Avantor, Inc. (AVTR) FY 2021 MD&A

Item 7.    Management’s discussion and analysis of financial condition and results of operations

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. See “Cautionary factors regarding forward-looking statements.”

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.

For the fiscal year ended December 31, 2021, we recorded net sales of $7,386.1 million, net income of $572.6 million and Adjusted EBITDA of $1,458.6 million. We also generated net sales growth of 15.5% and organic net sales growth of 11.3%, each compared to the same period in 2020. See “Reconciliations of non-GAAP measures” for a reconciliation of net income to Adjusted EBITDA and “Results of operations” for a reconciliation of net sales growth to organic net sales growth.

Trends affecting our business and results of operations

The following trends have affected our recent operating results, and they may also continue to 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 effect global economies, financial markets and the overall environment in which we do business as further described in Part I, Item 1A, “Risk factors.” The outbreak continued to impact the full year results of our three segments, as described further in the “Results of operations” section.

We completed acquisitions to further enhance our business model

We completed the acquisitions of Masterflex, Ritter GmbH, and RIM Bio in 2021. Masterflex is a leading global manufacturer of peristaltic pumps and aseptic single-use fluid transfer technologies. Ritter GmbH's current business is focused on providing diagnostic system providers and liquid handling OEMs with robotic fluid handling tips, plates, and other consumables. RIM Bio is a China-based single-use bioprocess bag manufacturer. RIM Bio's current business provides a complete range of single-use 2D bags, 3D bags, tank liners, bag assemblies and multi-bag manifolds used in the manufacturing of biologics including monoclonal antibodies (mAbs), vaccines, cell and gene therapies, and recombinant proteins.

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We financed the acquisitions with issuances of debt and equity, along with cash on hand. Refer to notes 14 and 15, respectively, for additional details.

We have been impacted by supply chain constraints and inflationary pressures

We have experienced challenges in sourcing certain products and raw materials as a result of global supply chain disruptions. While these impacts are not pervasive, they may impact our future growth. We have also experienced inflationary pressures, mainly driven by labor costs, which have the ability to affect our future margin expansion.

We lowered our weighted average annual cost of interest and simplified our capital structure

In 2021, we issued $396.5 million and $738.1 million of term loans that mature on June 9, 2026 and June 9, 2028, respectively. The debt bears interest at variable rates. We also issued $800.0 million aggregate principal amount of 3.875% senior unsecured notes. The notes are due on November 1, 2029, with interest payable semi-annually on May 1 and November 1 of each year. Additionally, we also amended our senior secured credit facilities and issued $900.0 million of incremental U.S. Dollar term loan at LIBOR plus 2.25%.

In 2020, we restructured our debt profile to take advantage of favorable interest rates by replacing our outstanding $2,000.0 million 9% unsecured notes with €400.0 million of 3.875% unsecured notes and $1,550.0 million of 4.625% unsecured notes. We also replaced our $1,500.0 million 6% secured notes and €500.0 million 4.75% secured notes with the issuance of a new $1,175.0 million tranche of our senior secured credit facility term loan that bears interest at a rate of LIBOR plus 2.50% under our modified credit agreement and €650.0 million of 2.625% secured notes.

Our IPO generated significant proceeds and certain costs

In the second quarter of 2019, we completed our IPO. The IPO generated net proceeds of $4,235.6 million after deducting underwriting discounts, commissions and other offering costs of $132.1 million. The IPO also satisfied a performance condition for certain of our stock options, which caused us to immediately recognize $26.9 million of expense. We continue to see increased compliance costs as a result of being a publicly traded company in 2021.

We reduced our expenses through a global restructuring program

Under a global restructuring program, which concluded on December 31, 2020, we combined sales and marketing resources, eliminated redundant corporate functions, optimized procurement and our manufacturing footprint, and implemented best practices throughout the organization.

From inception of the program through its completion on December 31, 2020, we have recognized $129.8 million of charges and have spent $9.6 million on capital projects, the vast majority of these expenses were incurred through 2020 with an immaterial amount incurred in 2021. Through December 31, 2020, we believe that we have generated over $220 million of annualized cost synergies, which we believe will favorably impact our results in 2022 and beyond. The program was originally envisioned to last for three years following the VWR acquisition and has concluded.

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We are investing in a differentiated innovation model

We are engaging with our customers early in their product development cycles to advance their programs from research and discovery through development and commercialization. These projects include enhancing product purity and performance characteristics, improving product packaging and streamlining workflows. We are also developing new products in emerging areas of science such as cell and gene therapy.

Changes in foreign currency exchange rates are impacting our financial condition and results of operations

We have substantial operations overseas whose financial condition and results of operations have been and will continue to be impacted by changes in the exchange rate of the U.S. dollar into other currencies. See Item 7A, “Quantitative and qualitative disclosures about market risk.”

Key indicators of performance and financial condition

To evaluate our performance, we monitor a number of key indicators. As appropriate, we supplement our results of operations determined in accordance with GAAP with certain non-GAAP measures 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. 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;”

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•Cash flows from operating activities, which is discussed in the section entitled “Liquidity and capital resources—Historical cash flows.”

•Free cash flow, which is a non-GAAP measure, is equal to our cash flow from operating activities, plus acquisition-related costs paid in the period, less capital expenditures. We have amended our definition of free cash flow to exclude acquisition-related costs as they may be significant, individually or in aggregate, and may make it more difficult for investors to understand the free cash flows associated with the normal operations of our business. We believe that this measurement is useful to investors as it provides a view on the Company’s ability to generate cash for use in financing or investing activities. This measurement is used by management for the same reason. A reconciliation of cash flows from operating activities, the most directly comparable GAAP financial measure, to free cash flows, is included in the section entitled “Liquidity and capital resources—Historical cash flows.”

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: the Americas, Europe and AMEA. Corporate costs are managed on a standalone basis and not allocated to segments.

Years ended December 31, 2021 and 2020

Executive summary

Our fiscal year 2021 operating results reflect strong growth across all of our end markets, highlighted by biopharma. We generated high single-digit sales growth in our core business which was augmented by our COVID-19 related sales of PPE and solutions to support diagnostics testing and vaccine production. Double-digit growth of our proprietary materials and consumables product group coupled with commercial excellence and productivity to offset inflationary headwinds contributed to gross margin and Adjusted EBITDA margin expansion.

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Net sales

Net sales increased $992.5 million or 15.5%, which included $130.3 million or 2.0% of favorable foreign currency impact and $143.0 million or 2.2% of M&A impact. Organic net sales growth was $719.2 million or 11.3% and was primarily due to strong growth in our core business and a modest contribution from COVID-19 related sales.

In Americas, net sales increased $505.9 million or 13.6%, which included $20.0 million or 0.5% of favorable foreign currency impact and $34.6 million or 1.0% of M&A impact. Organic net sales growth was $451.3 million or 12.1%. Additional information on organic net sales growth by end market (with approximate percentage of total organic net sales for the region) is as follows:

•Biopharma (55%) — Sales grew double-digits, with strong growth in our research & development business and biopharma production. The growth was led by both COVID-19 vaccine-related offerings as well as our support of non-COVID-19 therapies.

•Healthcare (10%) — Sales increased high single-digits driven by increased demand for materials and consumables in our medical/clinical reference lab business, COVID-19 diagnostic testing offerings and increased demand for our proprietary silicone offerings driven by recovery in elective surgical procedures.

•Education and government (15%) — Sales increased double-digits primarily from a recovery in education, as demand increased from customers that had been closed during the prior year due to COVID-19 and university research lab expanded.

•Advanced technologies & applied materials (20%) — Sales increased low single-digits driven by sales of proprietary materials and consumables into production platforms such as aerospace & defense and semiconductors and continued improvement in industrial demand.

In Europe, net sales increased $390.6 million or 17.1%, which included $99.4 million or 4.3% of favorable foreign currency impact and $85.3 million or 3.7% of M&A impact. Organic net sales growth was $205.9 million or 9.1%. Additional information on organic net sales growth by end market (with approximate percentage of total organic net sales for the region) is as follows:

•Biopharma (50%) — Sales grew in the double-digits driven by strong demand for our proprietary biopharma process ingredients, single-use solutions, and consumables to support our core business.

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•Healthcare (10%) — Sales grew double-digits due primarily to increased demand for our proprietary silicone offerings driven by recovery in elective surgical procedures and sales of COVID-19 testing content.

•Education & government (10%) — Sales grew in the high single-digits primarily from a recovery in education demand from academic labs that had been closed during the prior year due to COVID-19.

▪Advanced technologies & applied materials (30%) — We experienced mid single-digit growth driven by sales of our laboratory materials, consumables, and equipment and instrumentation offerings.

In AMEA, net sales increased $96.0 million or 25.6%, which included $10.9 million or 2.9% of favorable foreign currency impact and $23.1 million or 6.1% of M&A impact. Organic net sales growth was $62.0 million or 16.6%. Additional information on organic net sales growth by end market (with approximate percentage of total organic net sales for the region) is as follows:

•Biopharma (50%) — Sales grew double-digits driven by strong demand for our proprietary offering of process ingredients, chromatography resins, excipients, and single use solutions.

•Advanced technologies & applied materials (40%) — Sales grew double-digits primarily driven by strong demand for our proprietary offerings into the semiconductor industry.

Gross margin

Gross margin increased 140 basis points resulting primarily from favorable product mix, reflecting higher sales of our proprietary materials, commercial excellence and the favorable impact from the higher gross margins of acquired companies.

Operating income

Operating income increased primarily from higher gross profit, as previously discussed. This was partially offset by higher operating expenses from inflation, acquisition-related expenses, increased incentive compensation expense due to our strong performance in fiscal year 2021 and unfavorable foreign exchange impacts.

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Net income

Net income increased due to higher operating income, as previously discussed, lower interest expense as a result of the repricings and refinancings of our debt for more favorable interest rates in 2020, and the reduction of losses on the extinguishment of debt that we incurred in fiscal year 2020 as a result of our debt refinancings. These increases were partially offset by higher income tax expense as a result of higher pretax income and the absence of an income tax benefit related to the release of uncertain tax provisions that we recorded in the prior year.

Adjusted EBITDA

For reconciliations of Adjusted EBITDA to net income or loss, see “Reconciliations of non-GAAP measures.”

Adjusted EBITDA increased $317.0 million or 27.8%, which included a favorable foreign currency translation impact of $22.1 million or 1.9% and $49.4 million or 4.4% from M&A. The remaining growth was $245.5 million or 21.5%.

In the Americas, Adjusted EBITDA grew $176.0 million or 21.9%, or 19.5% when adjusted for favorable foreign currency translation impact and M&A. Gross margin expansion from commercial excellence, increased volume, and favorable mix driven by sales of our higher-margin proprietary products was partially offset by increased incentive compensation expense and inflationary pressures.

In Europe, Adjusted EBITDA grew $140.7 million or 35.4%, or 24.8% when adjusted for favorable foreign currency translation impact and M&A, due to gross margin expansion from increased volume, commercial excellence and favorable mix driven by sales of our higher-margin proprietary products partially offset by increased incentive compensation expense, inflationary pressures and operational foreign exchange impacts.

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In AMEA, Adjusted EBITDA grew $34.1 million or 42.7%, or 30.1% when adjusted for favorable foreign currency translation impact and M&A. In addition to the increased sales volume we experienced a favorable mix driven by sales of our higher-margin proprietary products. This was partially offset by increased incentive compensation expense, inflationary pressures and operational foreign exchange impacts.

In Corporate, Adjusted EBITDA declined $33.8 million or 24.4% reflecting higher incentive compensation expense, inflationary pressures and increased stock-based compensation expense.

Year ended December 31, 2019

A discussion and analysis covering the year ended December 31, 2019 is included in our 2020 10-K.

Reconciliations of non-GAAP measures

The following table presents the reconciliation of net income or loss to non-GAAP measures:

1.Represents legal, accounting, financing, investment banking and consulting fees incurred related to completed and pending acquisitions. Generally, these expenses are incurred prior to and at the closing of acquisitions.

2.Represents non-recurring direct costs incurred with third parties to integrate acquired companies. These expenses represent incremental costs and are unrelated to normal operations of our business. Integration expenses are incurred over a pre-defined integration period specific to each acquisition.

3.Represents the amortization of the purchase accounting adjustment we made to reflect Ritter’s acquired inventory at fair value upon acquisition in 2021, as shown in note 4 to our consolidated financial statements beginning on page F-1 of this report. In 2019, the amount relates mostly to a normalization of expense for prepaid customer rebates that were derecognized in purchase accounting.

4.Reflects the incremental expenses incurred in the period related to initiatives to increase profitability and productivity. Typical costs included in this caption are employee severance, site-related exit costs, and contract termination costs.

5.As described in note 19 to our consolidated financial statements beginning on F-1 of this report.

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Liquidity and capital resources

We fund short-term cash requirements primarily from operating cash flows, while most of our long-term financing is from indebtedness, which we use to finance transactions outside of our normal operations.

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 to fund defined benefit plan obligations primarily outside of the United States. In addition to contractual obligations, we use cash to fund capital expenditures, taxes, and dividends on our MCPS. 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 short-term and long-term capital needs with cash generated by operations and availability under our credit facilities. 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:

Our availability under our receivables facility depends upon maintaining a sufficient borrowing base of eligible accounts receivable. We believe that we have sufficient capital resources to meet our liquidity needs.

At December 31, 2021, $256.5 million or 85% of our cash and cash equivalents was held by our non-U.S. subsidiaries and may be subject to certain taxes upon repatriation, primarily where foreign withholding taxes apply.

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Historical cash flows

The following table presents a summary of cash provided by (used in) various activities:

1.Consists of typical non-cash charges including depreciation and amortization, stock based compensation expense, deferred income tax expense and others.

2.Includes changes to our accounts receivable, inventory, contract assets and accounts payable.

Cash flows from operating activities increased $23.8 million in 2021 primarily due to an increase of operating income offset by lower non-cash items and higher net working capital requirements.

Investing activities used $4,062.6 million of additional cash in 2021, reflecting the cash paid for acquisitions and an increase in capital spending.

Financing activities provided $4,002.1 million of additional cash in 2021 primarily due to our secondary equity offering and additional issuances of debt to finance the acquisition of Masterflex, and the issuance of two new tranches of Euro term loans to finance the acquisition of Ritter GmbH.

Free cash flow

Free cash flow was $52.1 million higher in 2021 due to changes in cash flows from operating activities noted above, which included the payment of $77.8 million of non-recurring costs related to acquisitions, offset by an increase in capital spending. Refer to “Reconciliations of non-GAAP financial measures” for disclosure regarding acquisition-related expenses.

A discussion and analysis of historical cash flows covering the year ended December 31, 2019 is included in the 2020 10-K.

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Indebtedness

A significant portion of our long-term financing is from indebtedness. The purpose of this section is to disclose how certain features of our indebtedness influence our liquidity and capital resources. Additional detail about the terms of our indebtedness may be found in note 14 to our consolidated financial statements beginning on page F-1 of this report.

Our credit facilities provide us access to up to $815.0 million of additional cash.

We have entered into a receivables facility and a revolving credit facility that provide us access to cash to fund short-term business needs. See the section entitled “Liquidity” for additional information.

Our indebtedness restricts us from paying dividends to common stockholders

The acquisition of VWR was partially funded by the issuance of debt by Avantor Inc.’s wholly-owned subsidiary, Avantor Funding, Inc. Certain of those debt agreements prevent Avantor Funding, Inc. from paying dividends or making other payments to Avantor, Inc., subject to limited exceptions. At December 31, 2021 and 2020, substantially all of Avantor, Inc.’s net assets were subject to those restrictions.

Our senior secured credit facilities require or may require us to make certain principal repayments prior to maturity

We are required to make quarterly payments on our senior secured credit facilities, with the balance due on the maturity date. We have generated sufficient cash flows to make all required historical payments, and we expect that our cash flows will continue to be sufficient to make future payments.

To the extent our net leverage ratios, as defined in our credit agreement, reach certain levels, we are required to make additional prepayments if: (i) we generate excess cash flows, as defined in our credit agreement, at specified percentages that decline if certain net leverage ratios are achieved; or (ii) we receive cash proceeds from certain types of asset sales or debt issuances. We are required to make a prepayment of 50% of our excess cash flows if our first lien net leverage ratio, as defined in our credit agreement, exceeds 4.50:1.00, a prepayment of 25% of our excess cash flows if our first lien net leverage ratio is less than or equal to 4.50:1.00 but greater than 3.75:1.00, and no prepayment if our first lien net leverage ratio is less than or equal to 3.75:1.00. As our first lien net leverage ratio was below 3.75:1.00 at December 31, 2021, no additional prepayments were required and no such prepayments have become due since the inception of the credit facilities.

We are subject to certain financial covenants that, if not met, could put us in default of our debt agreements

The receivables facility and our senior secured credit facilities contain certain customary covenants, including a financial covenant. That covenant becomes applicable in periods when we have drawn more than 35% of our revolving credit facility. When applicable, we may not have total borrowings in excess of a pro forma net leverage ratio, as defined. This covenant was not applicable at December 31, 2021, and our historical net leverage has been below the covenant requirement.

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Contractual obligations

The following table presents our contractual obligations at December 31, 2021:

(1)Includes finance lease liabilities. 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, 2021 through maturity. For the variable interest rates and principal amounts used, see note 14 to our consolidated financial statements beginning on page F-1 of this report.

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

(4)Represents our obligation to fund defined benefit plans with obligations in excess of plan assets. The total obligation is equal to the aggregate excess of the discounted benefit obligation over the fair value of plan assets for all underfunded plans. The payments due in less than one year are estimated using actuarial methods. The payments due for all other years are estimated by distributing the remaining funding status to future periods in the same way as benefit payments are expected to be made by the plans following actuarial methods.

(5)Represents our transition tax obligation due over eight years to transition to the modified territorial tax system under new U.S. income tax legislation.

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

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caution that future events rarely develop exactly as forecasted, and such estimates naturally 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 our consolidated financial statements beginning on page F-1 of this report.

Testing goodwill and other intangible assets for impairment

We carry significant amounts of goodwill and other intangible assets on our consolidated balance sheet. At December 31, 2021, the combined carrying value of goodwill and other intangible assets, net of accumulated amortization and impairment charges, was $10,481.4 million or 75% 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 if 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 impairment test requires us to estimate the fair value of our reporting units and indefinite-lived intangible assets. We estimate the fair value of each reporting unit using a weighted average of two valuation methods based on a discounted cash flows method and a guideline public company method. 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.

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.

We did not record any impairment charges as a result of our October 1, 2021 impairment testing. Each reporting unit had a fair value that was substantially in excess of its carrying value, and our indefinite-lived intangible assets did not show any indications that their fair value was more likely than not below their carrying value.

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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 unutilized. 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 December 31, 2021, our valuation allowance on deferred tax assets was $187.6 million, $155.7 million of which relates to foreign net operating loss carry forwards 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, 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 $55.3 million at December 31, 2021, exclusive of penalties and interest. Where applicable, associated interest expense has also been recognized as a component of interest expense.

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.

Calculating expense for long-term compensation arrangements

Our employees receive various long-term compensation awards, including stock options, RSUs, performance stock units and cash-based awards. We calculate expense for some of those awards using fair value estimates based on unobservable inputs. Additionally, some of those awards contain performance or market conditions. We assess the probability of achieving those performance conditions, and in cases where partial or exceptional performance affects the size of the award, we also estimate the projected achievement level. We determine the fair value of awards with market conditions on their grant date using

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a Monte Carlo model, which incorporates the probability of achieving the market condition in the awards’ fair value. We recognize the expense for such awards ratably over their vesting term.

Expense for stock options without performance or market conditions is determined on the grant date and recognized ratably over their vesting term. We estimate the grant date fair value of stock options using the Black-Scholes model. This model requires us to make various assumptions, with the most significant assumption currently being the volatility of our stock price. A public quotation was first established for our common stock in May 2019, which does not provide adequate historical basis to reasonably estimate the expected volatility of our common stock over their more than six-year expected life. Instead, we estimate volatility based on historical stock price trends of a peer company set. The fair value of our awards would have differed had we selected different peer companies or used a different technique to estimate volatility. Increasing our expected volatility assumption by 5 percentage points for all stock options at the date of grant would have increased our 2021 stock-based compensation expense by $2.4 million.

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.

Business combinations

We allocate the fair value of purchase consideration to the assets acquired, liabilities assumed, and non-controlling interests in the acquired companies generally based on their fair values at the acquisition date. The excess of the fair value of purchase consideration over the fair value of these assets acquired, liabilities assumed and non-controlling interests in the acquired companies is recorded as goodwill. When determining the fair values of assets acquired, liabilities assumed, and non-controlling interests in the acquired companies, management makes significant estimates related to intangible assets.

Critical estimates in valuing intangible assets include, but are not limited to, expected future cash flows and discount rates. Fair value estimates are based on the assumptions management believes a market participant would use in pricing the asset or liability. Amounts recorded in a business combination may change during the measurement period, which is a period not to exceed one year from the date of acquisitions, as additional information about conditions existing at the acquisition date becomes available.