senior Preferred Stock at redemption value: par value $0.01 per share; 25,000,000 shares authorized; 2.2 million shares issued and outstanding, actual;              shares issued and outstanding, as adjusted; and              shares issued and outstanding, as further adjusted

   $ 2,226.2     $        $    

Existing Junior Preferred Stock, including paid-in capital: par value $0.01 per share; 5,000,000 shares authorized; 1.7 million shares issued and outstanding, actual;              shares issued and outstanding, as adjusted;              shares issued and outstanding, as further adjusted

     1,562.0       
  

 

 

   

 

 

    

 

 

 

Total redeemable equity

     3,788.2       
  

 

 

   

 

 

    

 

 

 

Total equity:

       

Common stock, including paid-in capital: par value $0.01 per share; 535,000,000 shares authorized; 26.5 million shares issued and outstanding, actual;             shares issued and outstanding, as adjusted;              shares issued and outstanding, as further adjusted(1)(2)

   $ (2,678.4   $        $    

Accumulated deficit

     (185.1     

Accumulated other comprehensive loss

     (33.1     
  

 

 

   

 

 

    

 

 

 

Total stockholders’ deficit(1)

     (2,896.6     
  

 

 

   

 

 

    

 

 

 

Total capitalization(1)

   $ 7,886.7     $        $    
  

 

 

   

 

 

    

 

 

 

 

 

(1)

Each $1.00 increase (decrease) in the assumed initial public offering price of $             per share, based on the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would

 

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  increase (decrease), as applicable, cash and cash equivalents, additional paid-in-capital, total deficit and total capitalization by approximately $             million, assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us. We may also increase or decrease the number of shares we are offering. An increase (decrease) of 1,000,000 shares offered by us from the expected number of shares to be sold by us in this offering, assuming no change in the assumed initial public offering price per share, the midpoint of the estimated offering price range set forth on the cover page of this prospectus, would increase (decrease), as applicable, cash and cash equivalents, additional paid-in capital, total deficit and total capitalization by approximately $             million, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us.
(2)

Does not reflect the issuance of any additional shares upon the conversion of our Existing Junior Convertible Preferred Stock in the event the 30-day VWAP is less than $             as of the conversion date.

 

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DILUTION

If you invest in our common stock in this offering, your ownership interest in us will be diluted to the extent of the difference between the initial public offering price per share of our common stock and the as adjusted net tangible book value (deficit) per share of our common stock after this offering. Dilution results from the fact that the per share offering price of the common stock is substantially in excess of the book value per share attributable to the shares of common stock held by existing stockholders.

Our net tangible book value as of September 30, 2018 was approximately $                 million, or $             per share of our common stock. We calculate net tangible book value per share by taking the amount of our total tangible assets, reduced by the amount of our total liabilities, and then dividing that amount by the total number of shares of common stock outstanding.

After giving effect to (i) the sale of                shares of our common stock in this offering at an initial public offering price of $                per share (the midpoint of the estimated offering price range shown on the cover of this prospectus), after deducting the underwriting discounts and commissions and estimated offering expenses payable by us, (ii) the application of the net proceeds from this offering as set forth under “Use of Proceeds,” and (iii) the full conversion of the Existing Junior Convertible Preferred Stock at the midpoint of the price range shown on the cover page of this prospectus our as adjusted net tangible book value as of September 30, 2018 would have been $                million, or $                per share of our common stock. This amount represents an immediate increase in net tangible book value (or a decrease in net tangible book value) of $                per share to existing stockholders and an immediate and substantial dilution in net tangible book value (deficit) of $                per share to investors purchasing shares in this offering at the initial public offering price.

The following table illustrates this dilution on a per share basis:

 

Initial public offering price per share of common stock (the midpoint of the estimated offering price range shown on the cover page of this prospectus)

      $                

Net tangible book value per share as of September 30, 2018

   $                   

Increase in tangible book value per share attributable to investors in this offering

   $       

As adjusted net tangible book value (deficit) per share after this offering

     

Dilution per share to investors in this offering

      $    

Dilution is determined by subtracting as adjusted net tangible book value (deficit) per share of common stock after the offering from the initial public offering price per share of common stock.

If the underwriters exercise in full their option to purchase additional shares, the as adjusted net tangible book value (deficit) per share after giving effect to the offering, the use of proceeds therefrom and the full conversion of the Existing Junior Convertible Preferred Stock would be $                per share. This represents an increase in as adjusted net tangible book value (or a decrease in as adjusted net tangible book value) of $                per share to existing stockholders and results in dilution in as adjusted net tangible book value (deficit) of $                per share to investors purchasing shares in this offering at the initial public offering price.

 

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The following table summarizes, as of September 30, 2018, the differences between the number of shares purchased from us, the total consideration paid to us, and the average price per share paid by existing stockholders (including, upon full conversion of the Existing Junior Convertible Preferred Stock) and by new investors. As the table shows, new investors purchasing shares in this offering will pay an average price per share substantially higher than our existing stockholders paid. The table below is based on an initial public offering price of $            per share for shares purchased in this offering and excludes underwriting discounts and commissions and estimated offering expenses payable by us:

 

     Shares Purchased     Total Consideration     Avg/Share  
         Number              %               Amount            %  
($ in millions, except per share amounts)                                 

Existing stockholders(1)

                                        $                                 $                

Investors in this offering

                                   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

               $                 $    
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

(1)

Shares purchased by existing stockholders is determined as follows:

 

Shares of common stock issuable upon conversion of Existing Junior Convertible Preferred Stock

                      

Common shares issued and outstanding

 

Less: Common treasury shares

          

Total common shares purchased by existing stockholders

 
 

Because the number of shares of common stock into which the Existing Junior Convertible Preferred Stock will be converted into is determined by reference to the 30-day VWAP, a change in the VWAP would have a corresponding impact on the number of shares purchased by existing stockholders. The number of shares purchased by existing stockholders would have been the following as of September 30, 2018 assuming the 30-day VWAP for our common stock shown below:

 

     $     $     $     $     $  

Shares purchased by existing stockholders

          

Percent of total shares purchased by existing stockholders

                                                                 

If the underwriters were to fully exercise their option to purchase                additional shares of our common stock, the percentage of shares of our common stock held by existing stockholders as of September 30, 2018 would be    % and the percentage of shares of our common stock held by new investors would be    %.

To the extent that outstanding options or warrants are exercised or outstanding restricted stock units settle or we grant options, restricted stock, restricted stock units or other equity-based awards to our employees, executive officers and directors in the future, or other issuances of common stock are made, there will be further dilution to new investors.

 

 

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SELECTED CONDENSED HISTORICAL FINANCIAL DATA

The following table sets forth our selected historical consolidated financial data as of the dates and for the periods indicated. The selected historical consolidated financial data as of and for the years ended December 31, 2013 and 2014 is derived from our unaudited consolidated financial statements and the related notes thereto not included in this prospectus. The selected historical consolidated financial data as of December 31, 2016 and 2017 and for the years ended December 31, 2015, 2016 and 2017 is derived from our audited consolidated financial statements and related notes thereto included elsewhere in this prospectus. The selected historical consolidated balance sheet data as of December 31, 2015 is derived from our audited consolidated financial statements and related notes thereto not included in this prospectus. The selected condensed consolidated historical financial data as of September 30, 2018 and for the nine months ended September 30, 2017 and 2018 is derived from our unaudited condensed consolidated financial statements and related notes thereto included elsewhere in this prospectus. The unaudited condensed consolidated financial statements have been prepared on the same basis as our audited consolidated financial statements and, in the opinion of our management, reflect all normal recurring adjustments necessary for the fair statement of our consolidated results for these periods. The results for any interim period are not necessarily indicative of the results that may be expected for the full year. Additionally, our historical results are not necessarily indicative of the results expected for any future period.

In accordance with GAAP, we have included the financial results of VWR since the VWR Acquisition on November 21, 2017. In addition, on September 30, 2016, we merged with NuSil. Since both NuSil and our predecessor were controlled by New Mountain Capital, our historical financial statements have been combined with NuSil’s into a single comparative presentation for all periods presented. For more information about this basis of presentation, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 1 to the audited annual financial statements included elsewhere in this prospectus.

You should read the information contained in this table in conjunction with “Summary—Summary Historical Financial and Other Data,” “Capitalization,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements and the accompanying notes and our unaudited consolidated financial statements and the accompanying notes included in this prospectus.

 

    Year ended December 31,     Nine months ended
September 30,
 
(in millions except per share data)   2013     2014     2015     2016     2017     2017     2018  

Statement of operations data

             

Net sales

  $ 563.5     $ 587.2     $ 636.9     $ 691.3     $ 1,247.4     $ 517.7     $ 4,390.4  

Net income (loss)

    1.1       5.7       12.7       (80.7     (145.3     (19.9     (33.6

Earnings (loss) per share:

             

Basic

  $ 0.04     $ 0.19     $ 0.71     $ (1.39   $ (13.73   $ (0.24   $ (8.75

Diluted

  $ 0.03     $ 0.17     $ 0.64     $ (1.39   $ (13.73   $ (0.24   $ (8.75

Weighted average shares outstanding:

             

Basic

    30.5       30.5       30.5       30.5       30.2       30.7       26.5  

Diluted

    33.5       33.5       33.5       30.5       30.2       30.7       26.5  

Pro forma loss per share (unaudited)

             

Basic

             

Diluted

             

Balance sheet data (as of period end)

             

Total assets

  $ 942.7     $ 1,156.4     $ 1,150.4     $ 1,135.8     $ 10,446.5       $ 10,118.3  

Total long-term liabilities

    680.3       644.8       623.4       1,510.5       8,372.6         8,212.2  

Total redeemable equity

    —         —         —         —         3,589.8         3,788.2  

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion of our results of operations and financial condition together with “Summary—Summary Historical and Other Financial Data,” “Risk Factors,” “Special Note Regarding Forward-Looking Statements” and “Selected Condensed Historical Financial Data” and our audited annual financial statements and notes thereto, our unaudited interim financial statements and notes thereto and our unaudited pro forma financial statements and the notes thereto, each included elsewhere in this prospectus. In addition to historical financial information, this discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our actual results may differ materially from those contained in or implied by any forward-looking statements.

Overview

We are a leading global provider of mission critical products and services to customers in the biopharma, healthcare, education & government, and advanced technologies & applied materials industries. Our comprehensive offerings, which include materials & consumables, equipment & instrumentation and services & specialty procurement, are relied upon by our customers, often on a recurring basis, because they are frequently specified into their research, development and production processes. These processes are commonly organized into “workflows” that define the activities our customers perform each day. We collaborate closely with our customers to enable them to develop new innovative products, lower their development and production costs, improve product or process performance characteristics, and enhance the safety and reliability of the drugs, devices, and other products they produce. In addition to relying on our products, many customers depend upon our services. Some of these services are performed by approximately 1,400 of our associates that are co-located with certain customers, working side-by-side with their scientists every day. Our local presence combined with global infrastructure enable and promote successful relationships with our customers and connect us to over 240,000 of their locations in over 180 countries. Our mission is to set science in motion to create a better world.

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. Selected offerings used by our customers in discovery, research, development and production processes include:

 

   

Materials & consumables: Ultra-high purity chemicals and reagents, lab products and supplies, highly specialized formulated silicone solutions, customized excipients, customized single-use assemblies, process chromatography resins and columns, analytical sample prep kits and education and microbiology and clinical trial kits;

 

   

Equipment & instrumentation: Filtration systems, virus inactivation systems, incubators, analytical instruments, evaporators ultra-low-temperature freezers, biological safety cabinets and critical environment supplies; and

 

   

Services & specialty procurement: Onsite lab and production, clinical, equipment, MarketSource procurement & sourcing and biopharmaceutical material scale-up and development services.

We recorded net sales of $4,390.4 million, net loss of $33.6 million, Adjusted EBITDA of $710.0 million and Management EBITDA of $743.0 million for the nine months ended September 30, 2018. We generated revenue growth of approximately 10% for the nine months ended September 30, 2018 as compared to the same period in the prior year on a combined basis, and approximately 85% of our revenues were from offerings that are recurring in nature. For the definitions of Adjusted EBITDA and Management EBITDA, and a reconciliation of Adjusted EBITDA and Management EBITDA to net income or loss, please see “Reconciliations of Non-GAAP Financial Measures and Other Financial Data—Reconciliation of non-GAAP financial measures.”

 

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Factors and Current Trends Affecting Our Business and Results of Operations

We expect that our performance and financial condition will continue to benefit from the key trends impacting our customers, suppliers and customer segments as outlined in “Business—Industry.” In addition, we believe the following trends and key factors have affected our recent operating results and are likely to continue to affect our performance and financial condition in future periods.

We acquired VWR in November 2017 and have been integrating our companies

VWR is a global manufacturer and distributor of laboratory and production products and services. The VWR Acquisition improved our access to life sciences and research customers, expanded our geographic reach, created a robust offering for the entire biopharmaceutical value chain and continues to generate significant cost and commercial synergies.

As a result of the VWR Acquisition, our total assets as of September 30, 2018 and our net sales for the nine months ended September 30, 2018 increased over eight times as compared to the same date or period a year ago. We also expect to spend more on capital expenditures, including up to $100 million in capital expenditures in 2019, approximately $30 million of which relates to our global value capture program.

The VWR Acquisition has the potential to create significant long-term growth as a result of our ability to offer new products and services to existing customers and potential new customers.

We are implementing a significant global value capture program

We have generated significant cost and commercial synergies across all aspects of our business from the global value capture program we initiated in the fourth quarter of 2017. Under the program, we anticipate spending up to $215 million over a three-year period to optimize our sales, gross margins and operating costs. The spending is expected to include up to $105 million for capital expenditures and up to $110 million for employee severance, facility closure and other charges. Our plans include combining sales and marketing resources, eliminating redundant corporate functions, optimizing procurement and our manufacturing footprint and implementing best practices throughout the organization.

From the inception of this program through September 30, 2018, we have recognized $72 million of charges and have spent $3 million on capital projects. As of September 30, 2018, we believe that we have generated $110 million of annualized cost synergies as a result of the program, and we estimate that we will be able to generate an additional $109 million. We currently expect that all synergies and cost savings will be fully realized by 2021.

We expect to undergo a recapitalization of our equity in connection with this offering

Our capitalization includes two classes of preferred stock, common stock, class B stock and warrants. In connection with this offering, we intend to undergo a recapitalization by (i) redeeming all of our series A preferred stock, (ii) experiencing an automatic conversion of all shares of junior convertible preferred stock into common stock 90 days after the closing of this offering, and (iii) amending our certificate of incorporation to affect a     -for-     stock split of all of our outstanding shares of common stock see “Summary—The Offering.”

We have made significant borrowings, resulting in significant fees, interest and financial leverage

In connection with the VWR Acquisition, we refinanced substantially all of our indebtedness. Our indebtedness, availability under credit facilities and interest expense each significantly increased. We also extended the overall maturity profile of our debt. In connection with the refinancing, we paid debt issuance costs of $283.1 million and a transaction fee to New Mountain Capital of $180.0 million. A substantial majority of the debt issuance costs were deferred and are being recognized as interest expense through the maturity dates of our indebtedness. We also incurred a debt extinguishment loss of $34.6 million.

 

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In November 2018, we entered into a repricing amendment to our Senior Secured Credit Facility (as defined below) to reduce the interest rate margins on our euro term loans by 0.50% and our U.S. term loans by 0.25%. We expect the amendment to result in annual interest savings of approximately $10 million. The costs to complete the amendment were not material.

As of September 30, 2018, we had $7.2 billion of indebtedness. We estimate making annual payments of over $500 million to service our indebtedness. We will need to use a substantial portion of our operating cash flows to make those payments, which will reduce funds available for other forms of capital deployment.

Tax reform was enacted in the United States

In December 2017, tax reform legislation was enacted in the United States. The new legislation included a broad range of corporate tax reforms including: (i) a reduction of the U.S. federal corporate tax rate from 35% to 21% beginning in 2018; (ii) a one-time transition tax on undistributed foreign earnings and profits; (iii) ongoing anti-base erosion provisions designed to tax foreign earnings generated without a large fixed asset base; and (iv); new limitations on deductions for interest expense and net operating losses.

As a result of the new legislation, we recognized a one-time provisional income tax benefit of $126.7 million for 2017, of which a $285.5 million benefit was caused by the remeasurement of our deferred tax assets and liabilities at the new corporate tax rate and a $158.8 million expense was caused by the one-time transition tax on our accumulated foreign undistributed earnings and profits. We recognized an additional benefit of $48.8 million in 2018 as a result of updating our provisional accounting. The legislation impacted us in a number of other ways beginning in 2018, including (i) a new series of tax payments on undistributed foreign earnings being made over an eight-year period and (ii) various changes that impact our effective income tax rate.

Changes in foreign currency rates could have a significant impact on our financial condition and results of operations

Our operations span the globe. We have a substantial amount of indebtedness denominated in euros, whose remeasurement to U.S. dollars can impact our earnings. See “—Quantitative and Qualitative Disclosures About Market Risk.”

Changes to foreign currency exchange rates could favorably or unfavorably affect our operating results. For example, during times of a strengthening U.S. dollar, our reported international sales and earnings will be reduced because local currencies will translate into fewer U.S. dollars. For the nine months ended September 30, 2018, a $0.01 change in the exchange rate from U.S. dollars to euros would result in $0.8 million and $1.1 million changes to net loss and Adjusted EBITDA, respectively.

We are not able to predict the impact that future changes in foreign currency exchange rates may have on our operating results, but historically their impact on cost of sales and selling, general and administrative expenses has not been material.

Growth in AMEA and other emerging geographies

We are focused on expanding our geographic reach to certain emerging economies, including China, Southeast Asia and Eastern Europe. Our largest customers in the AMEA region are in the biopharma and advanced technologies & applied materials industries. We believe that local demand for our products and solutions in these regions is being driven by the expansion of our customers’ presence, an inadequate local supplier base and a significant increase in local government investment to support innovation in the industries we serve.

 

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We employ a differentiated innovation model that is informed by our embedded relationship with our customers

Our innovation model enables us to anticipate and align our innovation efforts with our customers’ priorities. We engage with our customers early in their product development cycles through our 300-person innovation team to advance our customers’ programs from research and discovery through development and commercialization. At each step of our customers’ workflows, we share our scientific and workflow expertise to help deliver incremental and sustainable improvements to existing customer products and processes. These projects include enhancing product purity and therefore its performance characteristics, improving product packaging and streamlining workflows.

Our deep workflow expertise allows us to provide tailored solutions throughout the lifecycle of our customers’ products. We leverage our technologies along with those of our approximately 4,000 core suppliers to deliver products that meet or exceed the demanding requirements of our customers across a number of highly regulated industries.

Our strategic initiatives include the development of new products in emerging areas of science such as cell and gene therapy. We currently have approximately 1,400 innovation projects with our customers that address process improvements for existing products and potential significant new opportunities for us to support. For the nine months ended September 30, 2018 and 2017, we incurred research and development expenses of $15.2 million and $13.0 million, respectively, to advance those initiatives, and for the years ended December 31, 2017, 2016 and 2015 we incurred expenses of $17.2 million, $19.1 million and $21.9 million, respectively.

Seasonality

We do not experience seasonality in the traditional manner. Two types of our proprietary materials & consumable products, science educational kits and implantable medical devices, have exhibited cyclical customer demand in prior periods. We believe that this is caused by factors unique to those particular product markets, such as the multi-year approval processes many states follow to approve new curriculums and the ability of medical device customers to adjust inventory levels on-hand. As a result, we may see fluctuations between quarters as the timing of our customers’ demand for these products may change on a year to year basis.

Key Indicators of Performance and Financial Condition

To evaluate our performance, we monitor a number of key indicators at the consolidated level and, in certain cases, at the segment level. As appropriate, we supplement our results of operations determined in accordance with GAAP with 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. We strongly encourage readers to review our consolidated financial statements included elsewhere in this prospectus in their entirety and not rely solely on any one, single financial measurement. See “Presentation of Certain Financial Measures.”

The key indicators that we monitor are as follows:

 

   

Net sales, gross margin, operating income and net income or loss, which we discuss in the section entitled “Results of Operations”;

 

   

Adjusted EBITDA and Management EBITDA, which we discuss in the section entitled “Results of Operations.” Adjusted EBITDA is a non-GAAP financial measurement that is used by investors to measure and evaluate our operating performance. Management EBITDA is a non-GAAP financial

 

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measurement used by our management to measure and evaluate our operating performance. We believe that these measurements are useful to investors as additional ways to analyze the underlying trends in our business consistently across the periods presented. Reconciliations of net income or loss, the most directly comparable GAAP financial measure, to Adjusted EBITDA and Management EBITDA are included in “—Reconciliations of Non-GAAP Financial Measures and Other Financial Data—Reconciliations of non-GAAP financial measures.” Management also uses Management EBITDA to evaluate segment profitability;

 

   

Covenant EBITDA, which is a non-GAAP financial measure used to measure compliance with certain of our covenants under our Credit Agreement (as defined below) and Indentures (as defined below). See “Liquidity and Capital Resources—Indebtedness” for additional information. Covenant EBITDA is our Management EBITDA further adjusted as required to calculate covenant ratios and compliance under our Credit Facility and Indentures. We believe that this measurement is useful to investors and creditors as a way to analyze our performance under debt covenants during the periods presented. Reconciliations of net income or loss to Covenant EBITDA are included under “—Reconciliations of Non-GAAP Financial Measures and Other Financial Data—Reconciliations of non-GAAP financial measures”; and

 

   

Cash flows, particularly, cash flows from operating activities, which we discuss in the section entitled “—Liquidity and Capital Resources—Historical Cash Flows.”

Basis of Presentation

We present results of operations in the same way that we manage our business, evaluate our performance and allocate our resources. We provide discussion of our segments based on customer location: Americas, Europe and AMEA. Each segment manufactures and distributes solutions for the biopharma, healthcare, education & government and advanced technologies & applied materials industries. Corporate costs are managed on a standalone basis and not allocated to segments.

In accordance with GAAP, we have included the financial results of VWR since the VWR Acquisition on November 21, 2017. On September 30, 2016, we merged with NuSil. Since both NuSil and our predecessor were controlled by New Mountain Capital, our historical financial statements have been combined with NuSil’s into a single comparative presentation for all periods presented. For more information about this basis of presentation, see Note 1 to the audited annual financial statements included elsewhere in this prospectus.

In order to provide relevant insight about the financial impact of the VWR Acquisition on our results for the nine months ended September 30, 2018 and 2017, we discuss and analyze the year-over-year change in operating results as two components:

 

  (1)

“Baseline VWR,” which is the period-over-period change attributable to VWR’s pre-acquisition performance for the nine months ended September 30, 2017 reduced by Avantor’s pre-acquisition sales and cost of sales to VWR for that period. See “—Reconciliations of Non-GAAP Financial Measures and Other Financial Data—Reconciliations of other financial data” for calculations to difference in gross margin. We present prior-year results as the baseline in order to evaluate current-year changes in performance as part of the Combined Change described below; and

 

  (2)

“Combined Change,” which isolates the period-over-period change in our combined business absent VWR’s pre-acquisition performance as described above. Our discussion and analysis of the Combined Change provides another way to evaluate the performance of our combined company compared to prior periods.

For more information regarding the calculation of “Baseline VWR” and “Combined Change,” see “—Reconciliations of Non-GAAP Financial Measures and Other Financial Data—reconciliations of other financial data”

 

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We do not present “Baseline VWR” or a “Combined Change” for net income or certain of its components because differences such as debt service, hedging strategies and tax attributes between VWR and Avantor introduce variables into the comparison that management believes may be confusing and will not be useful to investors in analyzing our results of operations. We also do not present Baseline VWR or the Combined Change for the years ended December 31, 2017, 2016 or 2015 because none of those years include VWR’s results for any period during the year.

Results of Operations

Nine months ended September 30, 2018 and 2017

 

     Nine months ended
September 30,
           Reason for change  
(dollars in millions)    2018      2017      Change     Baseline
VWR
    Combined
Change
 

Net sales

   $ 4,390.4      $ 517.7      $ 3,872.7     $ 3,465.0     $ 407.7  

Gross margin

     31.6      46.3      (1,470 ) bps      (1,560 ) bps      90 bps 

Operating income

   $ 314.2      $ 53.6      $ 260.6     $ 245.3     $ 15.3  

Net loss

     (33.6      (19.9      (13.7    

Adjusted EBITDA

     710.0        174.7        535.3       383.7       151.6  

Management EBITDA

     743.0        192.7        550.3       393.4       156.9  

The VWR Acquisition in November 2017 was the most significant driver of change when comparing the 2018 and 2017 nine-month periods. Net loss increased as a result of higher interest expense on new borrowings to finance the VWR Acquisition, while the inclusion of VWR’s results in the 2018 period caused net sales, operating income Adjusted EBITDA and Management EBITDA to increase. Gross margins declined because VWR’s historical margins were lower than ours.

As presented under “Combined Change”, we experienced growth in net sales and gross margin primarily driven by sales growth to our biopharma customers and our proprietary materials & consumables product group. We also incurred significant new expenses to restructure and integrate VWR that impacted operating income and net loss.

Net sales

 

     Nine months ended
September 30,
            Reason for change  
(in millions)    2018      2017      Change      Baseline
VWR
     Combined
Change
 

Americas

   $ 2,590.6      $ 286.0      $ 2,304.6      $ 2,096.2      $ 208.4  

Europe

     1,575.5        116.0        1,459.5        1,328.4        131.1  

AMEA

     224.3        115.7        108.6        40.4        68.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,390.4      $ 517.7      $ 3,872.7      $ 3,465.0      $ 407.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net sales increased primarily due to baseline growth from the VWR Acquisition. The Combined Change reflects a favorable currency impact of $98.7 million, strong sales of medical implantable devices from our proprietary materials & consumables portfolio, significant project business from a new education & government customer in the Americas, commercial synergies generated by our global value capture program, mid-double digit growth in the AMEA region and strong global performance in services & specialty procurement.

Americas

Net sales increased primarily due to baseline growth from the VWR Acquisition. The Combined Change included a generally favorable pricing environment with higher volumes. Our global value capture program included strategic initiatives to improve market share and pricing that contributed $7.0 million to net sales in the 2018 period.

 

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From a customer perspective, we were awarded a significant kitting project from a new education & government customer. We also continued to experience strong growth from biopharma customers, our largest customers. From a product perspective, we experienced strong sales of medical implantable devices in our proprietary materials & consumables portfolio. Customer demand for this product line is cyclical, and we believe that some of our sales growth includes increases in stocking by customers. We also experienced higher sales volume for equipment & instrumentation and significant growth in services & specialty procurement.

Europe

Net sales increased primarily due to baseline growth from the VWR Acquisition. The Combined Change included a favorable currency impact of $93.0 million and higher volumes with a generally similar pricing environment. Our global value capture program included strategic initiatives to improve market share and pricing that contributed $3.3 million to net sales.

From a customer perspective, we experienced strong growth in biopharma driven by higher demand from our largest customers. We experienced lower growth from our healthcare and our education & government customers. These customers continue to be impacted by constricted funding by several European governments, and lower 2018 growth reflects normalizing orders after receipt in 2017 of a large order for equipment & instrumentation to build a new university research facility. From a product perspective, higher sales of production-grade biopharmaceutical products drove growth in our proprietary materials & consumables category, which was partially offset by lower growth in equipment & instrumentation for the reasons previously discussed.

AMEA

Net sales increased primarily due to baseline growth from the VWR Acquisition. The combined change included a favorable currency impact of $3.8 million and a generally favorable pricing environment with significantly higher volumes.

We experienced double-digit growth across all product groups and customers driven by our ability to capture new market share in this emerging region. Our largest customers in this region are in the biopharma and advanced technologies & applied materials industries.

Gross margin

 

     Nine months ended
September 30,
           Reason for change  
         2018             2017         Change      Baseline
VWR
     Combined
Change
 

Gross margin

     31.6     46.3     (1,470) bps        (1,560) bps        90 bps  

The most significant driver of the decrease in gross margin was a 1,560 basis point baseline reduction from the VWR Acquisition. In the nine months ended September 30, 2017, VWR reported gross margins of 28.1%. We experienced 90 basis points of combined margin expansion resulting from efficient pricing, a favorable product sales mix, primarily from sales of our proprietary materials & consumables, and commercial synergies from our global value capture program.

Operating income

 

     Nine months ended
September 30,
            Reason for change  
(in millions)    2018      2017      Change      Baseline
VWR
     Combined
Change
 

Gross profit

   $ 1,387.0      $ 239.6      $ 1,147.4      $ 984.8      $ 162.6  

Operating expenses

     1,072.8        186.0        886.8        739.5        147.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

   $ 314.2      $ 53.6      $ 260.6      $ 245.3      $ 15.3  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Operating income increased as a result of higher gross profit, partially offset by higher operating expenses, each primarily due to baseline growth from the VWR Acquisition. Gross profit also increased due to the Combined Change to net sales and gross margin previously discussed.

The combined increase to operating expenses was primarily caused by depreciation and amortization expenses and severance, retention and integration charges. The increase includes a $148.0 million combined increase to depreciation and amortization primarily related to amortization of significant new customer relationship and trade name assets from the VWR Acquisition. The increase also includes a $42.1 million Combined Change to severance, retention and integration expenses driven by the new global value capture program. These increases were partially offset by about $55.3 million of savings generated by our global value capture program.

Net loss

 

     Nine months ended
September 30,
     Change  
(in millions)    2018      2017  

Operating income

   $ 314.2      $ 53.6      $ 260.6  

Interest expense

     (388.7      (109.3      (279.4

Other income, net

     7.0        11.6        (4.6

Income tax benefit

     33.9        24.2        9.7  
  

 

 

    

 

 

    

 

 

 

Net loss

   $ (33.6    $ (19.9    $ (13.7
  

 

 

    

 

 

    

 

 

 

Net loss increased primarily due to higher interest expense, which was partially offset by a significant increase to operating income as previously discussed and an increase to the income tax benefit. Interest expense increased due to the fourth quarter 2017 debt restructuring to finance the VWR Acquisition. See “Liquidity and Capital Resources—Indebtedness” for additional information. Income tax benefit increased $9.7 million primarily due to changes in our effective tax rate. Our effective tax rate has changed significantly from period to period due to the VWR Acquisition, a reduction in statutory tax rates in the United States and other countries, new taxes implemented by tax reform in the United States, losses in certain jurisdictions where we are not able to currently recognize a tax benefit and other nondeductible expenses. In the third quarter of 2018, part of our effective tax rate change applicable to the United States was caused by a $48.8 million benefit from updating our provisional accounting for tax reform, including our interpretation of new transition tax regulations issued in 2018.

Adjusted EBITDA and Management EBITDA

 

     Nine months ended
September 30,
          Reason for change  
(in millions)    2018     2017     Change     Baseline
VWR
    Combined
Change
 

Adjusted EBITDA

   $ 710.0     $ 174.7     $ 535.3     $ 383.7     $ 151.6  

Management EBITDA:

          

America

   $ 480.5     $ 116.8     $ 363.7     $ 269.7     $ 94.0  

Europe

     259.3       56.8       202.5       167.6       34.9  

AMEA

     51.7       28.5       23.2       1.5       21.7  

Corporate

     (48.5     (9.4     (39.1     (45.4     6.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 743.0     $ 192.7     $ 550.3     $ 393.4     $ 156.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA and Management EBITDA increased primarily due to baseline growth from the VWR Acquisition.

 

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For the Americas, the Combined Change included the impact of the net sales growth and gross margin improvements previously discussed as well as $34.5 million of growth from the cost synergies of the global value capture program. Those savings were primarily related to commercial integration, manufacturing productivity initiatives, strategic sourcing, headcount redundancy and personnel off-shoring.

For Europe, the Combined Change included the impact of the net sales growth and gross margin improvements previously discussed as well as $7.5 million of growth from the cost synergies of the global value capture program. Those savings were primarily related to commercial integration, strategic sourcing, headcount redundancy and personnel off-shoring.

For AMEA, the Combined Change included the impact of the net sales growth and gross margin improvements previously discussed, partially offset by personnel and other investments to increase our sales force in the region. Our strategy is to invest in the AMEA region in an effort to continue to capture market share.

For corporate, the combined improvement was primarily caused by $13.3 million of headcount reductions and other synergies generated by our global value capture program. Those savings were primarily related to the elimination of redundant executive officers.

Years ended December 31, 2017 and 2016

 

     Year ended December 31,     Change  
(dollars in millions)        2017             2016      

Net sales

   $ 1,247.4     $ 691.3     $ 556.1  

Gross margin

     34.7     46.2     (1,150 ) bps 

Operating (loss) income

   $ (210.4   $ 9.9     $ (220.3

Net loss

     (145.3     (80.7     (64.6

Adjusted EBITDA

     289.5       220.7       68.8  

Management EBITDA

     324.0       250.2       73.8  

The VWR Acquisition in November 2017 was the most significant driver of change when comparing 2017 to 2016. Net loss and operating loss reflect the impact of $194 million of fees to New Mountain Capital and other charges related to the VWR Acquisition. Net loss also increased as a result of higher interest expense on new borrowings to finance the VWR Acquisition. The inclusion of VWR’s results for the 41-day period after the acquisition caused significant growth in net sales, operating income, Adjusted EBITDA and Management EBITDA and a decline in gross margins. Gross margins declined because VWR’s historical margins were lower than ours.

Net sales

 

     Year ended December 31,      Change  
(in millions)        2017              2016      

Americas

   $ 688.1      $ 394.5      $ 293.6  

Europe

     381.4        155.6        225.8  

AMEA

     177.9        141.2        36.7  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,247.4      $ 691.3      $ 556.1  
  

 

 

    

 

 

    

 

 

 

Net sales increased primarily from the inclusion of 41 days of results from the VWR Acquisition. Otherwise, results were affected by three substantially offsetting factors. First, Americas and Europe experienced declines from biopharma customers in the first quarter. Secondly, we experienced increase in sales of advanced technologies & applied materials due to volume growth and pricing actions across all markets. Finally, we experienced significant, broad-based growth in Asia.

 

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Americas

Net sales increased primarily from the inclusion of 41 days of results from the VWR Acquisition. Otherwise, we experienced a generally favorable pricing environment with lower volumes. We experienced slower growth from biopharmaceutical customers. We believe that customers utilized previously purchased inventories in the first quarter of 2017, which compressed growth. Sales growth from advanced technologies & applied materials customers helped to partially offset that compression, driven by favorable pricing in a significant new customer contract and a new product supply award from another significant customer.

Europe

Net sales increased primarily from the inclusion of 41 days of results from the VWR Acquisition. Otherwise, we experienced a generally favorable pricing environment with lower volumes. For reasons similar to the Americas, we experienced slower growth from biopharma customers. We also consolidated plants in the Netherlands and Poland which caused a temporary disruption to production. We experienced growth from certain advanced technologies & applied materials customers caused by both higher demand and higher pricing for medical implantable devices.

AMEA

Net sales increased primarily from the inclusion of 41 days of results from the VWR Acquisition. Otherwise, we experienced generally higher volumes, particularly in India and China as we focused on growth in these regions. We experienced growth across all significant product groups and customers driven by our ability to capture new market share in this emerging region. Our strongest growing customer group was advanced technologies & applied materials, which was attributable to new product developments and a new product supply award from a significant customer.

Gross margin

 

     Year ended December 31,        
         2017             2016         Change  

Gross margin

     34.7     46.2     (1,150) bps  

The decrease in gross margin was primarily caused by the inclusion of 41 days of results from the VWR Acquisition. VWR’s gross margin for the nine months ended September 30, 2017 and December 31, 2016 was 28%. Gross margin was further reduced in 2017 due to $41.8 million of purchase accounting adjustments on sold VWR inventory whose carrying value was increased to fair value as part of purchase accounting for the VWR Acquisition.

Operating income or loss

 

     Year ended December 31,         
(in millions)        2017              2016          Change  

Gross profit

   $ 432.8      $ 319.7      $ 113.1  

Operating expenses

     643.2        309.8        333.4  
  

 

 

    

 

 

    

 

 

 

Operating (loss) income

   $ (210.4    $ 9.9      $ (220.3
  

 

 

    

 

 

    

 

 

 

Operating income decreased to a loss as a result of higher operating expenses, partially offset by higher gross profit, each primarily due to the inclusion of 41 days of results from the VWR Acquisition. Gross profit also increased due to other changes to net sales and gross margin previously discussed.

 

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The remaining increase to operating expenses was primarily caused by higher fees to New Mountain Capital and other expenses related to the VWR Acquisition. Fees to New Mountain Capital increased $165.2 million primarily due to the 2017 payments of a $180.0 million transaction fee for the VWR Acquisition and a $12.5 million transaction fee for a debt refinancing, whereas in 2016 we paid transaction fees totaling $27.3 million for two other debt refinancings. Other expenses related to the VWR Acquisition included an increase to amortization of $33.3 million for significant new customer relationship and trade name assets and $17.5 million related to cost synergies of the global value capture program.

Net loss

 

     Year ended December 31,         
(in millions)        2017              2016          Change  

Operating (loss) income

   $ (210.4    $ 9.9      $ (220.3

Interest expense

     (257.3      (80.3      (177.0

Other income (expense), net

     7.5        (0.2      7.7  

Income tax benefit (expense)

     314.9        (10.1      325.0  
  

 

 

    

 

 

    

 

 

 

Net loss

   $ (145.3    $ (80.7    $ (64.6
  

 

 

    

 

 

    

 

 

 

Net loss increased primarily due to a change from operating income to loss for reasons discussed in the previous section and higher interest expense, partially offset by a change from income tax expense to benefit. Interest expense increased due to the fourth quarter 2017 debt restructuring to finance the VWR Acquisition. See “Liquidity and Capital Resources—Indebtedness” for additional information. Income tax expense in 2016 changed from a provision to a significant benefit in 2017 primarily due to tax reform legislation passed in the United States and other foreign jurisdictions in the fourth quarter of 2017, from which we provisionally recognized benefits from rate changes of $339.0 million, partially offset by the provisional rate effect of a one-time transition tax of $158.8 million. The change from income tax expense to income tax benefit was also impacted by the changes in pretax earnings previously discussed.

Adjusted EBITDA and Management EBITDA

 

     Year ended December 31,         
(in millions)        2017              2016          Change  

Adjusted EBITDA

   $ 289.5      $ 220.7      $ 68.8  

Management EBITDA:

        

Americas

   $ 196.8      $ 171.0      $ 25.8  

Europe

     103.4        63.6        39.8  

AMEA

     43.3        42.1        1.2  

Corporate

     (19.5      (26.5      7.0  
  

 

 

    

 

 

    

 

 

 

Total

   $ 324.0      $ 250.2      $ 73.8  
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA and Management EBITDA increased primarily due to the inclusion of 41 days of results from the VWR Acquisition. Otherwise, growth was moderate due to offsetting factors.

In the Americas and Europe, the increase in Management EBITDA was primarily due to the inclusion of 41 days of results from the VWR Acquisition. Otherwise results were flat, supported by favorable pricing actions and productivity gains that were offset by generally lower volumes resulting from customer utilization of previously purchased inventory, as discussed above. Europe results also benefited from the consolidation of plants in Netherlands and Poland.

 

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For AMEA, the increase in Management EBITDA was due primarily to a better market share across the region, partially offset by investments in personnel and other resources to increase our sales force in the region.

For corporate, we captured significant costs savings from restructuring and severance activities that were partially offset by the inclusion of 41 days of costs from the VWR Acquisition.

Years ended December 31, 2016 and 2015

 

     Year ended December 31,        
(dollars in millions)        2016             2015         Change  

Net sales

   $ 691.3     $ 636.9     $ 54.4  

Gross margin

     46.2     41.2     500 bps  

Operating income

   $ 9.9     $ 60.6     $ (50.7

Net (loss) income

     (80.7     12.7       (93.4

Adjusted EBITDA

     220.7       158.8       61.9  

Management EBITDA

     250.2       182.7       67.5  

Net loss and operating income reflect a decrease of $80.0 million due to the acceleration of vesting and modification of share-based awards driven by the combination with NuSil and an additional decrease of $27.3 million due to transaction fees paid to New Mountain Capital. Net loss also reflects higher interest expense following the 2016 debt refinancings. Otherwise, net sales were favorably impacted by stronger performance in the biopharmaceutical and advanced technologies & applied materials customers, while operating income, Adjusted EBITDA and Management EBITDA were favorably impacted by gross margin improvements.

Net sales

 

     Year ended December 31,         
(in millions)        2016              2015          Change  

Americas

   $ 394.5      $ 388.1      $ 6.4  

Europe

     155.6        122.4        33.2  

AMEA

     141.2        126.4        14.8  
  

 

 

    

 

 

    

 

 

 

Total

   $ 691.3      $ 636.9      $ 54.4  
  

 

 

    

 

 

    

 

 

 

Net sales increased primarily from increases in sales in biopharma and advanced technologies & applied materials of $40.9 million and $11.3 million over the same period, respectively. The increase in sales resulted from a balanced mix of price and volume improvements, including improved net product pricing attributable to the implementation of our revised pricing strategy and ordinary course price increases. These increases were partially offset by the impact of foreign currency exchange rates.

Americas

Net sales increased due to a generally favorable pricing environment with lower volumes. Biopharma customers drove the majority of the growth in the region as our revised pricing strategy primarily impacted customers where Avantor provides value and differentiation. This growth slowed in the fourth quarter as inventory levels in the channel reached saturation and the industry took an active effort to reduce inventories.

Europe

Net sales increased due to a generally favorable pricing environment with higher volumes that were partially offset by an unfavorable foreign currency impact. Our contract manufacturing capabilities and specialty product

 

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offerings in chromatography and bio buffers enabled us to win significant new biopharma customers and generate other sales growth. The region also experienced higher volumes to advanced technologies & applied materials customers.

AMEA

Net sales increased primarily due to a generally similar pricing environment with higher volumes. Biopharma customers led the growth in the region with significant new projects from large customers. We benefited from initiatives to sell in new geographies and focus on specialty products tailored to the region.

Gross margin

 

     Year ended December 31,        
         2016             2015         Change  

Gross margin

     46.2     41.2     500 bps  

The increase in gross margin was primarily caused by production mix, price increases associated with the implementation of our revised pricing strategy and ordinary course price increases and productivity initiatives, including plant optimization initiatives, reductions in labor and overhead, and the procurement of direct materials at a lower cost. Those increases were partially offset by the impact of unfavorable foreign currency exchange rates.

Operating income

 

     Year ended December 31,         
(in millions)        2016              2015          Change  

Gross profit

   $ 319.7      $ 262.2      $ 57.5  

Operating expenses

     309.8        201.6        108.2  
  

 

 

    

 

 

    

 

 

 

Operating income

   $ 9.9      $ 60.6      $ (50.7
  

 

 

    

 

 

    

 

 

 

Operating income decreased as a result of higher operating expenses, which were partially offset by the benefit from higher gross profit as previously discussed. The increase in operating expenses was driven by an increase in share-based compensation expense of $80.0 million primarily caused by the acceleration of vesting and modification of awards caused by the September 30, 2016 legal entity restructuring to facilitate the combination with NuSil. Additional information is included in Note 18 to the audited annual financial statements included elsewhere in this prospectus. In addition, transaction fees paid to New Mountain Capital increased $27.3 million as a result of two debt refinancings in 2016.

Net income or loss

 

     Year ended December 31,         
(in millions)        2016              2015          Change  

Operating income

   $ 9.9      $ 60.6      $ (50.7

Interest expense

     (80.3      (30.6      (49.7

Other expense, net

     (0.2      (0.2      —    

Income tax expense

     (10.1      (17.1      7.0  
  

 

 

    

 

 

    

 

 

 

Net loss (income)

   $ (80.7    $ 12.7      $ (93.4
  

 

 

    

 

 

    

 

 

 

Net income decreased to net loss primarily due to a decrease in operating income as discussed in the previous section and higher interest expense. Interest expense increased primarily due to $15.3 million of

 

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incremental interest expense recognized from additional borrowings, $15.0 million of financing fees immediately recognized as interest expense related to 2016 debt refinancings and $19.9 million of debt extinguishment costs related to the 2016 debt refinancings. The overall decrease was partially offset by a $7.0 million decrease to income tax expense. Income tax expense decreased $7.0 million primarily due to changes in pretax earnings which was partially offset by a higher effective tax rate caused by share-based compensation expense and noncontrolling interest.

Adjusted EBITDA and Management EBITDA

 

     Year ended December 31,         
(in millions)        2016              2015          Change  

Adjusted EBITDA

   $ 220.7      $ 158.8      $ 61.9  

Management EBITDA:

        

Americas

   $ 171.0      $ 138.3      $ 32.7  

Europe

     63.6        44.1        19.5  

AMEA

     42.1        26.4        15.7  

Corporate

     (26.5      (26.1      (0.4
  

 

 

    

 

 

    

 

 

 

Total

   $ 250.2      $ 182.7      $ 67.5  
  

 

 

    

 

 

    

 

 

 

Adjusted EBITDA and Management EBITDA increased primarily due to a balance of price and volume improvements.

For the Americas, the increase in Management EBITDA was primarily caused by the favorable pricing actions previously discussed, partially offset by lower volumes. Cost savings initiatives around manufacturing footprint optimization, inventory controls and procurement savings resulted in $10.0 million of increase in Management EBITDA.

For Europe, the increase in Management EBITDA was primarily caused by the favorable pricing and higher volumes previously mentioned. Cost savings initiatives around manufacturing footprint optimization and procurement savings resulted in $2.5 million of increase in Management EBITDA.

For AMEA, the increase in Management EBITDA was primarily caused by the commercialization of new products to biopharma customers and better market share in the region.

For corporate, the results year over year were relatively flat.

Reconciliations of Non-GAAP Financial Measures and Other Financial Data

Cautionary statement about non-GAAP financial measurements

As previously noted, we supplement our results of operations determined in accordance with GAAP with certain non-GAAP financial measurements that are used by management, and which we believe are useful to investors, creditors and others as supplemental operational measurements to evaluate our financial 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. We strongly encourage investors to review our interim and annual financial statements included elsewhere in this prospectus in their entirety and not to rely solely on any one, single financial measurement or communication.

 

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Reconciliations of Non-GAAP Financial Measures

The following table presents a reconciliation of Adjusted EBITDA, Management EBITDA and Covenant EBITDA to net income or loss, the most directly comparable GAAP financial measure. We present EBITDA to assist readers in understanding the mathematical development of those EBITDA-based measures. Management does not use EBITDA as a financial performance metric. In accordance with GAAP, we have included the financial results of VWR since the VWR Acquisition on November 21, 2017. On September 30, 2016, we merged with NuSil. Since both NuSil and our predecessor were controlled by New Mountain Capital, our historical financial statements have been combined with NuSil’s into a single comparative presentation for all periods presented.

 

     Nine months ended
September 30,
    Year ended December 31,  
(in millions)    2018     2017     2017     2016     2015  

Net (loss) income

   $ (33.6   $ (19.9   $ (145.3   $ (80.7   $ 12.7  

Interest expense

     388.7       109.3       257.3       80.3       30.6  

Income tax (benefit) expense

     (33.9     (24.2     (314.9     10.1       17.1  

Depreciation and amortization

     303.5       47.5       99.2       60.3       60.7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

EBITDA

     624.7       112.7       (103.7     70.0       121.1  

Net foreign currency loss (gain) from financing activities(1)

     0.2       (0.4     5.5       0.4       (0.1

Gain on derivative instruments(2)

     —         (8.5     (9.6     —         —    

Other share-based compensation expense(3)

     —         —         26.6       86.6       15.8  

Restructuring and severance charges(4)

     57.1       5.2       29.6       11.1       8.6  

Purchase accounting adjustments(5)

     2.8       (1.0     41.8       4.5       7.1  

Sponsor transaction fees(6)

     —         12.5       192.5       27.3       —    

Executive departures(7)

     2.4       —         —         —         3.1  

Impairment charges(8)

     1.9       —         5.0       —         0.7  

VWR transaction expenses(9)

     0.4       3.9       43.6       —         —    

VWR integration and planning expenses(10)

     19.4       22.5       30.1       —         —    

Other transaction and integration expenses(11)

     1.1       24.7       25.0       11.5       2.5  

Debt refinancing fees(12)

     —         3.1       3.1       4.7       —    

Environmental remediation costs(13)

     —         —         —         4.6       —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

     710.0       174.7       289.5       220.7       158.8  

Commercial initiatives(14)

     6.4       0.3       0.3       6.5       12.2  

Ongoing share-based compensation expense from parent plans(15)

     14.5       8.6       21.6       12.1       2.9  

Inventory write-offs(16)

     0.2       —         —         1.0       —    

Long-term incentive plan(17)

     8.1       1.8       3.2       1.5       0.5  

Other(18)

     3.8       7.3       9.4       8.4       8.3  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Management EBITDA

     743.0       192.7       324.0     $ 250.2     $ 182.7  
        

 

 

   

 

 

 

Adjustment for VWR(19)

     —         417.5       492.7      

Projected synergies(20)

     108.5       164.3       219.0      
  

 

 

   

 

 

   

 

 

     

Covenant EBITDA

   $ 851.5     $ 774.5     $ 1,035.7      
  

 

 

   

 

 

   

 

 

     

 

(1)

Represents remeasurement of various foreign-denominated borrowings into functional currencies. Our U.S. subsidiaries carry a significant amount of euro-denominated debt, and many of our subsidiaries borrow and lend with each other in foreign currencies. For the nine months ended September 30, 2018 and the year ended December 31, 2017, the foreign currency gains were primarily caused by €190 million of unhedged intercompany loans receivable.

(2)

For the 2017 periods, represents changes in the fair value of foreign currency forward contracts used to hedge pre-acquisition changes in the value of VWR’s euro-denominated loans.

 

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(3)

Represents expenses related to remeasuring legacy NuSil awards at fair value on a recurring basis and modification of share-based awards caused by the legal-entity restructurings in November 2017 and September 2016. These expenses fluctuated significantly across the periods due to the increases in the value of our business following business combinations.

(4)

The following table presents restructuring and severance charges by plan:

 

     Nine months ended
September 30,
     Year ended December 31,  
(in millions)        2018              2017            2017          2016          2015    

Global value capture program

   $ 54.8      $ —        $ 17.5      $ —        $ —    

Other

     2.3        5.2        12.1        11.1        8.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 57.1      $ 5.2      $ 29.6      $ 11.1      $ 8.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

See “Factors and Current Trends Affecting Our Business and Results of Operations—We are implementing a significant global value capture program” for additional information about the global value capture program. Other includes three smaller plans for VWR, NuSil and legacy Avantor and other non-plan initiatives.

 

(5)

Represents reversals of the short-term impact of purchase accounting adjustments on earnings, the most significant of which was the increase to cost of sales that resulted from valuing VWR’s inventory at fair value in purchase accounting. Also includes the earnings impact of remeasuring contingent consideration to fair value on a recurring basis.

(6)

Represents transaction fees paid to New Mountain Capital. Pursuant to the terms of their advisory agreement with us, New Mountain Capital earned a fee equal to 2% of the value of each of our three debt refinancings and the VWR Acquisition. See “Certain Relationships and Related Party Transactions.”

(7)

Represents severance payments made to former executives that were not part of an approved restructuring program.

(8)

For the nine months ended September 30, 2018, represents the write-off of property, plant and equipment related to a legacy research and development facility. For the year ended December 31, 2017, represents the write-off of property, plant and equipment and inventory related to a discontinued product line.

(9)

Represents direct expenses incurred to consummate the VWR Acquisition.

(10)

Represents expenses incurred related to planning and integration of VWR.

(11)

The following table presents the components of our other transaction and integration expenses:

 

     Nine months ended
September 30,
     Year ended December 31,  
(in millions)        2018              2017            2017          2016          2015    

Unconsummated equity offering

   $ —        $ 19.9      $ 19.9      $ 5.0      $ —    

NuSil-related integration expenses

     —          4.8        5.1        3.4        —    

Other transaction expenses

     1.1        —          —          3.1        2.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1.1      $ 24.7      $ 25.0      $ 11.5      $ 2.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(12)

Represents non-capitalized fees incurred to refinance our debt in March 2017, September 2016 and June 2016, excluding transaction fees paid to New Mountain Capital.

(13)

Represents establishment of a multi-year environmental remediation liability to remediate soil and groundwater conditions at our Gliwice, Poland manufacturing facility.

(14)

Represents consultant and employee expenses to implement commercial operating improvements including optimization of our global manufacturing footprint, strategic pricing initiatives and manufacturing productivity.

(15)

Includes vesting of stock options, and for the 2018, 2017 and 2016 periods optionholder incentives, each requiring continuing employee service.

(16)

Represents the write-off of excess and obsolete inventories.

 

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(17)

Represents cost of compensation programs awarded to key employees that vest with continuing service over three-year period.

(18)

Represents non-recurring tax payments, customer rebates, non-cash pension charges, consulting projects and other immaterial items.

(19)

Represents inclusion of VWR as if the VWR Acquisition had been completed on January 1, 2017 as permitted by our debt covenants.

(20)

Reflects estimated cost synergies to be generated by our global value capture program as permitted by our debt covenants. As of September 30, 2018, we believe that we have captured $110 million of annualized cost synergies as a result of the program, and we have plans to capture an additional $109 million. We currently expect that all synergies and cost savings will be fully realized by 2021. See “—Factors and Current Trends Affecting Our Business and Results of Operations—We are implementing a significant global value capture program.”

Other Financial Data

The following table presents the reconciliation of VWR as previously reported to Baseline VWR for the nine months ended September 30, 2017 and presents Avantor, Inc.’s results for the same period for comparison purposes:

 

     VWR        
            Adjustments              
(in millions)    As
previously
reported
     Segment
allocation
    Pre-acquisition
sales between
VWR and Avantor
    Baseline
VWR
    Avantor,
Inc.
 

Net sales:

           

Americas

   $ 2,136.8      $ —       $ (40.6   $ 2,096.2     $ 286.0  

EMEA-APAC

     1,372.8        (1,372.8     —         —         —    

Europe

     —          1,332.4       (4.0     1,328.4       116.0  

AMEA

     —          40.4       —         40.4       115.7  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 3,509.6      $ —       $ (44.6   $ 3,465.0     $ 517.7  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Operating income:

           

Gross profit

   $ 984.8      $ —       $ —       $ 984.8     $ 239.6  

Operating expenses

     739.5        —         —         739.5       186.0  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 245.3      $ —       $ —       $ 245.3     $ 53.6  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Management EBITDA:

           

Not allocated

   $ 393.4      $ (393.4   $ —       $ —       $ —    

Americas

     —          269.7       —         269.7       116.8  

Europe

     —          167.6       —         167.6       56.8  

AMEA

     —          1.5       —         1.5       28.5  

Corporate

     —          (45.4     —         (45.4     (9.4
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 393.4      $ —       $ —       $ 393.4 (1)     $ 192.7  
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

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(1)

Represents the equivalent measures to Adjusted EBITDA and Management EBITDA for historical VWR. The following table reconciles these metrics to VWR’s historically reported net income:

 

Net income

   $ 124.6  

Interest expense

     61.1  

Income tax expense

     64.4  

Depreciation and amortization

     108.0  

Net foreign currency loss from financing activities(a)

     5.0  

Gain on derivative instruments(b)

     (9.7

Restructuring and severance charges

     9.8  

Purchase accounting related adjustments

     2.1  

VWR transaction expenses

     18.4  
  

 

 

 

Adjusted EBITDA equivalent

     383.7  

Share-based compensation expense(c)

     9.7  
  

 

 

 

Management EBITDA equivalent

   $ 393.4  
  

 

 

 

 

  (a) 

VWR recognized a loss for similar reasons on partially unhedged euro-denominated notes.

  (b) 

Gain was caused by the settlement of interest rate swaps in anticipation of the VWR Acquisition.

  (c) 

Includes vesting of stock options and restricted stock units, each also requiring continuing employee service.

The following table presents certain calculations of the changes to gross margin:

 

(dollars in millions)    Gross
profit
     Net sales      Gross
margin
 

Nine months ended September 30, 2017

   $ 239.6      $ 517.7        46.3% (A) 

Baseline VWR

     984.8        3,465.0     
  

 

 

    

 

 

    

Subtotal

     1,224.4        3,982.7        30.7% (B) 

Combined change

     162.6        407.7     
  

 

 

    

 

 

    

Nine months ended September 30, 2018

   $ 1,387.0      $ 4,390.4        31.6% (C) 
  

 

 

    

 

 

    

Calculation of Baseline VWR reason for change

        (B) - (A)        (1,560 )bps 

Calculation of Combined Change

        (C) - (B)        90  bps 

Quarterly Results

Our net sales were $1,418.3 million, $1,477.9 million and $1,494.2 million for the quarterly periods ended March 31, 2018, June 30, 2018 and September 30, 2018, respectively, and were $151.8 million, $182.9 million and $183.0 million for the quarterly periods ended March 31, 2017, June 30, 2017 and September 30, 2017, respectively.

Net sales for VWR were $1,139.1 million, $1,175.3 million and $1,195.2 million for the quarterly periods ended March 31, 2017, June 30, 2017 and September 30, 2017, respectively. Our pre-acquisition sales to VWR were $14.0 million, $16.0 million and $14.6 million for the quarterly periods ended March 31, 2017, June 30, 2017 and September 30, 2017, respectively.

Liquidity and Capital Resources

We fund short-term cash requirements primarily from operating cash flows and unused availability under our credit facilities. Most of our long-term financing is from indebtedness.

Our most significant contractual obligations are scheduled principal and interest payments for indebtedness. We also have obligations to make payments under operating leases, to purchase certain products and services and

 

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to fund pension obligations. In addition to contractual obligations, we use cash to fund capital expenditures and taxes. We have also used significant amounts of cash to fund distributions and debt refinancing fees, but we do not anticipate this going forward due to new restrictions imposed by our indebtedness. Changes in working capital may be a source or a use of cash depending on our operations during the period.

We expect to fund our long-term capital needs with cash generated by operations and availability under the Revolving Facilities (as defined below). See “—Indebtedness.” Although we believe that these sources will provide sufficient liquidity for us to meet our long-term capital needs, our ability to fund these needs will depend to a significant extent on our future financial performance, which will be subject in part to general economic, competitive, financial, regulatory and other factors that are beyond our control.

We believe that cash generated by operations, together with available liquidity under our credit facilities, will be adequate to meet our current and expected needs for cash prior to the maturity of our debt, although no assurance can be given in this regard.

Liquidity

The following table presents our primary sources of liquidity:

 

     As of
September 30, 2018
 
(in millions)      A/R  
  Facility  
     Revolver      Total  

Unused availability under credit facilities:

        

Current availability

   $ 250.0      $ 250.0      $ 500.0  

Undrawn letters of credit outstanding

     (12.3      (17.2      (29.5

Outstanding borrowings

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Unused availability

   $ 237.7      $ 232.8        470.5  
  

 

 

    

 

 

    

Cash and cash equivalents

 

     171.8  
        

 

 

 

Total liquidity

 

   $ 642.3  
  

 

 

 

Our liquidity needs change daily. We manage liquidity needs by utilizing our Revolving Facilities and also by monitoring working capital levels. Our A/R Facility availability also depends upon maintaining a sufficient borrowing base of eligible accounts receivable. We believe that we have sufficient capital resources to meet our daily liquidity needs.

Most of our cash resides outside of the United States. The new tax reform legislation in the United States, which, among other things, levies a one-time tax on undistributed foreign earnings and profits, may create opportunities to repatriate cash in the future. However, there may be other restrictions to repatriating cash, such as foreign exchange ceilings imposed by local governments, other regulatory requirements and lengthy approval processes that foreign governments require for international cash transfers. As a result, we are still evaluating our plans regarding cash repatriation. At September 30, 2018, $136.0 million of our cash and cash equivalents was held by our foreign subsidiaries.

 

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Historical cash flows

Nine months ended September 30, 2018 and 2017

 

     Nine months ended
September 30,
     Change  
(in millions)    2018      2017  

Net cash provided by (used in):

        

Operating activities

   $ 130.6      $ (20.5    $ 151.1  

Investing activities

     (23.2      (92.7      69.5  

Financing activities

     (115.9      99.6        (215.5

Capital expenditures

     32.3        15.8        16.5  

Cash flows from operating activities increased $151.1 million primarily due to the VWR Acquisition. Our net loss excluding non-cash items such as depreciation and amortization, share-based compensation, deferred income tax provision, loss on extinguishment of debt and amortization and write-off of deferred financing costs, grew by $133.7 million, while working capital changes contributed an additional $17.4 million.

Cash flows from investing activities increased primarily due to the absence of a business acquisition in 2018. This reduction in spending was partially offset by higher capital expenditures in 2018 due to the acquisition of VWR, which requires a certain level of recurring capital expenditure.

Cash flows from financing activities changed from net cash provided in 2017 to net cash used in 2018. The change was caused by a significant debt refinancing and stockholder distribution in 2017 as well as ordinary changes in borrowing levels under the A/R Facility. Cash outflows for the nine months ended September 30, 2018 included $95.4 million of debt repayments and $20.5 million of contingent consideration payments related to previous acquisitions. There are no material liabilities currently remaining for contingent consideration.

Years ended December 31, 2017 and 2016

 

     December 31,      Change  
(in millions)    2017      2016  

Net cash provided by (used in):

        

Operating activities

   $ (167.5    $ 72.9      $ (240.4

Investing activities

     (6,676.0      (29.9      (6,646.1

Financing activities

     6,965.0        (43.5      7,008.5  

Capital expenditures

     25.2        29.9        (4.7

Cash flows from operating activities decreased $240.4 million primarily due to a $165.2 million increase in fees paid to New Mountain Capital and an $82.3 million increase in interest payments. Other changes to operating cash flows from working capital changes were substantially offset by earnings, as adjusted for non-cash items.

Cash flows from investing activities decreased $6.6 billion primarily due to the acquisition of VWR for $6.6 billion.

Cash flows from financing activities increased $7.0 billion, the result of $1.8 billion raised from the issuance of Existing Senior Preferred Stock and warrants, $1.2 billion raised from the issuance of the Existing Junior Convertible Preferred Stock and a $6.0 billion net increase in debt borrowings to finance the VWR Acquisition, partially offset by $1.7 billion of distributions and $319 million of cash paid for debt refinancings.

 

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Years ended December 31, 2016 and 2015

 

     Year ended
December 31,
     Change  
(in millions)    2016      2015  

Net cash provided by (used in):

        

Operating activities

   $ 72.9      $ 124.6      $ (51.7

Investing activities

     (29.9      (35.4      5.5  

Financing activities

     (43.5      (87.6      44.1  

Capital expenditures

     29.9        20.9        9.0  

Cash flows from operating activities decreased by $51.7 million primarily due to: $28.1 million of additional cash paid for interest, $27.3 million of transaction fees paid to New Mountain Capital for two debt refinancings, additional cash paid for income taxes of $19.0 million, partially offset by $26.9 million of net loss excluding non-cash items such as depreciation and amortization, share-based compensation and deferred income tax provision.

Cash flows from investing activities increased by $5.5 million due to the absence of $14.5 million paid for a business acquisition in 2015, which was partially offset by a $9.0 million increase in capital expenditures.

Cash flows from financing activities increased by $44.1 million primarily due to a net increase in borrowings of $981.2 million from the June and September 2016 refinancings, which was substantially offset by $56.4 million of cash paid for financing fees and premiums, $701.8 million of additional cash paid to repurchase CPECs and a $156.4 million increase in stockholder distributions.

Indebtedness

In November 2017, we refinanced substantially all of our debt through our wholly-owned subsidiary Avantor Funding, Inc. As a result, our availability under credit facilities, debt borrowings and interest each significantly increased. We also extended the overall maturity profile of our debt. The refinancing resulted in payments of $283.1 million to fund debt issuance costs, $273.5 million of which was deferred and is being recognized as interest expense through the maturity dates of our debt. We also incurred a loss on extinguishment of debt of $34.6 million. Each of those amounts excludes transaction fees paid to New Mountain Capital.

 

In connection with the foregoing, Avantor Funding, Inc. entered into (i) a senior secured term facility, or the “Term Loan Facility,” for the borrowing of approximately $3,154.3 million, including a $1,953.1 million U.S. dollar tranche, or the “Dollar Term Loan Facility” and a €1,000 million euro tranche, or the “Euro Term Loan Facility” and (ii) a senior secured revolving credit facility of up to $250.0 million, or the “Revolver” and, together with the Term Loan Facility, the “Senior Secured Credit Facilities,” each with a syndicate of financial institutions led by Goldman Sachs Bank USA, as administrative agent and collateral agent. The Term Loan Facility and the Revolver mature in November 2024 and November 2022, respectively, and have the terms described under “Description of Indebtedness—Senior Secured Credit Facilities.” In November 2018, Avantor Funding, Inc. entered into a repricing amendment to the Term Loan Facility to lower the applicable interest rate margin for each of the U.S. dollar tranche and the euro tranche.

In addition, in 2017, VWR Receivables Funding, LLC entered into an amended and restated receivables facility (the “A/R Facility” together with Revolver the “Revolving Facilities”) with PNC Bank, National Association, as administrator. The A/R Facility provides us with borrowing capacity in an aggregate principal amount of up to $250.0 million. As of September 30, 2018, we had $237.7 million of additional capacity thereunder (after giving effect to $12.3 million of issued but undrawn letters of credit). The A/R Facility matures in November 2020 and has the terms described under “Description of Indebtedness—A/R Facility.”

 

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Further, in 2017, Avantor Funding, Inc. issued (i) $1.5 billion aggregate principal amount of 6.000% Senior First Lien Notes due 2024 (the “Dollar Notes”), (ii) €500 million aggregate principal amount of 4.750% Senior First Lien Notes due 2024 (the “Euro Notes” and together with the Dollar Notes, the “Senior Secured Notes”) and (iii) $2 billion aggregate principal amount of 9.000% Senior Notes due 2025 (the “Senior Unsecured Notes”), each in an exempt offering pursuant to Rule 144A and Regulations S under the Securities Act. The Senior Secured Notes and the Senior Unsecured Notes mature in October 2024 and October 2025, respectively, and have the terms described under “Description of Indebtedness-Senior Secured Notes” and “Description of Indebtedness—Senior Unsecured Notes.”

The credit agreement governing the Senior Secured Credit Facilities (the “Credit Agreement”), the purchase agreement governing the A/R Facility (the “A/R Purchase Agreement”) and the indentures governing the Senior Secured Notes (the “Secured Indenture”) and Senior Unsecured Notes (the “Unsecured Indenture” and, together with the Secured Indenture, the “Indentures”) contain a number of affirmative and negative covenants, which we consider to be customary and usual. As of September 30, 2018, we were in compliance with all of these covenants. For more information regarding the terms of our indebtedness, see “Description of Indebtedness.”

Among other things, the Credit Agreement and the Indentures restrict the ability of Avantor Funding, Inc. to pay dividends or make other distributions to Avantor, Inc. As of September 30, 2018, substantially all of our net assets were held by our subsidiaries.

In addition, under the Credit Agreement, we are required to satisfy and maintain a maintain a consolidated first lien net leverage ratio of 7.35:1.00, in periods when we have drawn more than 35% of our revolving credit facility. To date, the covenant has not yet become applicable. Our continued ability to meet this financial ratio can be affected by events beyond our control, and we may not meet such ratio in the future.

This financial ratio, as well as others including the (i) consolidated interest coverage ratio, consolidated total net leverage ratio and fixed charge coverage ratio, which are utilized, among other things, in the debt incurrence covenants of the Credit Agreement, the Credit Agreement and the Indentures, respectively (ii) consolidated secured net leverage ratio and consolidated total debt ratio, which are utilized, among other things, in the investment covenant of the Credit Agreement and the Indentures, respectively and (iii) consolidated secured debt ratio, which is utilized, among other things, in the liens incurrence covenant of the Indentures, involve the calculation of a non-GAAP financial measure that we refer to in this discussion as “Covenant EBITDA.”

Contractual obligations

The following table presents our contractual obligations at December 31, 2017:

 

     Payments due by period  
(in millions)    Total      Less than
1 year
     1-3 years      3-5 years      More than
5 years
 

Debt:(1)

              

Principal(2)

   $ 7,396.1      $ 38.2      $ 140.4      $ 65.5      $ 7,152.0  

Interest(3)

     3,328.6        464.0        922.0        911.1        1,031.5  

Operating leases

     180.2        44.6        60.0        38.2        37.4  

Purchase obligations(4)

     109.0        99.5        9.5        —          —    

Other liabilities:

              

Underfunded pension obligations

     136.6        6.7        14.0        15.7        100.2  

Transition tax payments(5)(6)

     158.8        12.7        25.4        25.4        95.3  

Other

     36.3        20.1        9.9        1.5        4.8  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,345.6      $ 685.8      $ 1,181.2      $ 1,057.4      $ 8,421.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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(1)

Includes capital lease obligations, which were not material. To calculate payments for principal and interest, we assumed that variable interest rates, foreign currency exchange rates and outstanding borrowings under credit facilities were unchanged from December 31, 2017 through maturity.

(2)

Our Senior Secured Credit Facilities would require us to accelerate our principal repayments should we generate excess cash flows, as defined, in future periods.

(3)

In November 2018, we amended our Senior Secured Credit Facilities to reduce the interest rate margins on our euro term loans by 0.50% and our U.S. term loans by 0.25%. We expect the amendment to result in annual interest savings of approximately $10 million.

(4)

Purchase obligations for certain products and services are made in the normal course of business to meet operating needs.

(5)

Represents our provisional estimate of the transition tax obligation due over eight years to transition to the modified territorial tax system under new U.S. income tax legislation.

(6)

In the third quarter of 2018, we updated our provisional accounting for tax reform and determined that our transition tax payable was $77.3 million. The transition tax payments were revised as follows: $6.2 million in 2018, $12.4 million from 2019 to 2020, $12.4 million from 2021 to 2022 and $46.3 million thereafter. This adjustment is not included in the table.

Off-Balance Sheet Arrangements

We do not use special purpose entities or have any other material off-balance sheet financing arrangements except for our receivables facility, letters of credit and operating leases. We enter into these arrangements for ordinary business reasons and believe that they are governed by ordinary commercial terms. See Notes 14 and 23 to the audited consolidated financial statements included elsewhere in this prospectus for more information.

Critical Accounting Policies and 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. Those estimates and assumptions are based on our best estimates and judgment. We evaluate our estimates and assumptions on an ongoing basis using historical experience and known facts and circumstances. We adjust our estimates and assumptions when we believe the facts and circumstances warrant an adjustment. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates.

We consider the policies and estimates discussed below to be critical to an understanding of our financial statements because their application places the most significant demands on our judgment. Specific risks for these critical accounting policies are described in the following sections. For all of these policies, we caution that future events rarely develop exactly as forecast, and such estimates routinely require adjustment.

Our discussion of critical accounting policies and estimates is intended to supplement, not duplicate, our summary of significant accounting policies so that readers will have greater insight into the uncertainties involved in these areas. For a summary of all of our significant accounting policies, see Note 2 to the audited annual financial statements included elsewhere in this prospectus.

Estimating the fair value of assets acquired from VWR

In November 2017, we acquired VWR for a purchase price of $6.6 billion. To account for the acquisition, we were required to allocate the purchase price to the assets acquired and liabilities assumed based on their individual fair values with the excess allocated to goodwill.

Estimating fair value requires the use of significant unobservable inputs, or level 3 measurements. Determining these inputs requires us to make significant assumptions and judgments. Those estimates impacted

 

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nearly all captions on our consolidated balance sheet and the amount of net sales, cost of sales, depreciation and amortization expense and income tax expense on our statement of operations. Using different estimates or assumptions would have materially affected our results in 2017 and future periods. For example:

 

   

A one percent decrease to the rate we used to discount future cash flows would have increased the fair value of finite-lived intangible assets by $580 million and increased annual amortization expense by $25 million; and

 

   

An overall one-year decrease to our estimates of remaining useful lives would have increased annual amortization of our customer relationships by $11 million and annual depreciation of our property, plant and equipment by $17 million.

All purchase accounting estimates are determined as of the acquisition date and are not adjusted for future developments. However, any differences between acquisition-date estimates and actual future results could impact other subsequent accounting under GAAP, such as the results of future impairment tests.

Accounting for changes to income tax laws

Income tax laws change from time to time. The effect of a change in tax law on deferred tax assets and liabilities is recognized as a cumulative adjustment to income tax expense or benefit in the period of enactment. The effect of a change in tax law on the income tax expense or benefit itself is recognized prospectively for the applicable tax years.

In December 2017, tax reform legislation was enacted in the United States. The new legislation included a broad range of corporate tax reforms, some of which were very complex. The new legislation caused us to recognize a provisional income tax benefit of $126.7 million for 2017 and an additional benefit of $48.8 million when we updated our accounting for tax reform in 2018. Additional details are included in Note 20 to the audited annual financial statements included in elsewhere in this prospectus.

Testing goodwill and other intangible assets for impairment

As a result of the VWR Acquisition, we carry significant amounts of goodwill and other intangible assets on our consolidated balance sheet. At September 30, 2018, the combined carrying value of goodwill and other intangible assets, net of accumulated amortization and impairment charges, was $7.5 billion or 74% of our total assets.

Required annual assessment

On October 1 of each year, we perform annual impairment testing of our goodwill and indefinite-lived intangible assets, or more frequently whenever an event or change in circumstance occurs that would require reassessment of the recoverability of those assets. The impairment analysis for goodwill and indefinite-lived intangible assets consists of an optional qualitative test potentially followed by a quantitative analysis. These measurements rely upon significant judgment from management described as follows:

 

   

The qualitative analysis for goodwill and indefinite-lived intangible assets requires us to identify potential factors that may result in an impairment and estimate whether they would warrant performance of a quantitative test;

 

   

The quantitative goodwill impairment test requires us to estimate the fair value of our reporting units. We estimate the fair value of each reporting unit using a weighted average of three valuation methods based on discounted cash flows, market multiples and market references. These valuation methods require management to make various assumptions, including, but not limited to, future profitability, cash flows, discount rates, weighting of valuation methods and the selection of comparable publicly traded companies; and

 

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The quantitative test for indefinite-lived intangible assets is determined using a discounted cash flow method that incorporates an estimated royalty rate, an estimated discount rate and certain other assumptions.

Our estimates are based on historical trends, management’s knowledge and experience and overall economic factors, including projections of future earnings potential. Developing future cash flows in applying the income approach requires us to evaluate our intermediate to longer-term strategies, including, but not limited to, estimates about net sales growth, operating margins, capital requirements, inflation and working capital management. The development of appropriate rates to discount the estimated future cash flows requires the selection of risk premiums, which can materially impact the present value of future cash flows. Selection of an appropriate peer group under the market approach involves judgment, and an alternative selection of guideline companies could yield materially different market multiples. Weighing the different value indications involves judgment about their relative usefulness and comparability to the reporting unit.

Based on the preliminarily results of our October 1, 2018 impairment testing, we do not believe that any impairment charges will be recognized for the fourth quarter of 2018. The percentage by which the fair value of each reporting unit exceeded its respective carrying amount ranged between approximately 60% to 380%.

Determination of operating segments and reporting units

Effective October 1, 2018, we established three new reporting units aligned to geographic operating segments based on customer location: Americas, Europe and AMEA. Prior to this, we determined that we had three reporting units aligned to product groups.

The determination of operating segments and reporting units requires us to exercise significant judgment, especially in determining (i) the basis of segmentation used by our Chief Executive Officer and segment management at various points in time across the reporting periods; and (ii) whether components of operating segments are economically similar and therefore aggregated. Determining one basis of segmentation versus another fundamentally changes the way economic and other changes will impact individual reporting units; an impairment could be recognized under one basis but not another, or the impairment could be of different magnitudes. If we make a judgment that reporting units are economically dissimilar when in fact they are similar, we will establish more reporting units than necessary. This would put us at a greater risk of goodwill impairment because there will be a smaller portfolio to potentially mitigate specific types of business downturn or other indicators of impairment.

Estimating valuation allowances on deferred tax assets

We are required to estimate the degree to which tax assets and loss carryforwards will result in a future income tax benefit, based on our expectations of future profitability by tax jurisdiction. We provide a valuation allowance for deferred tax assets that we believe will more likely than not go unused. If it becomes more likely than not that a deferred tax asset will be realized, we reverse the related valuation allowance and recognize an income tax benefit for the amount of the reversal. At September 30, 2018, our valuation allowance on deferred tax assets was $195.0 million, most of which relates to foreign net operating loss carryforwards that are not expected to be realized.

We must make assumptions and judgments to estimate the amount of valuation allowance to be recorded against our deferred tax assets, which take into account current tax laws and estimates of the amount of future taxable income, if any. Changes to any of the assumptions or judgments could cause our actual income tax obligations to differ from our estimates.

Accounting for uncertain tax positions

In the ordinary course of business, there is inherent uncertainty in quantifying our income tax positions. We assess income tax positions for all years subject to examination based upon our evaluation of the facts,

 

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circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded an amount having greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority assumed to have full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Our reserve for uncertain tax positions was $88.3 million at September 30, 2018, exclusive of penalties and interest. Where applicable, associated interest expense has also been recognized as a component of the provision for income taxes.

We operate in numerous countries under many legal forms and, as a result, we are subject to the jurisdiction of numerous domestic and non-U.S. tax authorities, as well as to tax agreements and treaties among these governments. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations and the use of estimates and assumptions regarding significant future events, such as the amount, timing and character of deductions and the sources and character of income and tax credits. Changes in tax laws, regulations, agreements and treaties, currency exchange restrictions or our level of operations or profitability in each taxing jurisdiction could have an impact upon the amount of current and deferred tax balances and hence our net income.

We file tax returns in each tax jurisdiction that requires us to do so. Should tax return positions not be sustained upon audit, we could be required to record an income tax provision. Should previously unrecognized tax benefits ultimately be sustained, we could be required to record an income tax benefit.

Estimating the fair value of share-based compensation

Our employees have received awards under various share-based compensation plans. Those awards include stock options, restricted stock awards, restricted stock units, stock appreciation rights, mirror units and phantom units. Expense for all of those awards is calculated using a measurement of fair value based on unobservable inputs, a level 3 measurement. Fair value for some of those awards is determined on the grant date and recognized ratably over their vesting term. Fair value for other awards is remeasured at the end of each reporting period.

For awards measured at grant date fair value, we estimate fair value using the Black-Scholes model. This model requires us to make various assumptions with the most significant assumption being the grant date fair value of our shares and the volatility of the stock price. The fair value of our awards may have differed if we had applied different assumptions in the valuation model or if our shares had been traded in a public market. The factors that may impact the grant date fair value of our shares include a change in our customer base, market interest or overall economic conditions. These factors would also have an impact on the volatility of our share price. For example, increasing our expected volatility assumptions by 5% would increase the ongoing expense for our stock options by 10% to 15%.

For awards measured at fair value on a recurring basis, we estimate fair value based upon forecasts and three different valuation methodologies, each of which depends on management making assumptions and judgments. The valuation methodologies include a discounted cash flow approach, a guideline company method and a selected transaction method. In connection with each of these valuation methodologies, we prepare a forecast to project our financial results, identify our terminal growth rate, determine our discount rate, identify comparable companies and transactions, and determine our volatility among other things.

Estimating the net realizable value of inventories

We value our inventories at the lower of cost or net realizable value. We regularly review quantities of inventories on hand and compare these amounts to the expected use of each product or product line, which can require us to make significant judgments. If our judgments prove to be incorrect, we may be required to record a charge to cost of sales to reduce the carrying amount of inventory on hand to net realizable value. As with any significant estimate, we cannot be certain of future events which may cause us to change our judgments.

 

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Quantitative and Qualitative Disclosures About Market Risk

Foreign currency exchange rate risk

While we report our consolidated financial statements in U.S. dollars, a significant portion of the underlying operations are denominated in foreign currencies, principally the euro but also the British pound sterling and many others. Changes to foreign currency exchange rates expose us to the risk of: (i) changes to our earnings from the remeasurement of foreign-denominated financing; (ii) changes to earnings from the translation of our foreign operations into U.S. dollars; and (iii) changes to the reported value of our cash and cash equivalents.

Our U.S. subsidiaries carry a significant amount of euro-denominated debt, which is significantly hedged by intercompany borrowing arrangements. We also enter into cross-border purchasing and service arrangements in the ordinary course of business. We remeasure these transactions into local currencies each period, and the translation effect is recognized immediately in earnings. Our most significant exposure to changes in foreign currency rates at December 31, 2017 was €190 million of unhedged intercompany loans receivable. A one percent decrease to the price of the euro in U.S. dollars at December 31, 2017 would have required us to reduce our 2017 pretax income by $2.3 million.

Changes to foreign currency exchange rates could favorably or unfavorably affect our operating results. For example, during times of a strengthening U.S. dollar, our reported international sales and earnings will be reduced because local currencies will translate into fewer U.S. dollars. In December 2017, 45% of our net sales were denominated in foreign currencies. At that proportion, a 5% increase to the value of the U.S. dollar compared to all other foreign currencies would result in a $22.5 million decrease per $1 billion of reported net sales.

Most of our cash and cash equivalents are denominated in foreign currencies. At December 31, 2017, a 10% increase in the value of U.S. dollar compared to all other foreign currencies would have caused our cash and cash equivalents to decrease by $14.1 million.

Interest rate risk

We carry a significant amount of debt that exposes us to interest rate risk. A significant portion of our debt consists of variable-rate instruments. We have also issued fixed-rate secured and unsecured notes. None of our other financial instruments are subject to material interest rate risk.

At December 31, 2017, we had borrowings of $3.2 billion under our Senior Secured Credit Facilities. These facilities bear interest at variable rates based on prevailing LIBOR and EURIBOR rates in the financial markets. Changes to those market rates affect both the amount of cash we pay for interest and our reported interest expense. Our euro term loans include a zero percent floor on EURIBOR, which has been negative, so the floor provides a partial hedge of our variable interest rate risk on that loan. At December 31, 2017, a 100 basis point increase to the applicable variable rate of interest would have increased the amount of interest by $25.1 million per annum.

Our Senior Secured Notes and Senior Unsecured Notes bear interest at fixed rates, so their fair value will increase if interest rates fall and decrease if interest rates rise. At December 31, 2017, a 100 basis point decrease in the market rate of interest for the notes would have increased their aggregate fair value by $236.3 million.

 

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BUSINESS

Company Overview

We are a leading global provider of mission critical products and services to customers in the biopharma, healthcare, education & government, and advanced technologies & applied materials industries. Our comprehensive offerings, which include materials & consumables, equipment & instrumentation and services & specialty procurement, are relied upon by our customers, often on a recurring basis, because they are frequently specified into their research, development and production processes. These processes are commonly organized into “workflows” that define the activities our customers perform each day. We collaborate closely with our customers to enable them to develop new innovative products, lower their development and production costs, improve product or process performance characteristics, and enhance the safety and reliability of the drugs, devices, and other products they produce. In addition to relying on our products, many customers depend upon our services. Some of these services are performed by approximately 1,400 of our associates that are co-located with certain customers, working side-by-side with their scientists every day. Our local presence combined with our global infrastructure enable and promote successful relationships with our customers and connect us to over 240,000 of their locations in over 180 countries. Our mission is to set science in motion to create a better world.

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. Selected offerings sold to our customers in discovery, research, development and production processes include:

 

   

Materials & consumables: Ultra-high purity chemicals and reagents, lab products and supplies, highly specialized formulated silicone materials, customized excipients, customized single-use assemblies, process chromatography resins and columns, analytical sample prep kits and education and microbiology and clinical trial kits;

 

   

Equipment & instrumentation: Filtration systems, virus inactivation systems, incubators, analytical instruments evaporators, ultra-low-temperature freezers, biological safety cabinets and critical environment supplies; and

 

   

Services & specialty procurement: Onsite lab and production, clinical, equipment, MarketSource procurement & sourcing and biopharmaceutical material scale-up and development.

We have deep expertise in developing, customizing, manufacturing and supplying products for a wide variety of workflows, allowing us to provide tailored solutions throughout the lifecycle of our customers’ products. In aggregate, we provide approximately six million products, including products we make as well as products from approximately 4,000 core suppliers across the globe. We manufacture products that meet or exceed the demanding requirements of our customers across a number of highly-regulated industries. Our high-purity and ultra-high purity products, such as our J.T.Baker and SeaStar brand chemicals, are trusted by life sciences and electronic materials customers around the world and can be manufactured at purity levels as stringent as one part-per-trillion. Similarly, our NuSil brand of high-purity, customized silicones has been trusted for more than thirty years by leading medical device manufacturers and aerospace companies.

We complement our products with a range of value-added services. Each day, our onsite service associates work side-by-side with our customers to support their workflows. This close proximity to our customers and their workflows allows our associates to develop insights into how to serve them better. In certain cases, customers choose to fully leverage our value-added services and expertise by outsourcing specialized workflows entirely to us, further connecting us to their operations and allowing us to identify new business opportunities. We believe our growing services offering is a competitive advantage that further differentiates us from our competitors, deepens our relationships with current customers and enhances our ability to reach new ones.

We employ a differentiated innovation model that is informed by our embedded relationships with our customers and enables us to anticipate and align our innovation efforts with our customers’ priorities. We engage

 

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with our customers early in their product development cycles through our 300-person innovation team to advance our customers’ programs from research and discovery through development and commercialization. At each step of our customers’ workflows, we share our scientific and workflow expertise to help deliver incremental and sustainable improvements to existing customer products and processes. These projects include enhancing product purity and therefore its performance characteristics, improving product packaging and streamlining workflows. Our strategic initiatives include the development of new products in emerging areas of science such as cell and gene therapy. We currently have approximately 1,400 innovation projects with our customers that address process improvements for existing products and potential significant new opportunities for us to support.

We are a strategic partner to a diverse and sophisticated customer base with stringent quality and regulatory demands. Our ability to customize products and processes at scale while meeting these quality and regulatory requirements and the embedded nature of our business model have made us an integral part of our customers’ development programs and broader supply chain. We are incorporated in over 800 of our customers’ MAFs and DMFs that are registered with regulatory authorities around the world. Additionally, we are able to meet the exacting quality and regulatory requirements of our advanced technologies & applied materials customers, including semiconductor manufacturers, by providing materials at purity levels as stringent as one part-per-trillion. We have developed long-standing relationships with a global customer base, and generated approximately 35% of our revenues for the nine months ended September 30, 2018 from customers with whom we have 15+ year relationships. In total, in 2018 we believe we served established leaders and emerging innovators across each of the industries we serve:

 

 

LOGO

The combination of our innovation centers and manufacturing facilities empowers us to support our customers from the earliest stages of their product innovation to commercial manufacturing, and provides us multiple opportunities to serve as a critical partner to them. Our eight regional innovation centers located in five different countries (including four currently operating in the AMEA region and a fifth which we expect to be operational in mid-2019), allow us to efficiently support the product development needs of our diverse customer base. In addition, we have 27 manufacturing facilities, 13 of which are cGMP compliant and 12 of which are regulated by the FDA or comparable foreign regulatory authorities. Led by our globally recognized VWR brand, we have approximately 150 sales and distribution centers strategically located to promote supply chain efficiency, enabling us to deliver orders virtually anywhere in the world, often within 24 to 48 hours. We employ approximately 3,800 sales and sales support professionals around the world who are focused on serving our customers through a local presence. Our professionals’ comprehensive industry-specific knowledge is supplemented by our leading online customer platform which affords current and potential customers a rich, informative and customized user experience and allows us to better address a global customer base. Many customers choose to directly integrate their ordering activity with our online platform. We have over 2,500 integrated connections with our customers and approximately 1,000 integrated connections with our suppliers to simplify and expedite their transactions with us. In 2018, approximately 45% of our customer orders came from our online platform.

We recorded net sales of $4,390.4 million, net loss of $33.6 million and Adjusted EBITDA of $710.0 million for the nine months ended September 30, 2018. We generated revenue growth of approximately 10% for the nine months ended September 30, 2018 as compared to the same period in the prior year on a

 

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combined basis, and approximately 85% of our revenues were from offerings that are recurring in nature. For the definitions of Adjusted EBITDA, and a reconciliation of Adjusted EBITDA to net income or loss, please see “Summary—Summary Historical Financial and Other Data.”

Our Competitive Strengths

Our customer-centric business model, combined with our deep understanding of our customers’ workflows, allows us to differentiate ourselves in the marketplace and is at the core of our competitive advantage. We believe the following competitive strengths provide the foundation for our position as the partner of choice for mission critical products and services to our customers:

Trusted Partner With Deep Customer Relationships. Our end-to-end integrated workflow platform and our ability to partner at every stage of research, development and commercialization have led to deep, embedded customer relationships. Approximately 1,400 of our associates are co-located with certain customers, working side-by-side with their scientists every day. We have collaborated with and supported many of our strategic global accounts for decades, and approximately 35% of our revenue for the nine months ended September 30, 2018 was generated by customers with whom we have maintained relationships for over 15 years. We serve large, multinational customers through our dedicated Strategic Partners group, which deepens our relationship with these customers and allows us to support their critical workflows throughout their global operations. We also hold strong positions with many smaller and emerging companies. For example, through our 20-year, relationship with Biotechnology Innovation Organization (“BIO”), the world’s largest biotech trade association, we are well-positioned to serve as the supplier of choice to many startups and emerging companies. Collectively, the community of innovators we serve through our BIO agreement is one of our largest customers. Regardless of company size or development stage, our customers seek a partner with innovative and comprehensive product offerings, superior quality, advanced manufacturing and skilled technical services to support all of their research, development and commercialization needs. Based on our expertise and experience in these areas, we believe we are a critical partner for our customers.

Customized Offerings to Address Our Customers’ Evolving Needs. We work closely with our customers to provide highly customized formulations across a variety of workflows. Our customization capabilities span the entire spectrum of core customer requirements, including purity, composition, blending, kitting, form factor, packaging, lot size and specialized certifications. In demanding medical device workflows, where customization and precision are essential, our NuSil brand of formulated silicones is trusted by device manufacturers to create healthcare products and implantable devices approved by the FDA. Many of our product brands, such as J.T. Baker, have been specified and trusted for decades in critical biopharma processes as well. Our ability to rapidly customize and innovate has led to significant adoption of our products as we and our customers seek to improve productivity and establish new processes. In addition, many of our products are routinely used in complex and sensitive workflows such as Liquid Chromatography/Mass Spectrometry. Similarly, as the power of Next Generation Sequencing revolutionizes the scientific understanding of biological systems, enhances diagnostics, and screens patients for clinical trials, our strong offering related to sample preparation combined with our evolving digital capabilities enable scientists to tackle complex genomic and clinical research challenges. Our highly specialized and customized development, manufacturing and servicing capabilities also allow us to continue to pursue customized solutions in emerging and innovative therapeutic areas such as cell and gene therapies.

Depth And Breadth of Product and Service Offerings. Our comprehensive portfolio of materials & consumables, equipment & instrumentation and services & specialty procurement enables us to serve some of the most demanding and challenging areas of science. We offer more than six million distinct products that are often required by our customers in many of their most important processes. Our portfolio includes products valued for their exacting purity and performance specifications, some of which we manufacture to purity levels as stringent as one part-per-trillion. In addition, we offer our customers comprehensive value-added services which include lab and production services, clinical services, equipment services,

 

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procurement and sourcing services, biopharma material scale-up and development services. We also offer additional services such as research support, DNA extraction, sample prep, compound management and other innovative technical services needed in the laboratory. We are dedicated to bringing new digital insights and capabilities to our customers as we collaborate to cultivate the “lab of the future” – a lab capable of generating and digesting vast amounts of data with IoT devices.

Quality and Regulatory Expertise Drives Customer Loyalty. We serve industries that are subject to rigorous quality, performance and reliability regulations. Our customers rely on us to navigate these requirements while also facilitating their innovation and manufacturing efforts. We have submitted and maintain over 800 MAFs and DMFs with the FDA and comparable local regulatory authorities in nine countries, which simplifies our customers’ medical product approval processes by allowing them to reference our products as part of their own applications. We utilize supply chain transparency and security practices, manufacturing batch tracking, statistical controls, tamper-evident packaging, and multi-compendial product standards to meet our customers’ requirements. In addition, our 13 cGMP facilities and 19 ISO-certified distribution facilities create a distribution and manufacturing network that is designed to meet stringent quality and regulatory requirements. Our quality expertise is highly valued, including in semiconductor manufacturing, where customer demands for precision frequently exceed those in pharmaceuticals, biologics and medical devices. Our manufacturing expertise allows us to utilize the same manufacturing line for all stages of development and commercialization thus reducing customer regulatory burdens as their products progress from the laboratory to full scale production. This differentiated approach allows our customers to bring their products to market faster and more efficiently, and allows us to typically maintain our position over the life of the product given the regulatory requirements as well as the costs and risks involved in substituting our products.

Customer-Centric Innovation Framework. We employ a differentiated innovation model that is informed by our embedded relationships with our customers and enables us to anticipate and align our innovation efforts with our customers’ priorities. Grounded in our business and portfolio strategies, we have a comprehensive innovation system that seamlessly integrates our talent, key processes, functions, infrastructure and metrics. We take a portfolio approach to our activities and focus on both incremental and breakthrough innovation. We will continue to serve the most successful established and emerging companies through:

 

   

Proprietary Product Innovations. We engage with our customers throughout their product lifecycles, including during initial discovery and development activities, to create materials and solutions that meet stringent specifications. We currently have approximately 1,400 innovation projects with our customers that address process improvements for existing products and potential significant new opportunities for us to support.

 

   

Third-Party Product Innovations. We are an important channel for thousands of specialized manufacturers of complex and sophisticated scientific products. Because we are already embedded in key customer workflows and are widely trusted among a broad collection of emerging and established suppliers, we are able to accelerate market acceptance and growth of promising third-party innovations.

 

   

Data and Research Analytics. We are actively engaged in developing advanced, innovative data integration and analytical solutions to support the vast amounts of data being generated by our customers. By relying on our data capabilities and insights, we will allow our customers to continue to focus on their core competencies while also participating in the benefits derived from analyzing and utilizing data.

Global Scale, Strategic Locations and Specialized Infrastructure. We are strategically located close to our global customers to drive supply chain efficiency, minimize customer lead times and navigate a complex network of regulatory requirements. Our highly dispersed customer base often requires access to intensely-regulated materials, which few other companies can address as well as we do given our

 

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capabilities and infrastructure. Our global footprint consists of over 200 facilities located in over 30 countries and allows us to deliver our extensive portfolio of products and services to customers nearly anywhere in the world and generally within 24 to 48 hours. We have the expertise and government licenses to manage multiple controlled environments globally, enabling us to safely and in a compliant manner handle highly regulated chemicals and other materials. Our local and regional sales associates, offshore support teams and global export organization are complemented by our multi-language online platform, which can display 17 languages and accept 10 currencies. Our global manufacturing, innovation, sales and customer service locations, combined with our online platform, allow us to provide outstanding service to our customers and enable us to grow.

Attractive Financial Profile and Scalable Operating Platform. We believe we have an attractive business model due to our scale, resilient and recurring revenue base, demonstrated operating leverage, and strong cash flow generation. We generated revenue growth of approximately 10% for the nine months ended September 30, 2018 as compared to the same period in the prior year on a combined basis. The cost of our products is often a small percentage of the overall cost of our customers’ workflow, resulting in a resilient business profile. Additionally, for the nine months ended September 30, 2018, approximately 85% of our sales were from our materials & consumables and services & specialty procurement offerings which we consider to be recurring. By employing ABS, a disciplined approach to continuously unlocking operational efficiencies, we have a demonstrated track record of improving profitability and driving cash flow generation. Our platform is further enhanced by a highly disciplined approach to M&A that has historically contributed incremental revenue growth of approximately 1% to 2% per year by targeting businesses that enhance our workflow solutions, increase our technical capabilities and extend our global reach. Over the past ten years, VWR and Avantor have acquired and successfully integrated approximately 50 businesses.

World-Class Leadership with Proven Ability to Execute at Scale. Our 13-member senior executive team has extensive experience within the life sciences and advanced technologies & applied materials industries globally, and possesses a wide network of industry relationships. Our management team has a proven track record of delivering stable revenue growth, executing on investment plans, achieving margin expansion and driving continuous improvement of global enterprises. Our management team is supported by approximately 12,000 associates around the world who have extensive scientific and commercial experience and enable us to provide our customers with tailored expertise and service.

Our Growth Strategies

We intend to capitalize on our world-class platform and distinctive competitive strengths as we pursue the following growth strategies:

Increase Integration of Our Products and Services Into Customers’ Workflows. Our extensive and long-term relationships with our customers and our embedded position in their workflows provide us with unique insights into their activities and understanding of additional products and services that we could offer to them. We translate these insights and understanding, together with our focus on workflows into a convenient one-stop solution for our customers resulting in a growing volume of business.

Develop New Products and Services. We are continuously expanding our portfolio to provide our customers with additional solutions and further expand our addressable markets. Specifically, we are focusing our efforts to expand our portfolio in:

 

   

Bioproduction. We are broadening our range of process ingredients, serums, reagents, excipients, chromotography resins and single-use assemblies for use in the fast-growing bioproduction sector.

 

   

Custom Manufactured Products. We are continuing to partner with our customers to create materials and solutions that meet the unique and stringent specifications for their current and future products. We currently have approximately 1,400 customer-directed projects in development at our innovation centers located around the world.

 

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New Products in High Growth Areas. We are working closely with our sales force and our customers’ R&D teams to understand emerging technologies and regulatory and industry standards that will become critical workflows in high growth industries. This close coordination with customers allows us to make targeted investments in the development of innovative products and solutions, bringing new products and services to market rapidly.

 

   

Service Offerings. We are expanding upon our traditional services, such as specialty procurement, to offer additional innovative, flexible and customized solutions to our global strategic customers. We will continue to expand the scope of our service offerings. In addition, we will increase the complexity, precision and value of our offerings by adding more PhD-level practitioners with a significant level of expertise in particular workflows critical to biopharma and other industries.

 

   

Digital Capabilities. As the volume, velocity, and variety of data generated by our customers continue to expand, the ability to organize and analyze this data for actionable insight has become increasingly critical to our customers. We continue to develop digital solutions and tools to help expedite our customers’ understanding of this critical data. Based on the insights we gain as strategic partners, we are building a broad suite of technology-enabled offerings tailored to our customers’ objectives to increase productivity and effectiveness of their research and manufacturing workflows.

Expand in Geographies Expected to Have Outsized Growth. We are focused on expanding our geographic reach and believe certain emerging economies, including China, Southeast Asia and Eastern Europe, offer a strong opportunity for growth. Local demand for our products and solutions in these regions is being driven by increasingly stringent quality and regulatory requirements, the expansion of our customers’ presence, an inadequate local supplier base and a significant increase in local government investment to support innovation in the industries we serve. We have invested in targeted geographies. We have dedicated executive leadership, R&D and sales force headcount to better serve these high growth markets. For example, we established a research and development facility for our electronic materials customers in Taiwan. Further, in the second half of 2019, we expect to open a new technology and development center in Shanghai to support customer innovation. We expect to continue this accelerating growth trend as we capitalize on our local presence and ability to attract new customers and follow existing ones into new geographies.

Continually Enhance Our Global Online Platform. We are continually improving and expanding our multi-lingual online sales platform in order to deliver our complete portfolio of offerings across all workflows. We will focus on enhancing our online platform in order to improve search engine effectiveness, simplify and personalize the user experience though enhancements to our vwr.com website, and capture greater wallet share at existing customers and business from new customers. Using advanced analytics, we have also developed digital tools and marketing programs to increase the utility and stickiness of our platform, improve order conversion rates and share better insights with our customers regarding their needs and purchasing behaviors.

Increase Commercial Excellence and Operational Efficiency to Drive Margin Expansion. Operational discipline has been a core business focus at Avantor and VWR historically and continues to be our priority across manufacturing, sales and operational processes. ABS is fundamental to our operational growth strategy. ABS uses a team to drive continuous improvement by improving efficiency throughout our supply chain and increasing our overall productivity. Our associates are committed to running Kaizen events across the business in order to establish disciplined, sustainable processes to enhance our culture. This approach will continue to play a key component in our margin expansion plans going forward and will help drive profitability and cash generation.

Pursue Strategic Acquisitions to Expand our Platform. We have a strong track record of successfully identifying, completing and integrating strategic acquisitions. Our broad platform, global infrastructure and diversified customer base allow us to generate growth and operating leverage through such acquisitions. Our deep understanding of our customers’ objectives provides us with the insight to make

 

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highly informed decisions on the acquisitions we should pursue. We have developed internal capabilities to source, evaluate and integrate acquisitions that have created value for stockholders. We intend to continue to pursue opportunistic acquisitions in our existing and adjacent customer segments to accelerate our entry into high-growth markets and geographies as well as add capabilities and workflow solutions.

Industry Overview

We operate primarily in the biopharma, healthcare, education & government and advanced technologies & applied materials industries. We estimate our total addressable market within these industries to be approximately $70 billion in the aggregate in 2018. We expect the total addressable market we serve will grow approximately 5% annually from 2018 to 2020. We expect the convergence of several industry trends to drive increased demand for our products and services:

 

   

Favorable Demographic and Epidemiologic Trends. Healthcare demand is increasing rapidly across most of the world, driven principally by aging populations, an increased prevalence of chronic diseases and improved access to healthcare. In the United States, individuals 65 and older spent three times more on healthcare in 2012 than working-age people between the ages of 19 to 64. At the same time, we expect the percentage of the population aged 65 and older to increase. The Centers for Medicare & Medicaid Services estimates that total healthcare expenditures will go from representing approximately 18% of gross domestic product in 2016 to approximately 20% in 2026, or $5.7 trillion.

 

   

Strong Funding and Externalization of Drug Discovery. R&D activities are accelerating with approximately $200 billion of investment in life sciences being deployed each year by a variety of sources, including governments, startups and large pharmaceutical companies. The increasing contribution of startups to R&D spend is particularly noticeable in the biopharma industry, with more than 100 new companies being founded each year. These companies also control a significant proportion of the new molecules that are in development. These smaller companies often utilize an outsourced R&D model to allow them to focus on their core competencies, access expertise and support more efficiently from partners, and better manage their capital. In parallel, we have seen an increasing trend in R&D outsourcing among large pharmaceutical companies, who are also focused on driving efficiencies in their processes and aim to focus on their key strengths and value generating activities.

 

   

Proliferation of R&D and Development of New Therapeutic Modalities. The rapid, accelerating pace of scientific innovation in the industries we serve is propelling heightened investment in complex and novel research, including new biologic and therapeutic modalities. For example, there has been a proliferation of various targeted therapies and drugs as companies seek to develop new and improve existing therapies and drugs to optimize patient outcomes leading to an increased R&D spend in these areas.

 

   

Emergence of Biosimilars. Biosimilars are rapidly emerging alongside small and large molecule drugs. Based on our evaluation of third-party data, we believe biosimilar sales will exceed $25 billion by 2020.

 

   

Digital Transformation of Science. Scientific research has entered a new era, where the convergence of chemistry, biology and computational science is being utilized to solve complex challenges and create new modalities. The rapid adoption of technologies such as big data and analytics and cloud based solutions represents a meaningful opportunity to automate and optimize mission critical operations and drive competitive differentiation. As the volume, velocity, and variety of data continue to expand, the ability to leverage this data for actionable insight has become increasingly foundational to driving innovation and improving efficiencies in science.

 

   

Positive Research and Development Trends in Advanced Technologies & Applied Materials. The increasing intelligence and mobility of electronic devices coupled with the prevalence of internet access globally are enabling the IoT, a term that describes the massive increase in IP-enabled devices

 

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connected to the Internet. Continued demand for IoT devices and groundbreaking technological advancements, including artificial intelligence and autonomous cars, are driving demand for improved chip designs that often have smaller feature sizes. These new chips will increase the need for ultra-high purity materials, in higher volumes, that are used in the semiconductor manufacturing processes. In addition, the aerospace & defense industry continues to utilize new technologies and features, which has driven growth of spending in this industry.

 

   

Geographic Expansion. Emerging markets represent an attractive growth opportunity given the emerging health needs, increased disposable income of their growing populations and focus on healthcare and innovation by governments in these regions. We expect China and India to significantly increase the amount each spends on healthcare in the future, with China expected to increase investment to make biotech 4% of its GDP by 2020. Chinese venture capital and private equity investment in healthcare reached approximately $20 billion in 2016 and increased to approximately $30 billion in 2017. Biologics only make up 12% of the Chinese market, but are forecasted to grow at a CAGR of more than 16% from 2010 to 2021, compared to approximately 8% in the US. There has been a growing trend where venture capital is buying US intellectual property or molecule licenses for the China market, subcontracting the drug development to Chinese contract research and manufacturing organizations. To respond to the needs in these geographies, many of our customers expanded their operations in these regions resulting in an increased need for our offerings.

 

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Our table presents select applications of our products, services and solutions for the customers in each industry we serve:

 

Industry Sectors

   2018 Management
Estimated
Addressable Market(1)
(approximate dollar
amount in billions)
   Management
Estimated CAGR
(2018 – 2020)
 

Select Research, Development and

Manufacturing Applications

Biopharma

     $ 30        7 %  

•  Small molecule pharmaceutical and generic drugs

 

•  Biologics and biosimilars

 

•  Vaccines, cell and gene therapies and blood components

 

Healthcare

     $ 9        5 %  

•  Medical implants, drug delivery devices, non-implantable devices

 

•  Diagnostic tools and consumables

 

Education & Government

    

$

15

    

 

3

%

 

•  Basic and applied science

 

•  Government sponsored research across multiple areas of discovery

 

•  Kits for primary and secondary science education

 

•  Agricultural and environmental testing

 

Advanced Technologies & Applied Materials

 

    

$

15

    

 

4

%

 

•  Semiconductor manufacturing

•  Aerospace & defense

•  Chemical/petroleum

•  Other Industrial

 

    

 

 

      

 

 

   

Total

 

     $ 70        5 %  
    

 

 

      

 

 

   

 

(1)

2018 Management Estimated Addressable Market includes both products and services.

The scientific communities above are served by a number of laboratory product suppliers and distributors. Customers have historically maintained a complex procurement infrastructure to achieve their procurement and resource objectives in order to source their desired products. They are increasingly seeking to eliminate complexity and improve the effectiveness of their supply chain.

 

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Our customers are sophisticated, science-driven businesses working across highly technical industries that require innovation and adherence to the most demanding technical and regulatory requirements. The following chart presents net sales from each of our end markets for the nine months ended September 30, 2018, of which approximately 65% comes from life sciences:

 

 

LOGO
                                                                                      

Biopharma

We offer a range of products and services along every step of the biopharmaceutical production process, from research and development to commercialization. Our offerings are used by biopharmaceutical companies, biotechnology companies, biosimilar companies, generic drug companies and CMOs of all sizes to specifically address their development and manufacturing needs during each phase of a drug’s lifecycle. We are well-positioned to support the emerging needs of science, providing solutions for both traditional small molecule sectors and the growing, more complex large molecule sector. Specifically, our solutions are specified in 80% of the top 20 currently marketed biologic drugs. These drugs make up 50% of the biopharma industry revenue.

We are a trusted partner and serve the top 10 biotech and pharma companies, and have a 20-year relationship with BIO. We believe we are well-positioned to continue growing in this industry. We estimate that our addressable portion of the biopharmaceutical market for 2018 was approximately $30 billion.

Industry Overview

The biopharma industry is comprised of two primary sectors: large molecule and small molecule drugs. Large molecule drugs are produced in living cells, microorganisms or animals by using bioproduction methods. Other cutting-edge techniques are used after production to isolate, purify and prepare these large molecules for therapeutic use. These drugs include antibodies, vaccines, monoclonal antibodies, gene therapies, and blood components.

Large molecule drugs are produced in a living cell culture and are highly susceptible to changes in the production process that might lead to variations in yield, quality and composition. As a result, large molecule drugs tend to require more complex and costly manufacturing processes than those used to manufacture traditional pharmaceuticals. The large molecule drug manufacturing process is divided into two critical phases, the upstream production of the protein culture and the downstream purification/formulation process. Upstream bioprocessing steps include fermentation, cell growth and product harvest. Downstream steps include product purification and formulation fill and finish. The upstream process steps are needed to drive yield and product conformity, while the downstream steps relate to purification of the active ingredient followed by formulation of a stable drug.

Small molecule drugs, commonly referred to as “traditional pharmaceuticals,” are chemically synthesized and may also use similar techniques as large-molecule drugs for purification and final dosage preparation. The

 

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process of manufacturing small molecule drugs is more predictable than that of large-molecule drugs, as the former are chemically synthesized. This sector contains a well-established generic drug sub-market that provides large volumes of off-patent small molecule pharmaceuticals at significantly reduced prices to patients worldwide.

Large and small molecule drug development is characterized by complex and lengthy research and development processes with strict regulatory requirements. Before a drug is marketed, the drug must go through a regulatory approval process which includes several clinical trials and the submission of an application for approval. In addition to traditional new drug application or biologic license application pathways, there are abbreviated processes to reach FDA approval for generic drugs and biosimilar drugs. The pathway for biosimilars is more complicated than that for generics because the product quality characteristics of the originator molecules are more complex and harder to replicate.

In addition to requiring laboratory products, participants in the biopharma and global life sciences industries also utilize a range of value-added services. These services historically have consisted of stockroom and other operational services performed at customer locations. We believe that these customers are beginning to look to outsource some of the more routine components of their scientific and more complex activities to focus on their core high science research activities.

Regulatory standards have become increasingly stringent in recent years, especially as they relate to the drug manufacturing process and overall supply chain. As a result, biopharma customers look to suppliers who are able to satisfy the industry’s rigorous regulatory and quality standards in all stages, from research and development to full production.

Healthcare

We offer a range of products and services for the medical device industry and diagnostics industry, including inputs to traditional offerings such as medical implantable devices to evolving treatments such as deep brain stimulation used to treat Parkinson’s disease. Our NuSil brand is recognized as a global leader in high-purity silicones used in the manufacture of medical implantable devices, including aesthetic and reconstructive implants, pacemakers and cochlear implants. Our high-purity silicones are also frequently specified into non-implantable medical devices, such as medical-grade tubing, balloons and bladders. Also, we provide medical-grade silicones expertise to customize sustained drug release devices for our pharmaceutical and biologics customers.

Our products and value-added service offerings include medical implants, drug delivery devices, non-implantable devices, and lab equipment onsite services. In addition, we provide reagents across diagnostic chemistries such as hematology, immunology, histology and clinical chemistry to diagnostics companies globally, and diagnostics kits for customers in India and greater Asia.

We are the trusted partners for the top 10 medical device companies and the top 10 diagnostics companies and believe we have the relationships to continue to growth with our customers. We estimate that our addressable portion of the healthcare market for 2018 was approximately $9 billion.

Industry Overview

The medical device industry is focused on providing a range of products, from simple consumables such as surgical gloves to medical implants across a range of applications. These applications include surgical robotics, diabetes, atrial fibrillation, structural heart, neuro, and many others. The medical device industry has many established, large participants as well as a number of fast growing entrants, each fueling innovation and adoption of new technologies. The growth in the industry has been driven by favorable demographics, increased consumer willingness to utilize medical devices, high-tech medical equipment improving patient outcomes and the increasing demand for services from the aging population.

 

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The diagnostics industry consists of companies offering in vitro diagnostic tests that utilize reagents, techniques, or instruments for the analysis of specimens such as blood, urine, or tissue with the goal of obtaining a diagnosis from assays in a controlled environment outside a living organism. The diagnostics industry has many established, large participants as well as a number of highly specialized smaller players, for which lack of scale makes product differentiation essential. The evolution of science and adoption of technology are providing tailwinds for market growth in the near future. The genomics revolution is enabling predictive, personalized medicine and targeted therapies. The digitization of diagnostics is driving a new wave of analytics that will bring continued innovation. These innovations are not only increasing the patient’s standard of living, but are also creating data that needs to be processed, analyzed, and applied for broader population health and to meet their evolving needs. At the same time, the standardization and automation of medical diagnostics is rapidly democratizing previously complex testing, potentially increasing the addressable market.

Education & Government

We are a supplier of materials & consumables and equipment & instrumentation used in academic and government research laboratories. We offer a product suite that includes a variety of high-purity products, including HPLC solvents, solutions, salts, separation media and services that are used in these research laboratories.

We work with 19 of the 20 top research universities in both the United States and Europe, and the top 5 largest U.S. government research agencies. We estimate that our addressable portion of the education & government market for 2018 was approximately $15 billion.

Industry Overview

Academic institutions educate the next generation of scientists, and require high quality products and services to ensure their labs are keeping pace with innovation and supporting breakthroughs in research. In addition to higher education, the industry serves both primary and secondary education, delivering laboratory kits and equipment. Organizations such as the National Science Foundation and the National Institute of Health (“NIH”) fund thousands of university and government programs through grants, cooperative agreements, and contracts. In 2018, there was an increase in U.S. academic spending partially as a result of strong NIH funding, which we expect to further increase by 5% in 2019. In Europe, the 2019 EU Budget is implementing an approximately 10% increase in the Horizon 2020 research and innovation program, with the Health, Demographic Change and Wellbeing Budget in particular receiving a 21% increas