Avantor, Inc. (AVTR) FY 2024 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

For the fiscal year ended December 31, 2024, we recorded net sales of $6,783.6 million, net income of $711.5 million, Adjusted EBITDA of $1,198.8 million and Adjusted Operating Income of $1,089.8 million. Net sales declined 2.6% which included 2.1% organic net sales decrease compared to the same period in 2023. See “Reconciliations of non-GAAP measures” for reconciliations of net income to Adjusted EBITDA and Adjusted Operating Income, and net income margin to Adjusted EBITDA margin and Adjusted Operating Income margin. See “Results of operations” for a reconciliation and explanation of changes of net sales growth (decline) to organic net sales growth (decline).

Segment Change

Effective January 1, 2024, we changed our operating model and reporting segment structure from three reportable segments to two reportable segments, Laboratory Solutions and Bioscience Production. This structure aligns with how our Chief Executive Officer, who is our CODM, measures segment operating performance and allocates resources across our operating segments. This reportable segment change has no impact on our consolidated operating results.

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

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 business continues to be impacted by the transition from the global COVID-19 pandemic

Customer demand and required inventory levels continue to normalize in the transition from the COVID-19 pandemic. The transition from the outbreak continued to impact the full year results of our two segments, as described further in the “Results of operations” section.

Our results are impacted by a divestiture to further refine our business model

We completed the sale of our Clinical Services business, a component of the Company’s Laboratory Solutions reportable segment, on October 17, 2024, pursuant to a definitive agreement that was signed on August 16, 2024. The Clinical Services business has not been classified as a discontinued operation as it did not represent a strategic shift that will have a major effect on the Company’s operations and financial results.

We have been impacted by supply chain constraints and inflationary pressures

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We have experienced inventory fluctuations and build up at customers as a result of global supply chain disruptions and have experienced inflationary pressures across all of our cost categories. While we have implemented pricing and productivity measures to combat these pressures, they may continue to adversely impact our results.

We continue to invest 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.

We continue to advance our cost transformation initiative to reduce our expenses

We are advancing a global cost transformation initiative to further enhance productivity through increased organizational efficiency, footprint optimization, reduced cost-to-serve and procurement savings that are expected to generate approximately $300 million in run rate gross cost savings by the end of 2026.

We increased our liquidity and mitigated the impact of interest rate volatility

In June 2023, we amended the revolving credit facility to increase its funding limit up to $975.0 million and extended the term to June 29, 2028.

In 2024, we made prepayments of $690.0 million and $526.4 million on U.S. dollar term loan B-6 and Euro term loan B-4, respectively, which reduced our variable-rate debt.

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

Our consolidated results of operations are comprised of many different functional currencies that translate into our U.S. dollar reporting currency. The movement of the U.S. dollar against those functional currencies, particularly the Euro, has caused significant variability in our results and may continue to do so in the future. See Part I, 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 U.S. GAAP with certain non-GAAP financial measurements that we believe are useful to investors, creditors and others in assessing our performance. These measures 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 measures, and such measures may not be comparable to similarly titled measures reported by other companies. Rather, these measures should be considered as an additional way of viewing aspects of our operations that provide a more complete understanding of our business.

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The key indicators that we monitor are as follows:

•Net sales, gross margin, operating income, operating income margin, net income or loss and net income or loss margin. These measures are discussed in the section entitled “Results of operations”;

•Organic net sales growth (decline), which is a non-GAAP measure discussed in the section entitled “Results of operations.” Organic net sales growth (decline) eliminates from our reported net sales change the impacts of revenues from acquisitions and divestitures that occurred in the last year (as applicable) 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 our net income or loss adjusted for the following items: (i) interest expense, (ii) income tax expense, (iii) amortization of acquired intangible assets, (iv) depreciation expense, (v) losses on extinguishment of debt, (vi) charges associated with the impairment of certain assets, (vii) gain on sale of business, (viii) 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 ways to analyze the underlying trends in our business consistently across the periods presented. These measurements are used by our management for the same reason. A reconciliation of net income or loss and net income or loss margin, the most directly comparable GAAP financial measures, to Adjusted EBITDA and Adjusted EBITDA margin, respectively, are included in the section entitled “Reconciliations of non-GAAP measures”;

•Adjusted Operating Income and Adjusted Operating Income margin, which are non-GAAP measures discussed in the section entitled “Results of operations.” Adjusted Operating Income is our net income or loss adjusted for the following items: (i) interest expense, (ii) income tax expense, (iii) amortization of acquired intangible assets, (iv) losses on extinguishment of debt, (v) charges associated with the impairment of certain assets, (vi) gain on sale of business, (vii) and certain other adjustments. This measurement is our segment reporting profitability measure under GAAP. Adjusted Operating Income margin is Adjusted Operating Income divided by net sales as determined under GAAP. We believe that these measurements are useful to investors as ways to analyze the underlying trends in our business consistently across the periods presented. These measurements are used by our management for the same reason. A reconciliation of net income or loss and net income or loss margin, the most directly comparable GAAP financial measures, to Adjusted Operating Income and Adjusted Operating Income margin, respectively, are included in the section entitled “Reconciliations of non-GAAP measures”;

•Cash flows from operating activities, which we discuss in the section entitled “Liquidity and capital resources—Historical cash flows”;

•Free cash flow, which is a non-GAAP measure, is equal to our cash flows from operating activities, less capital expenditures, plus direct transaction costs and income taxes paid related to acquisitions and divestitures (as applicable) in the period. We believe that this measurement is

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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 flow, 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 Operating Income by segment: Laboratory Solutions and Bioscience Production. Corporate costs are managed on a standalone basis, certain of which are allocated to our reportable segments.

Years ended December 31, 2024, 2023 and 2022

Executive summary

In 2024, the net sales decline was driven by decreases in both segments primarily due to reduced customer demand. Volume declines and inflationary pressures, partially offset by savings from our cost transformation initiative, contributed to contraction in gross margin and gross profit. Operating income was driven primarily by the gain on sale of our Clinical Services business. Lower gross profit and higher annual incentive compensation expenses, partially offset by savings from our cost transformation initiative, drove Adjusted EBITDA and Adjusted Operating Income margin contraction.

In 2023, the net sales decline was driven primarily by reduced customer demand, the impact of customer destocking, and COVID-19 related headwinds. Unfavorable product mix and inflationary pressures contributed to contraction in gross margin. Operating income was driven primarily by asset impairment charges recorded in 2023. Lower sales volumes along with unfavorable product mix drove Adjusted EBITDA margin contraction and Adjusted Operating Income margin contraction.

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Net sales

Net sales decreased $183.6 million or 2.6%, which included $7.3 million or 0.1% of favorable foreign currency translation impact and $42.4 million or 0.6% of impact related to our Clinical Services divestiture. Organic net sales decreased by $148.5 million or 2.1% which is discussed below.

In the Laboratory Solutions segment, net sales decreased $128.2 million or 2.7% which included $5.5 million or 0.1% of favorable foreign currency translation impact and $42.4 million or 0.9% of impact related to our Clinical Services divestiture. Organic net sales decreased by $91.3 million or 1.9%. The sales decline was driven primarily by decreased demand in biopharma and healthcare end markets.

In the Bioscience Production segment, net sales decreased $55.4 million or 2.5%, which included $1.8 million or 0.1% of favorable foreign currency translation impact. Organic net sales decreased $57.2 million or 2.6%. The sales decline was driven primarily by decreased demand in biopharma and healthcare end markets.

Net sales decreased $545.2 million or 7.3%, which included $41.2 million or 0.5% of favorable foreign currency translation impact. Organic net sales decreased by $586.4 million or 7.8% (decline of 5.2% when excluding the impact of sales of COVID-19 related products in both periods, referred to herein as COVID-19 related headwinds or tailwinds).

In the Laboratory Solutions segment, net sales decreased $264.1 million or 5.3% which included $30.8 million or 0.6% of favorable foreign currency translation impact. Organic net sales decreased by $294.9 million or 5.9% (decline of 3.4% excluding COVID-19 headwinds). The organic decline was primarily

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related to the roll off of COVID-19 revenues for diagnostic testing, in addition to reduced customer demand and destocking of lab products.

In the Bioscience Production segment, net sales decreased $281.1 million or 11.2%, which included $10.4 million or 0.4% of favorable foreign currency translation impact. Organic net sales decreased $291.5 million or 11.6% (decline of 8.9% excluding COVID-19 headwinds). The organic decline was primarily related to the roll off of COVID-19 revenues for vaccines, decline in medical grade silicones and lower demand for our semiconductor and electronic device offerings.

Gross margin

In 2024, gross margin decreased 30 basis points resulting primarily from the impact of inflationary pressures, partially offset by savings from our cost transformation initiative.

In 2023, gross margin decreased 70 basis points resulting primarily from unfavorable product mix and the impact of inflationary pressures, partially offset by lower distribution costs.

Operating income

In 2024, operating income increased primarily from the gain on sale of our Clinical Services business and the absence of impairment charges in 2024, partially offset by lower gross profit as previously discussed, higher operating expenses driven by restructuring and severance charges, transformation expenses, and annual incentive compensation expenses.

In 2023, operating income decreased primarily from lower gross profit, as previously discussed, as well as higher operating expenses driven by asset impairment charges recorded in 2023, accrual of a long-term retention incentive, inflation and investments made to grow the business, partially offset by lower accruals related to incentive compensation.

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Net income

In 2024, net income increased primarily due to higher operating income, as previously discussed, as well as lower interest expense due to debt repayments on our variable-rate debt, partially offset by higher income tax expense due to higher income before income taxes.

In 2023, net income decreased primarily due to lower operating income, as previously discussed, as well as higher interest expense from rising interest rates on our variable-rate term loans, partially offset by lower income tax expense due to lower income before income taxes.

Adjusted EBITDA and Adjusted EBITDA margin

For reconciliations of Adjusted EBITDA and Adjusted EBITDA margin to net income and net income margin, respectively, the most directly comparable measures under GAAP, see “Reconciliations of non-GAAP measures.”

In 2024, Adjusted EBITDA decreased $110.3 million or 8.4%, which included a favorable foreign currency translation impact of $3.3 million or 0.3%. The remaining decline of $113.6 million or 8.7% was driven primarily by lower gross profit and higher annual incentive compensation expenses, partially offset by savings from our cost transformation initiative.

In 2023, Adjusted EBITDA decreased $261.6 million or 16.7%, which included a favorable foreign currency translation impact of $5.3 million or 0.3%. The remaining decline of $266.9 million or 17.0% was driven primarily by lower gross profit, partially offset by reduced operating expenses and lower distribution costs.

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Adjusted Operating Income and Adjusted Operating Income margin

For a reconciliation of Adjusted Operating Income and Adjusted Operating Income margin to net income and net income margin, respectively, the most directly comparable measures under GAAP, see “Reconciliations of non-GAAP financial measures.”

Adjusted Operating Income decreased $122.0 million or 10.1%, which included an unfavorable foreign currency translation impact of $1.3 million or 0.1%. The remaining decline of $120.7 million or 10.0% is discussed below.

In the Laboratory Solutions segment, Adjusted Operating Income declined $70.3 million or 10.5%, or 10.2% when adjusted for unfavorable foreign currency translation impact. The decrease was driven primarily by lower sales volume and higher annual incentive compensation expenses, partially offset by savings from our cost transformation initiative.

In the Bioscience Production segment, Adjusted Operating Income declined $43.7 million or 7.3%. The impact of foreign currency translation impact was immaterial. The decrease was driven primarily by lower sales volume, unfavorable product mix and higher annual incentive compensation expenses, partially offset by savings from our cost transformation initiative.

In Corporate, Adjusted Operating Income decreased $8.0 million driven primarily by increased stock-based compensation expense.

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Adjusted Operating Income decreased $265.5 million or 18.0%, which included a favorable foreign currency translation impact of $5.3 million or 0.4%. The remaining decline of $270.8 million or 18.4% is discussed below.

In the Laboratory Solutions segment, Adjusted Operating Income declined $96.4 million or 12.6%, or 13.1% when adjusted for favorable foreign currency translation impact. The decrease was driven by lower sales volume and unfavorable product mix, partially offset by reduced operating expenses and distribution costs.

In the Bioscience Production segment, Adjusted Operating Income declined $177.0 million or 22.7%, or 22.9% when adjusted for favorable foreign currency translation impact. The decrease was driven by lower sales volume and unfavorable product mix, partially offset by reduced operating expenses, distribution costs and favorable manufacturing variances.

In Corporate, Adjusted Operating Income increased $7.9 million driven primarily by reduced stock-based compensation expense.

Reconciliations of non-GAAP measures

The following table presents the reconciliation of net income and net income margin to Adjusted EBITDA and Adjusted EBITDA margin, respectively:

1.Represents direct costs incurred with third parties and the accrual of a long-term retention incentive to integrate acquired companies. These expenses represent incremental costs and are unrelated to normal

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operations of our business. Integration expenses are incurred over a pre-defined integration period specific to each acquisition.

2.Represents the non-cash reduction of contingent consideration related to the Ritter acquisition and the amortization of the purchase accounting adjustment to record Masterflex inventory at fair value.

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

4.Represents incremental expenses directly associated with the Company’s publicly-announced cost transformation initiative, primarily related to the cost of external advisors.

5.Represents charges and legal costs, net of recoveries, in connection with certain litigation and other contingencies that are unrelated to our core operations and not reflective of on-going business and operating results.

6.Represents net foreign currency (gain) loss from financing activities and other stock-based compensation expense (benefit).

7.As described in notes 10 and 11 to our consolidated financial statements beginning on F-1 of this report.

8.As described in note 4 to our consolidated financial statements beginning on F-1 of this report.

9.As described in note 17 to our consolidated financial statements beginning on F-1 of this report.

The following table presents the reconciliation of net income and net income margin to Adjusted Operating Income and Adjusted Operating Income margin, respectively:

1.Represents direct costs incurred with third parties and the accrual of a long-term retention incentive to integrate acquired companies. These expenses represent incremental costs and are unrelated to normal

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operations of our business. Integration expenses are incurred over a pre-defined integration period specific to each acquisition.

2.Represents the non-cash reduction of contingent consideration related to the Ritter acquisition and the amortization of the purchase accounting adjustment to record Masterflex inventory at fair value.

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

4.Represents incremental expenses directly associated with the Company’s publicly-announced cost transformation initiative, primarily related to the cost of external advisors.

5.Represents charges and legal costs, net of recoveries, in connection with certain litigation and other contingencies that are unrelated to our core operations and not reflective of on-going business and operating results.

6.Represents other stock-based compensation expense (benefit).

7.As described in notes 10 and 11 to our consolidated financial statements beginning on F-1 of this report.

8.As described in note 4 to our consolidated financial statements beginning on F-1 of this report.

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 and taxes. 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.

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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, 2024, $217.7 million or 83% 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. We ordinarily generate significant cash flows in the U.S. and deploy U.S. cash flows promptly toward debt principal repayment. Our U.S. business has significant liquidity via our unused working capital facilities, which satisfy our day-to-day cash operating needs.

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Historical cash flows

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

1.Consists of non-cash charges including depreciation and amortization, impairment charges, stock-based compensation expense, deferred income tax expense, non-cash restructuring charges, pension termination charges, gain on sale of business and others.

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

Cash flows from operating activities provided $29.2 million less cash in 2024 due to higher cash costs related to our cost transformation initiative and higher cash taxes paid in the current year, partially offset by improved working capital.

Investing activities provided $582.6 million more cash in 2024. The change was primarily attributable to the proceeds received from the sale of our Clinical Services business.

Financing activities used $437.5 million more cash in 2024 primarily due to higher debt repayments in the current year, partially offset by higher proceeds received from stock option exercises in 2024.

Free cash flow

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Free cash flow was $44.7 million higher in 2024 driven by changes in cash flows from operating activities noted above.

A discussion and analysis of historical cash flows covering the year ended December 31, 2022 is included in the 2023 Form 10-K.

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 $1,222.6 million of borrowing capacity.

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.

Certain of the debt agreements entered into by our wholly-owned subsidiary, Avantor Funding, Inc., prevent it from paying dividends or making other payments to Avantor, Inc., subject to limited exceptions. At December 31, 2024 and 2023, 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, 2024, 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

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a pro forma net leverage ratio, as defined. This covenant was not applicable at December 31, 2024, and our historical net leverage has been below the covenant requirement.

Contractual obligations

The following table presents our contractual obligations at December 31, 2024:

(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, 2024 through maturity. Further, we have not considered any interest obligation on our receivables facility. 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 U.S. income tax legislation issued in 2017.

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.

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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 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, 2024, the combined carrying value of goodwill and other intangible assets, net of accumulated amortization and impairment charges, was $8,899.4 million or 73% 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, 2024 impairment testing. Each reporting unit had a fair value that was in excess of its carrying value, and our indefinite-lived intangible

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assets did not show any indications that their fair value was more likely than not below their carrying value.

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, 2024, our valuation allowance on deferred tax assets was $214.1 million, $149.2 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 $83.3 million at December 31, 2024, 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. Our tax positions may be scrutinized by local tax authorities upon examination. Determination of taxable income in any jurisdiction requires the interpretation of the related tax laws and regulations, including transfer pricing guidelines, 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

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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 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 2024 stock-based compensation expense by $1.1 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.