In addition to historical financial information, this discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Our results may differ materially from those contained in or implied by any forward-looking statements. You should carefully read "Cautionary factors regarding forward-looking statements" for additional information. Also, please refer to the "Factors and current trends affecting our business and results of operations" for discussion concerning the ongoing coronavirus outbreak known as COVID-19. Basis of presentation Pursuant toSEC rules for reports covering interim periods, we have prepared this discussion and analysis to enable you to assess material changes in our financial condition and results of operations sinceDecember 31, 2019 , the date of our Annual Report. Therefore, we encourage you to read this discussion and analysis in conjunction with the Annual Report. Overview We are a leading global provider of mission critical products and services to customers in the biopharmaceutical, healthcare, education & government and advanced technologies & applied materials industries. We have global operations and an extensive product portfolio. We strive to enable customer success through innovation, cGMP manufacturing and comprehensive service offerings. The depth and breadth of our portfolio provides our customers a comprehensive range of products and services and allows us to create customized and integrated solutions for our customers. In the third quarter of 2020, we recorded net sales of$1,605.0 million , net loss of$42.2 million , which included a$226.4 loss on extinguishment of debt, and Adjusted EBITDA of$285.6 million . Net sales increased by 6.7%, including an increase in organic net sales of 5.4% compared to the same period in 2019. See "Reconciliations of non-GAAP measures" for a reconciliation of net income (loss) to Adjusted EBITDA and "Results of operations" for a reconciliation of net sales growth to organic net sales growth. Factors and current trends affecting our business and results of operations The following updates the factors and current trends disclosed in the Annual Report. These updates could affect our performance and financial condition in future periods. Our results are being impacted by the ongoing global coronavirus outbreak The COVID-19 pandemic continues to adversely affect global economies, financial markets and the overall environment in which we do business as further described in Part II, Item 1A, "Risk Factors." The outbreak continued to have a mixed impact on the third quarter results of our three regions, as described further in the "Results of operations" section. 25 -------------------------------------------------------------------------------- Table of
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Key indicators of performance and financial condition To evaluate our performance, we monitor a number of key indicators including certain non-GAAP financial measurements that we believe are useful to investors, creditors and others in assessing our performance. These measurements should not be considered in isolation or as a substitute for reported GAAP results because they may include or exclude certain items as compared to similar GAAP-based measurements, and such measurements may not be comparable to similarly-titled measurements reported by other companies. Rather, these measurements should be considered as an additional way of viewing aspects of our operations that provide a more complete understanding of our business. The key indicators that we monitor are as follows: •Net sales, gross margin, operating income and net income or loss. These measures are discussed in the section entitled "Results of operations;" •Organic net sales growth, which is a non-GAAP measure discussed in the section entitled "Results of operations." Organic net sales growth eliminates from our reported net sales the impacts of earnings from any acquired or disposed businesses and changes in foreign currency exchange rates. We believe that this measurement is useful to investors as a way to measure and evaluate our underlying commercial operating performance consistently across our segments and the periods presented. This measurement is used by our management for the same reason. Reconciliations to the change in reported net sales, the most directly comparable GAAP financial measure, are included in the section entitled "Results of operations;" •Adjusted EBITDA and Adjusted EBITDA margin, which are non-GAAP measures discussed in the section entitled "Results of Operations." Adjusted EBITDA is used by investors to measure and evaluate our operating performance exclusive of interest expense, income tax expense, depreciation, amortization and certain other adjustments. Adjusted EBITDA margin is Adjusted EBITDA divided by net sales as determined under GAAP. We believe that these measurements are useful to investors as a way to analyze the underlying trends in our core business consistently across the periods presented. This measurement is used by our management for the same reason. A reconciliation of net income or loss, the most directly comparable GAAP financial measure, to Adjusted EBITDA is included in the section entitled "Reconciliations of non-GAAP measures;" •Cash flows from operating activities, which we discuss in the section entitled "Liquidity and capital resources-historical cash flows." Results of operations We present results of operations in the same way that we manage our business, evaluate our performance and allocate our resources. We also provide discussion of net sales and Adjusted EBITDA by geographic segment based on customer location:Americas ,Europe and AMEA. Corporate costs are managed on a standalone basis and not allocated to segments. 26 --------------------------------------------------------------------------------
Table of contents Executive summary Three months ended September 30, (dollars in millions) 2020 2019 Change Net sales$ 1,605.0 $ 1,503.8 $ 101.2 Gross margin 31.6 % 31.5 % 10 bps Operating income $ 177.2$ 143.2 $ 34.0 Net income (loss) (42.2) 22.1 (64.3) Adjusted EBITDA 285.6 250.8 34.8 Adjusted EBITDA margin 17.8 % 16.7 % 110 bps Third quarter revenue growth reflects strong growth in the biopharma and healthcare end markets and COVID-19 related sales of PPE and solutions to support diagnostic testing and vaccine development. Double-digit growth of our proprietary materials and consumables product group, commercial excellence, and continued impact of productivity and cost containment contributed to Adjusted EBITDA margin expansion. Net sales Three months ended Reconciliation of net sales growth to organic net sales growth Three months ended September 30, Net sales (in millions) 2020 2019 growth Foreign currency impact Organic net sales growth Americas$ 950.5 $ 918.2 $ 32.3 $ (4.3) $ 36.6 Europe 562.1 501.1 61.0 25.1 35.9 AMEA 92.4 84.5 7.9 (0.1) 8.0 Total$ 1,605.0 $ 1,503.8 $ 101.2 $ 20.7 $ 80.5 Net sales increased$101.2 million or 6.7%, which included$20.7 million or 1.3% of favorable foreign currency impact. The increase in organic net sales of$80.5 million or 5.4% was due to growth in our ongoing business as well as to COVID-19 related sales. In theAmericas , net sales increased$32.3 million or 3.5%, which included$4.3 million or 0.5% of unfavorable foreign currency impact. Organic net sales increased$36.6 million or 4.0%. Additional information by end market is as follows: •Biopharma - Sales grew in the high single-digits driven by double-digit growth in biopharma production from sales of process ingredients and additives, chromatography resins, excipients, and single use solutions, partially offset by declines in sales of equipment and instrumentation as customers delayed spending due to COVID-19. 27 -------------------------------------------------------------------------------- Table of
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•Healthcare - Sales increased double-digits driven by demand for chemicals and consumables in our medical/clinical reference lab business, partially offset by continued softness in the demand for elective procedures. •Education and government - Sales declined in the high single-digits due to school and academic lab closures related to COVID-19. This was partially offset by double-digit growth from government customers related to COVID-19. •Advanced technologies & applied materials - Sales were roughly flat, with growth in our semiconductor and microelectronics platforms largely offset by softness in our industrial sector. InEurope , net sales increased$61.0 million or 12.2%, which included$25.1 million or 5.0% of favorable foreign currency impact. Organic net sales increased$35.9 million or 7.2%. Additional information by end market is as follows: •Biopharma - Sales grew in the double-digits driven by sales of production chemicals, single-use solutions, consumables and PPE to support our ongoing business, as well as solutions to support COVID-19 detection and testing. •Healthcare - Sales grew in the high single-digits as sales of COVID-19 testing content and PPE were partially offset by a continued decline in elective procedures and ongoing clinical diagnostics due to COVID-19. •Education & government - Sales grew in the mid single-digits driven by our government customers, partially offset by academic lab closures due to COVID-19. • Advanced technologies & applied materials - Sales declined in the mid single-digits as COVID-19 continues to impact industrial customers. In AMEA, net sales increased$7.9 million or 9.3%, which included$0.1 million or 0.1% of unfavorable foreign currency impact. Organic net sales increased$8.0 million or 9.4%. Additional information by end market is as follows: •Biopharma - Sales grew in the double-digits driven by strong growth in biopharma production chemicals and lab supplies. •Advanced technologies & applied materials - Sales declined in the high single-digits primarily driven by prior year sales of equipment and instrumentation to labs inChina and timing of sales for our electronic materials products. 28 -------------------------------------------------------------------------------- Table of
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Reconciliation of net sales growth to organic net sales growth Nine months ended September 30, Net sales (in millions) 2020 2019 growth Foreign currency impact Organic net sales growth Americas$ 2,707.1 $ 2,701.0 $ 6.1 $ (14.8) $ 20.9 Europe 1,627.1 1,561.8 65.3 (3.5) 68.8 AMEA 268.5 253.5 15.0 (4.9) 19.9 Total$ 4,602.7 $ 4,516.3 $ 86.4 $ (23.2) $ 109.6 Net sales increased$86.4 million or 1.9%, which included$23.2 million or 0.5% of unfavorable foreign currency impact. Organic net sales increased$109.6 million or 2.4%, which was negatively impacted by the effects of the COVID-19 pandemic experienced primarily in the second and third quarters. In theAmericas , net sales increased$6.1 million or 0.2%, which included$14.8 million or 0.6% of unfavorable foreign currency impact. Organic net sales increased$20.9 million or 0.8% including 5.4% growth in the first quarter, 6.7% decline in the second quarter and 4.0% growth in the third quarter. The negative impacts from COVID-19 were most pronounced in the second quarter and began to moderate in the third. Increased sales of PPE and solutions to support COVID-19 detection and vaccination and moderation of academic and school closure rates are driving the improvement in quarterly growth rates. InEurope , net sales increased$65.3 million or 4.2%, which included$3.5 million or 0.3% of unfavorable foreign currency impact. Organic net sales increased$68.8 million or 4.5% driven by strength in biopharma and by solutions to support COVID-19 detection and vaccination. In AMEA, net sales increased$15.0 million or 5.9%, which included$4.9 million or 2.0% of unfavorable foreign currency impact. Organic net sales increased$19.9 million or 7.9% largely due to strength in our biopharma production business. The AMEA region dealt with the effects of the COVID-19 pandemic in the first quarter when we experienced organic net sales decline of 5.1%. Growth from sales of PPE helped to drive a return to organic net sales growth in the second quarter of 18.2%. The third quarter has seen the region return to normalized high single-digit growth. 29 --------------------------------------------------------------------------------
Table of contents Gross margin Three months ended September 30, Nine months ended September 30, 2020 2019 Change 2020 2019 Change Gross margin 31.6 % 31.5 % 10 bps 32.6 % 31.9 % 70 bps Three months ended The increase in gross margin included 60 basis points from commercial excellence and 20 basis points of favorable product mix, reflecting strong growth from proprietary materials and consumables, which was partially offset by 70 basis points worth of adjustments to reduce the carrying value of inventories to their market value. The global restructuring program initiated following the VWR acquisition contributed an additional$13.6 million to third quarter 2020 gross profit compared to the same period of the prior year and included more favorable prices relative to cost inflation, product cost reductions and productivity improvements from leaner footprints and operating practices. Nine months ended The increase in gross margin included 50 basis points of favorable product mix, reflecting strong growth from proprietary materials products and 40 basis points from commercial excellence. This was partially offset by 20 basis points worth of adjustments to reduce the carrying value of inventories to their market value. The global restructuring program initiated following the VWR acquisition contributed an additional$55.4 million to nine months endedSeptember 30, 2020 gross profit compared to the same period of the prior year and included more favorable prices relative to cost inflation, product cost reductions and productivity improvements from leaner footprints and operating practices. Operating income Three months ended Nine months ended September 30, September 30, (in millions) 2020 2019 Change 2020 2019 Change Gross profit$ 506.4 $ 474.0 $ 32.4 $ 1,498.9 $ 1,440.3 $ 58.6 Operating expenses 329.2 330.8 (1.6) 996.7 1,040.4 (43.7) Operating income$ 177.2 $ 143.2 $ 34.0 $ 502.2 $ 399.9 $ 102.3 Three months ended Gross profit increased$32.4 million due to the reasons described above. The reduction in operating expenses primarily reflects cost containment due to COVID-19 related measures such as discretionary cost controls around travel, expenses and hiring, along with the reduction in 30 -------------------------------------------------------------------------------- Table of
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restructuring and severance charges and the benefit of prior year restructuring activity. These benefit were offset by the non-recurrence of$9.2 million of stock-based compensation benefits from the prior year, as well as inflation. Nine months ended Gross profit increased$58.6 million due to the reasons described above. The reduction in operating expenses primarily reflects the non-recurrence of$33.5 million of stock-based compensation expense from the prior year. Operating expenses also declined reflecting cost containment due to COVID-19 related measures such as discretionary cost controls around travel, expenses and hiring, along with the reduction in restructuring and severance charges and the benefit of prior year restructuring activity offset by inflation. Net income or loss Three months ended Nine months ended September 30, September 30, (in millions) 2020 2019 Change 2020 2019 Change Operating income$ 177.2 $ 143.2 $ 34.0 $ 502.2 $ 399.9 $ 102.3 Interest expense (65.2) (98.3) 33.1 (251.8) (342.0) 90.2 Loss on extinguishment of debt (226.4) - (226.4) (226.4) (70.2) (156.2) Other income (expense), net 6.6 (7.6) 14.2 11.6 2.9 8.7 Income tax benefit (expense) 65.6 (15.2) 80.8 29.4 (23.4) 52.8 Net (loss) income$ (42.2) $ 22.1 $ (64.3) $ 65.0 $ (32.8) $ 97.8 Three and nine months ended Net (loss) income for the three and nine months ended decreased$64.3 million and increased$97.8 million , respectively. The third quarter decline was primarily driven by$226.4 million of loss on extinguishment of our 9% senior unsecured notes, which we refinanced in the third quarter for more favorable interest rates. For the nine-month period, higher operating income along with lower interest expense from our refinancing and declining debt balance, and lower tax expense from rate improvement more than offset the loss on extinguishment of our 9% senior unsecured notes. Adjusted EBITDA and Adjusted EBITDA margin For a reconciliation of Adjusted EBITDA to the most directly comparable measure under GAAP, see "Reconciliations of non-GAAP financial measures." 31 --------------------------------------------------------------------------------
Table of contents Three months ended September 30, Nine months ended September 30, (in millions) 2020 2019 Change 2020 2019 Change Adjusted EBITDA: Americas$ 203.6 $ 182.7 $ 20.9 $ 591.0 $ 542.8 $ 48.2 Europe 98.4 84.0 14.4 278.4 255.3 23.1 AMEA 20.9 15.9 5.0 56.8 51.4 5.4 Corporate (37.3) (31.8) (5.5) (104.5) (81.9) (22.6) Total$ 285.6 $ 250.8 $ 34.8 $ 821.7 $ 767.6 $ 54.1 Adjusted EBITDA margin 17.8 % 16.7 % 1.1 % 17.9 % 17.0 % 0.9 % Three months ended Adjusted EBITDA increased$34.8 million or 13.9%, which included a favorable foreign currency translation impact of$3.7 million or 1.5%. The reasons for the remaining growth of$31.1 million or 12.4%, are discussed below: In theAmericas , Adjusted EBITDA grew$20.9 million or 11.4%, or 10.8% when adjusted for favorable foreign currency translation impact. Gross margin expansion from commercial excellence, favorable volume and product mix along with savings from SG&A cost containment initiatives in response to COVID-19 challenges offset by inventory provisions drove significant Adjusted EBITDA rate expansion. InEurope , Adjusted EBITDA grew$14.4 million or 17.1%, or 13.9% when adjusted for favorable foreign currency translation impact. Strong volume and commercial excellence along with savings from SG&A cost containment initiatives in response to COVID-19 were partially offset by unfavorable product mix and inventory provisions. In AMEA, Adjusted EBITDA grew$5.0 million or 31.3%, or 31.6% when adjusted for unfavorable foreign currency translation. In addition to the favorable volume, lower inventory provisions, SG&A favorability due to cost containment initiatives and government-mandated stay-at-home orders in response to COVID-19 contributed to the strong growth. In Corporate, Adjusted EBITDA declined$5.5 million or 17.1% reflecting increased public company costs and miscellaneous provisions. 32 -------------------------------------------------------------------------------- Table of
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Nine months ended Adjusted EBITDA increased$54.1 million or 7.0%, which included an unfavorable foreign currency translation impact of$1.9 million or 0.3%. The reasons for the remaining growth of$56.0 million or 7.3%, are discussed below: In theAmericas , Adjusted EBITDA grew$48.2 million or 8.8%, driven by commercial excellence, favorable product mix reflecting strong growth from proprietary products and cost containment initiatives. InEurope , Adjusted EBITDA grew$23.1 million or 9.0%, or 9.5% when adjusted for unfavorable foreign currency translation impact driven by commercial excellence, favorable volume from COVID-19 related sales and cost containment initiatives. In AMEA, Adjusted EBITDA grew$5.4 million or 10.6%, or 12.3% when adjusted for unfavorable foreign currency translation driven by strong volume, favorable product mix reflecting strong growth from proprietary products and cost containment initiatives. In Corporate, Adjusted EBITDA declined$22.6 million or 27.5% reflecting increased public company costs, stock-based compensation expense and miscellaneous provisions. Reconciliations of non-GAAP financial measures The following table presents the reconciliation of net income or loss to Adjusted EBITDA: Three months ended Nine months ended September 30, September 30, (in millions) 2020 2019 2020 2019 Net (loss) income$ (42.2) $ 22.1 $ 65.0 $ (32.8) Interest expense 65.2 98.3 251.8 342.0 Income tax (benefit) expense (65.6) 15.2 (29.4) 23.4 Depreciation and amortization 99.1 100.3 293.4 301.6 Net foreign currency (gain) loss from financing activities (4.1) 8.2 (4.3) 0.1 Loss on extinguishment of debt 226.4 - 226.4 70.2 Other share-based compensation expense 0.6 (9.2) 0.6 33.5 Restructuring and severance charges 2.3 13.4 6.7 19.8 VWR transaction, integration and planning expenses 2.1 5.4 7.2 16.8 Other 1.8 (2.9) 4.3 (7.0) Adjusted EBITDA$ 285.6 $ 250.8 $ 821.7 $ 767.6 33
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Liquidity and capital resources We fund short-term cash requirements primarily from operating cash flows. Most of our long-term financing is from indebtedness. The ongoing COVID-19 outbreak has dramatically reduced global economic activity and negatively impacted the financial markets. Despite this, in the third quarter of 2020 our results remained strong. We generated$281.5 million of cash provided by operating activities, we ended the quarter with$370.5 million of cash and cash equivalents and our availability under credit facilities was$801.1 million . We also have no debt repayments due in the next twelve months other than required term loan prepayments of$10.8 million . Liquidity The following table presents our primary sources of liquidity: September 30, 2020 Revolving credit (in millions) Receivables facility facility Total Unused availability under credit facilities: Capacity$ 300.0 $ 515.0 $ 815.0 Undrawn letters of credit outstanding (12.3) (1.6) (13.9) Outstanding borrowings - - - Unused availability$ 287.7 $ 513.4 $ 801.1 Cash and cash equivalents 370.5 Total liquidity$ 1,171.6 We fund short-term cash requirements primarily from operating cash flows. Some of our credit line availability depends upon maintaining a sufficient borrowing base of eligible accounts receivable. We believe that we have sufficient capital resources to meet our liquidity needs. As ofSeptember 30, 2020 , we were in compliance with our debt covenants. AtSeptember 30, 2020 ,$201.8 million or 54.5% of our$370.5 million in cash and cash equivalents was held by our non-U.S. subsidiaries and may be subject to certain taxes upon repatriation, primarily where foreign withholding taxes apply. OnJuly 14, 2020 , we refinanced our revolving credit facility to obtain an additional$265.0 million of available funding, bringing the total amount of available funding under this facility to$515.0 million , and$815.0 million when combined with the receivables facility. The revolving credit facility will mature onJuly 14, 2025 . For additional information, see note 11 to our unaudited condensed consolidated financial statements included in Part I, Item 1 - "Financial statements." 34 -------------------------------------------------------------------------------- Table of
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Historical cash flows The following table presents a summary of cash provided by (used in) various activities: Nine months ended September 30, (in millions) 2020 2019 Change Operating activities: Working capital changes* $ (7.7)$ (156.0) $ 148.3 Non-cash items 509.8 423.9 85.9 All other 121.7 (0.9) 122.6 Total 623.8 267.0 356.8 Investing activities (40.3) (30.7) (9.6) Financing activities (402.5) (240.4) (162.1) Capital expenditures (41.4) (39.5) (1.9) --------- * Includes changes to our accounts receivable, inventory, contract assets and accounts payable balances. Cash flows from operating activities increased$356.8 million in 2020 primarily due to an increase of operating income and reductions in cash paid for income taxes and working capital. Investing activities used$9.6 million more cash in 2020, reflecting a modest increase in capital spending and lower proceeds from the sale of capital assets. Financing activities used$162.1 million more cash in 2020 primarily due to cash paid to refinance our 9% senior unsecured notes at significantly reduced interest rates. Indebtedness For information about our indebtedness, refer to the section entitled "Liquidity" and note 11 to our unaudited condensed consolidated financial statements included in Part I, Item 1 - "Financial statements." New accounting standards For information about new accounting standards, see note 3 to our unaudited condensed consolidated financial statements included in Part I, Item 1 - "Financial statements." Item 3. Quantitative and qualitative disclosures about market risk There have been no significant changes to the disclosures about market risk included in our Annual Report. 35 -------------------------------------------------------------------------------- Table of
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