VWR Corp - FORM 10-Q - November 3, 2016

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission file number: 001-36673
 
VWR Corporation
(Exact name of registrant as specified in its charter)
 
Delaware
26-0237871
(State of incorporation)
(I.R.S. Employer Identification No.)
Radnor Corporate Center, Building One, Suite 200
100 Matsonford Road
Radnor, Pennsylvania 19087
(Address of principal executive offices)
(610) 386-1700
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. ☒ Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
On October 27, 2016, 131,546,406 shares of the registrant’s common stock, $0.01 par value per share, were outstanding.
 


VWR Corporation and Subsidiaries
Form 10-Q
For the quarterly period ended September 30, 2016
Table of Contents

i

Glossary of Commonly Used Terms
 
Description
Company, we, us, our
VWR Corporation and its consolidated subsidiaries
2014 Plan
the VWR Corporation 2014 Equity Incentive Plan
Adjusted EPS*
our net income, adjusted for certain items, divided by diluted weighted average shares outstanding
Americas
a segment covering North, Central and South America
AOCI
accumulated other comprehensive income or loss
Annual Report
our Annual Report on Form 10-K filed with the SEC on February 25, 2016
Biopharma
the combination of the pharmaceutical and biotechnology sectors
Board
the board of directors of VWR Corporation
bps
basis points
EMEA-APAC
a segment covering Europe, Middle East, Africa and Asia-Pacific
EURIBOR
the applicable interest rate determined by the Banking Federation of the European Union
FASB
the Financial Accounting Standards Board
GAAP
United States generally accepted accounting principles
IPO
our initial public offering which occurred in 2014
ITRA
the income tax receivable agreement between us and Varietal
LIBOR
the applicable British Bankers Association London Interbank Offered Rate
Organic net sales growth*
the reported growth in net sales compared to a prior period, adjusted by the impact of changes in foreign currency rates and the contribution of acquisitions to the extent not present in the prior reported results
SEC
the United States Securities and Exchange Commission
SG&A expenses
selling, general and administrative expenses
Varietal
Varietal Distribution Holdings, LLC
VWR Funding
VWR Funding, Inc., our wholly-owned subsidiary
 
*
Denotes a non-GAAP financial measurement. See Part I, Item 2 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Key Indicators of Performance and Financial Condition” for more information, including where to find reconciliations from the most directly comparable GAAP-based financial measurements.
Cautionary Factors Regarding Forward-Looking Statements
This report contains forward-looking statements. All statements other than statements of historical fact included in this report are forward-looking statements. Forward-looking statements discuss our current expectations and projections relating to our financial condition, results of operations, plans, objectives, future performance and business. These statements may be preceded by, followed by or include the words “aim,” “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “intend,” “likely,” “outlook,” “plan,” “potential,” “project,” “projection,” “seek,” “can,” “could,” “may,” “should,” “would,” “will,” the negatives thereof and other words and terms of similar meaning.

ii

Forward-looking statements are inherently subject to risks, uncertainties and assumptions; they are not guarantees of performance. You should not place undue reliance on these statements. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our assumptions made in connection with the forward-looking statements are reasonable, we cannot assure you that the assumptions and expectations will prove to be correct.
You should understand that the following important factors, in addition to those discussed in our Annual Report and Part II, Item 1A — “Risk Factors,” could affect our future results and could cause those results or other outcomes to differ materially from those expressed or implied in our forward-looking statements:
•
unfavorable political, economic, capital and credit market conditions in the regions where we operate;
•
changes in our customers’ research, development and production and other scientific endeavors;
•
changes to the life science industry adversely affecting our business;
•
increased competition from other companies in our industry and our ability to increase our market shares in the geographic regions where we operate;
•
our ability to maintain relationships with our customers and suppliers;
•
our ability to consummate and integrate prior and future acquisitions;
•
the international scope of our operations;
•
the need to record impairment charges against our goodwill, other intangible and/or other long-lived assets;
•
existing and increased government regulations to which we and our suppliers are subject;
•
our ability to comply with applicable antitrust or competition laws;
•
increased costs to comply with environmental, health and safety laws and regulations;
•
product liability and other claims in the ordinary course of business;
•
our ability to hire, train and retain executive officers and other key personnel;
•
significant interruptions in the operations of our distribution centers or the operations of our suppliers;
•
failure of our information services and its connectivity to our customers, suppliers and/or certain service providers;
•
our failure to register and in some cases own the existing applications and registrations for our material trademarks or service marks in certain countries where we do business;
•
foreign currency exchange rate fluctuations; and
•
unanticipated increases to our income tax liabilities.
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. In addition, all forward-looking statements speak only as of the date of this report. We undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise other than as required under the federal securities laws.

iii

PART I — FINANCIAL INFORMATION
Item 1.
Financial Statements
VWR Corporation and Subsidiaries
Index to Condensed Consolidated Financial Statements (Unaudited)

1

VWR Corporation and Subsidiaries
Condensed Consolidated Balance Sheets (Unaudited)
(in millions, except per share data)
 
September 30,
2016
 
December 31,
2015
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
141.7

 
$
136.3

Trade accounts receivable, net of reserves of $11.7 and $12.0
631.5

 
583.2

Inventories
464.8

 
424.0

Other current assets
84.8

 
89.5

Total current assets
1,322.8

 
1,233.0

Property and equipment, net
240.9

 
228.2

Goodwill
1,853.2

 
1,791.4

Other intangible assets, net
1,441.8

 
1,455.6

Other assets
90.3

 
85.6

Total assets
$
4,949.0

 
$
4,793.8

Liabilities, Redeemable Equity and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Current portion of debt
$
120.4

 
$
92.8

Accounts payable
458.0

 
474.5

Employee-related liabilities
89.8

 
61.4

Current amount due to Varietal — ITRA
37.4

 
78.1

Other current liabilities
142.3

 
112.3

Total current liabilities
847.9

 
819.1

Debt, net of current portion
1,897.2

 
1,896.2

Amount due to Varietal — ITRA, net of current portion
47.6

 
85.0

Deferred income tax liabilities
469.1

 
459.5

Other liabilities
156.1

 
158.8

Total liabilities
3,417.9

 
3,418.6

Commitments and contingencies (Note 8)

 

Redeemable equity, at redemption value
28.6

 
38.8

Stockholders’ equity:
 
 
 
Preferred stock, $0.01 par value; 50.0 shares authorized, no shares issued or outstanding
—

 
—

Common stock, $0.01 par value; 750.0 shares authorized, 131.5 and 131.4 shares issued and outstanding
1.3

 
1.3

Additional paid-in capital
1,752.7

 
1,735.1

Retained earnings
127.5

 
6.3

Accumulated other comprehensive loss
(379.0
)
 
(406.3
)
Total stockholders’ equity
1,502.5

 
1,336.4

Total liabilities, redeemable equity and stockholders’ equity
$
4,949.0

 
$
4,793.8


See accompanying notes to the condensed consolidated financial statements.
2

VWR Corporation and Subsidiaries
Condensed Consolidated Income Statements (Unaudited)
(in millions, except per share data)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Net sales
$
1,136.1

 
$
1,095.5

 
$
3,383.9

 
$
3,206.3

Cost of goods sold
822.6

 
796.0

 
2,436.4

 
2,317.1

Gross profit
313.5

 
299.5

 
947.5

 
889.2

Selling, general and administrative expenses
230.3

 
218.4

 
700.0

 
656.7

Operating income
83.2

 
81.1

 
247.5

 
232.5

Interest expense
(20.6
)
 
(28.1
)
 
(60.5
)
 
(83.7
)
Other income (expense), net
(0.4
)
 
(4.8
)
 
(0.9
)
 
46.9

Loss on extinguishment of debt
—

 
(30.3
)
 
—

 
(32.7
)
Income before income taxes
62.2

 
17.9

 
186.1

 
163.0

Income tax provision
(21.6
)
 
(6.9
)
 
(64.9
)
 
(62.2
)
Net income
$
40.6

 
$
11.0

 
$
121.2

 
$
100.8

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.31

 
$
0.08

 
$
0.92

 
$
0.77

Diluted
0.31

 
0.08

 
0.92

 
0.76

Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
131.5

 
131.4

 
131.4

 
131.4

Diluted
131.9

 
131.5

 
131.7

 
131.9


See accompanying notes to the condensed consolidated financial statements.
3

VWR Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income or Loss (Unaudited)
(in millions)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
40.6

 
$
11.0

 
$
121.2

 
$
100.8

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation:
 
 
 
 
 
 
 
Net unrealized gain (loss) arising during the period
4.7

 
(19.8
)
 
27.3

 
(150.0
)
Derivative instruments:
 
 
 
 
 
 
 
Net unrealized gain (loss) arising during the period
2.9

 
2.6

 
(0.2
)
 
1.8

Reclassification of net gain into earnings
(0.5
)
 
(0.3
)
 
(1.3
)
 
(0.1
)
Defined benefit plans:
 
 
 
 
 
 
 
Reclassification of net loss into earnings
0.3

 
0.8

 
1.5

 
2.1

Other comprehensive income (loss)
7.4

 
(16.7
)
 
27.3

 
(146.2
)
Comprehensive income (loss)
$
48.0

 
$
(5.7
)
 
$
148.5

 
$
(45.4
)
VWR Corporation and Subsidiaries
Condensed Consolidated Statements of Redeemable Equity and Stockholders’ Equity (Unaudited)
(in millions)
 
Redeemable equity, at redemption value
 
Stockholders’ equity
 
 
Common stock
 
Additional paid-in capital
 
Retained earnings
 
AOCI
 
Total
 
 
Shares
 
Par value
 
 
 
 
Balance at December 31, 2015
$
38.8

 
131.4

 
$
1.3

 
$
1,735.1

 
$
6.3

 
$
(406.3
)
 
$
1,336.4

Share-based compensation expense
—

 
—

 
—

 
6.1

 
—

 
—

 
6.1

Issuance of common stock
—

 
0.1

 
—

 
1.3

 
—

 
—

 
1.3

Reclassifications to state redeemable equity at redemption value
(10.2
)
 
—

 
—

 
10.2

 
—

 
—

 
10.2

Net income
—

 
—

 
—

 
—

 
121.2

 
—

 
121.2

Other comprehensive income
—

 
—

 
—

 
—

 
—

 
27.3

 
27.3

Balance at September 30, 2016
$
28.6

 
131.5

 
$
1.3

 
$
1,752.7

 
$
127.5

 
$
(379.0
)
 
$
1,502.5


See accompanying notes to the condensed consolidated financial statements.
4

VWR Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(in millions)
 
Nine months ended September 30,
 
2016
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
121.2

 
$
100.8

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
96.5

 
92.5

Net foreign currency remeasurement loss (gain)
2.3

 
(44.3
)
Deferred income tax provision
15.9

 
23.4

Loss on extinguishment of debt
—

 
32.7

Share-based compensation expense
6.1

 
3.7

Other, net
6.2

 
11.5

Changes in working capital, net of business acquisitions:
 
 
 
Trade accounts receivable
(29.8
)
 
(41.3
)
Inventories
(30.0
)
 
(26.6
)
Accounts payable
(34.4
)
 
9.1

Other assets and liabilities
32.1

 
(4.2
)
Net cash provided by operating activities
186.1

 
157.3

Cash flows from investing activities:
 
 
 
Acquisitions of businesses, net of cash acquired
(60.8
)
 
(45.6
)
Capital expenditures
(45.5
)
 
(24.7
)
Other investing activities
—

 
2.1

Net cash used in investing activities
(106.3
)
 
(68.2
)
Cash flows from financing activities:
 
 
 
Proceeds from debt
483.7

 
2,673.2

Repayment of debt
(497.1
)
 
(2,694.2
)
Payments to Varietal under ITRA
(78.1
)
 
(9.8
)
Payment of debt issuance costs and redemption premium
—

 
(40.3
)
Net change in bank overdrafts
16.2

 
(2.0
)
Other financing activities
(2.9
)
 
(2.4
)
Net cash used in financing activities
(78.2
)
 
(75.5
)
Effect of exchange rate changes on cash
3.8

 
(8.8
)
Net increase in cash and cash equivalents
5.4

 
4.8

Cash and cash equivalents at beginning of period
136.3

 
118.0

Cash and cash equivalents at end of period
$
141.7

 
$
122.8

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for interest
$
54.7

 
$
81.7

Cash paid for income taxes, net
51.5

 
29.1


See accompanying notes to the condensed consolidated financial statements.
5

VWR Corporation and Subsidiaries
Notes to the Condensed Consolidated Financial Statements (Unaudited)
(1)
Nature of Operations and Basis of Presentation
We are a leading global independent provider of product and service solutions to laboratory and production customers. We have significant market positions in Europe and North America. We also have operations in Asia-Pacific and other key emerging markets to support our multinational customers across the globe. We serve a critical role in connecting customer sites with laboratory product suppliers across multiple industries and geographies. We offer a broad portfolio of branded and private label laboratory products. We also offer a full range of value-added services, including custom manufacturing, to meet our customers’ needs. These services represent a growing but currently small portion of our overall net sales. We offer a wide selection of unique products and have developed an extensive global infrastructure including thousands of sales and service-focused professionals. We deliver value to our customers by improving the costs, efficiency and effectiveness of their research laboratories and production operations. We deliver value to our suppliers by providing them with cost-effective channel access to a global and diverse customer base.
The following describes our corporate organization at September 30, 2016:
orgchart20160930a03.gif
•
Varietal — Following a 2007 merger, Varietal was our only stockholder until our IPO in October 2014 and since then had been our majority stockholder through March 2016. Private equity funds managed by Madison Dearborn Partners hold a controlling interest in Varietal. Our condensed consolidated balance sheets reflect significant amounts of goodwill and other intangible assets as a result of the 2007 merger.
In April 2016, Varietal completed a sale of our common stock that caused it to no longer hold a majority ownership interest in us. As a result, we experienced a change in control under U.S. federal tax regulations which has impacted (i) the amount and timing of the utilization of our net operating loss carryforwards; (ii) the timing of payments under an ITRA with Varietal (see Note 12); and (iii) the amount of cash taxes we are paying.
•
VWR Funding and its wholly-owned subsidiaries — VWR Funding is our wholly-owned subsidiary and the sole issuer of our debt. Certain of those debt agreements restrict its ability to make distributions to us.

6

Basis of Presentation
We report financial results on the basis of two segments organized by geographic region: the Americas and EMEA-APAC.
We have prepared these condensed consolidated financial statements without audit pursuant to the rules and regulations of the SEC. Certain information normally included in financial statements prepared in accordance with GAAP has been condensed or omitted pursuant to such rules and regulations. The financial information presented herein reflects all adjustments (consisting only of normal, recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the results for the interim periods presented. The results for interim periods are not necessarily indicative of the results to be expected for the full year.
We believe that the disclosures included herein are adequate to make the information presented not misleading in any material respect when read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report. Those audited consolidated financial statements include a summary of our significant accounting policies, to which there have been no material changes.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of VWR Corporation and the redeemable equity of Varietal, each after the elimination of intercompany balances and transactions.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue, expense, income and loss during the reporting period. Actual results could differ significantly from those estimates.
(2)
New Accounting Standards
In March 2016, the FASB issued new guidance to simplify several aspects of accounting and presentation for share-based compensation. The new guidance is effective for us beginning in the first quarter of 2017, with early adoption permitted. We early adopted the guidance beginning October 1, 2016. The guidance did not have a material impact to us upon adoption.
In February 2016, the FASB issued comprehensive new guidance about leases. Under the new guidance, most leases will be recognized on our consolidated balance sheet as liabilities with corresponding right-of-use assets. The new guidance is effective for us beginning in the first quarter of 2019, with early adoption permitted. The guidance must be adopted using a modified retrospective approach. Although we are continuing to evaluate its impact, we expect that the new guidance will result in a significant increase to the assets and liabilities we present on our consolidated balance sheet.
In May 2014, the FASB issued comprehensive new revenue recognition guidance. The guidance provides a new model for revenue recognition that supersedes most current guidance and requires more disclosures about revenue including the components of revenue that are communicated to investors. The new guidance is effective for us beginning in the first quarter of 2018 and may be adopted using either a full retrospective or a modified retrospective approach. Although we are continuing to evaluate the impact of the new guidance, we expect that the new recognition model will primarily impact only certain portions of our business, and we expect to provide expanded disclosures and to adopt the new standard using the modified retrospective method.
There were no other new accounting standards that we expect to have a material impact to our financial position or results of operations upon adoption.

7

(3)
Earnings per Share
The following table presents information about basic and diluted earnings per share (in millions):
 
Three months ended September 30,

Nine months ended September 30,
 
2016

2015

2016

2015
Reconciliation of weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
131.5

 
131.4

 
131.4

 
131.4

Dilutive effect of share-based instruments
0.4

 
0.1

 
0.3

 
0.5

Diluted
131.9

 
131.5

 
131.7

 
131.9

 
 
 
 
 
 
 
 
Number of anti-dilutive share-based instruments excluded from determination of dilutive effect
2.1

 
2.1

 
3.9

 
2.1

(4)
Acquisitions
During the nine months ended September 30, 2016, we acquired three businesses. In November 2016, we acquired two additional businesses, which we expect will result in aggregate cash paid for the five acquisitions of approximately $145 million. Except for their expected effects on investing cash flow, none of these acquisitions, nor their related costs, were material individually or in the aggregate to our results of operations or financial condition.
(5)
Goodwill and Other Intangible Assets, net
The following tables present information about goodwill by segment (in millions):
 
Americas
 
EMEA-APAC
 
Total
Balance at December 31, 2015
$
1,046.3

 
$
745.1

 
$
1,791.4

Acquisitions
23.6

 
12.7

 
36.3

Currency translation
4.7

 
20.8

 
25.5

Balance at September 30, 2016
$
1,074.6

 
$
778.6

 
$
1,853.2

 
September 30, 2016
 
December 31, 2015
 
Gross carrying amount
 
Accumulated impairment losses
 
Net carrying amount
 
Gross carrying amount
 
Accumulated impairment losses
 
Net carrying amount
Americas
$
1,281.2

 
$
206.6

 
$
1,074.6

 
$
1,252.9

 
$
206.6

 
$
1,046.3

EMEA-APAC
778.6

 
—

 
778.6

 
745.1

 
—

 
745.1

Total
$
2,059.8

 
$
206.6

 
$
1,853.2

 
$
1,998.0

 
$
206.6

 
$
1,791.4


8

The following table presents the components of other intangible assets (in millions):
 
September 30, 2016
 
December 31, 2015
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
 
Gross carrying amount
 
Accumulated amortization
 
Net carrying amount
Customer relationships
$
1,445.9

 
$
648.3

 
$
797.6

 
$
1,402.2

 
$
581.4

 
$
820.8

Other
35.1

 
20.5

 
14.6

 
30.3

 
15.2

 
15.1

Amortizable intangible assets
1,481.0

 
668.8

 
812.2

 
1,432.5

 
596.6

 
835.9

Indefinite-lived trademarks and tradenames
629.6

 
—

 
629.6

 
619.7

 
—

 
619.7

Other intangible assets
$
2,110.6

 
$
668.8

 
$
1,441.8

 
$
2,052.2

 
$
596.6

 
$
1,455.6

(6)
Debt
The following table presents information about debt (dollars in millions):
 
September 30, 2016
 
December 31, 2015
 
Interest terms
 
Rate
 
Amount
 
Accounts receivable securitization facility
LIBOR plus 1.15%
 
1.69
%
 
$
65.1

 
$
38.0

Senior credit facility:
 
 
 
 
 
 
 
Term A loan, net of discount of $5.2 and $6.1
LIBOR plus 2.00%
 
2.74
%
 
870.7

 
903.9

Term B loan, net of discount of $4.2 and $4.7
EURIBOR plus 3.25%
 
4.00
%
 
509.1

 
494.8

4.625% senior notes, net of discount of $7.5 and $8.4
Fixed rate
 
4.63
%
 
558.8

 
538.6

Other debt
13.9

 
13.7

Total debt
$
2,017.6

 
$
1,989.0

Classification on consolidated balance sheets:
 
 
 
Current portion of debt
$
120.4

 
$
92.8

Debt, net of current portion
1,897.2

 
1,896.2

Total debt
$
2,017.6

 
$
1,989.0

In the table above, discounts include unamortized original issue discounts and debt issuance costs. EURIBOR is subject to a floor of 0.75% and other debt includes capital lease obligations and subsidiary loans from local banks. Borrowings under the accounts receivable securitization facility and the multi-currency revolving loan facility, if any, are included in the current portion of debt because we frequently borrow from and repay them to satisfy short term cash requirements.
In April 2016, we entered into two interest rate swaps that exchange LIBOR for fixed rates on a portion of our term A loan. See Note 7.

9

The following table presents availability under credit facilities at September 30, 2016 (in millions):
 
Accounts receivable securitization facility
 
Multi-currency revolving loan facility
 
Total
Maximum availability
$
175.0

 
$
250.0

 
$
425.0

 
 
 
 
 
 
Current availability
$
175.0

 
$
250.0

 
$
425.0

Undrawn letters of credit outstanding
(11.0
)
 
(2.0
)
 
(13.0
)
Outstanding borrowings
(65.1
)
 
—

 
(65.1
)
Unused availability
$
98.9

 
$
248.0

 
$
346.9

Current availability under the accounts receivable securitization facility depends upon maintaining a sufficient borrowing base of eligible trade accounts receivable.
(7)
Financial Instruments and Fair Value Measurements
Our financial instruments include cash and cash equivalents, trade accounts receivable, accounts payable, debt and an amount due to Varietal under the ITRA. Except for the amount due to Varietal, these financial instruments are held or issued by a number of institutions, which reduces the risk of material non-performance.
Assets and Liabilities for which Fair Value is Only Disclosed
The carrying amount of cash and cash equivalents is the same as its fair value and is a Level 1 measurement. The carrying amounts for trade accounts receivable and accounts payable approximate fair value due to their short-term nature and are Level 2 measurements.
The following table presents the carrying amounts and fair values of debt instruments (in millions):
 
September 30, 2016
 
December 31, 2015
 
Carrying amount
 
Fair value
 
Carrying amount
 
Fair value
Accounts receivable securitization facility
$
65.1

 
$
65.1

 
$
38.0

 
$
38.0

Senior credit facility:
 
 
 
 
 
 
 
Term A loan
870.7

 
868.2

 
903.9

 
901.5

Term B loan
509.1

 
519.3

 
494.8

 
500.5

4.625% senior notes
558.8

 
582.0

 
538.6

 
536.5

Other debt
13.9

 
13.9

 
13.7

 
13.7

The fair values of debt instruments are based on quoted market prices and standard pricing models that take into account the present value of future cash flows, which are Level 2 measurements.
At September 30, 2016 and December 31, 2015, the amount due to Varietal under the ITRA (see Note 12) had carrying amounts of $85.0 million and $163.1 million, respectively, and fair values of $74.6 million and $147.6 million, respectively. The fair values were estimated using a combination of observable and unobservable inputs following an income-based approach, a Level 3 measurement.

10

Recurring Fair Value Measurements with Significant Unobservable Inputs
Certain of the business acquisitions we completed entitle the sellers to contingent consideration if earnings targets are met during a period of time following the acquisition.
The following table presents changes in contingent consideration liabilities (in millions):
 
Nine months
ended
September 30, 2016
Beginning balance
$
21.0

Acquisitions
13.8

Loss from changes to estimated fair value
3.7

Settlements in cash
(4.2
)
Currency translation
(0.5
)
Ending balance
$
33.8

We estimate the fair value of contingent consideration using the average of probability-weighted potential earn-out payments specified in the purchase agreements, a Level 3 measurement, ranging in the aggregate from approximately $4 million to $39 million for all open earn-outs at September 30, 2016. The significant assumptions used in these calculations include forecasted results and the estimated likelihood for each performance scenario.
Derivative Instruments and Hedging Activities
We engage in hedging activities to reduce our exposure to changes in variable interest rates and foreign currency exchange rates. Our hedging activities are designed to manage specific risks according to our strategies, as summarized below, which may change from time to time. Our hedging activities consist of the following:
•
Cash flow hedging — We hedge the variable base interest rate of a portion of our term A loan using interest rate swaps;
•
Net investment hedging — We hedge a portion of our net investment in euro-denominated foreign operations using our 4.625% senior notes and a portion of our term B loan;
•
Economic hedge — We experience opposite foreign currency exchange rate effects related to a euro-denominated intercompany loan and the unhedged portion of our term B loan. The currency effects for these non-derivative instruments are recorded through earnings in the period of change and substantially offset one another; and
•
Other hedging activities — Some of our subsidiaries hedge short-term foreign-denominated business transactions and intercompany financing transactions using foreign currency forward contracts. No additional disclosures are provided for these activities because they were not material to our consolidated financial statements.
Cash Flow and Net Investment Hedging
We have entered into two interest rate swaps designated as cash flow hedges of the variable LIBOR rate on our term A loan. Beginning April 2016, we swapped LIBOR for a 1.00% fixed rate on $375.0 million of our term A loan. Beginning September 2016, we swapped LIBOR for a 1.05% fixed rate on an additional $125.0 million of our term A loan. Both interest rate swaps mature on September 28, 2020. These hedges have been and are

11

expected to continue to be fully effective. As a result, changes to the fair value of the interest rate swaps, which otherwise would be recognized in earnings, are deferred to AOCI.
We have designated €410.0 million of our term B loan and all €503.8 million of our 4.625% senior notes as hedges to protect a portion of our net investment in foreign operations from the impact of changes in the euro to U.S. dollar exchange rate. As a result of these hedge designations, the foreign currency changes on the debt instruments, which otherwise would be recognized in earnings, are deferred to AOCI and equally offset the foreign currency changes on the hedged portion of our net investment. These hedges have no other impact to our financial position, financial performance or cash flows.
The following table presents the balance sheet classification and fair values of these instruments, all of which are Level 2 measurements (in millions):
 
Balance sheet classification
 
September 30,
2016
 
December 31,
2015
Cash flow hedging:
 
 
 
 
 
$375.0 interest rate swap
Other liabilities
 
$
1.3

 
$
—

$125.0 interest rate swap
Other liabilities
 
0.7

 
—

Net investment hedging:
 
 
 
 
 
Portion of term B loan
Debt, net of current portion
 
465.2

 
402.6

4.625% senior notes
Debt, net of current portion
 
582.0

 
536.5

The following table presents the net unrealized gain (loss) deferred to AOCI for these instruments (in millions):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Cash flow hedging:
 
 
 
 
 
 
 
$375.0 interest rate swap
$
1.9

 
$
—

 
$
(2.2
)
 
$
—

$125.0 interest rate swap
0.6

 
—

 
(0.7
)
 
—

Net investment hedging:
 
 
 
 
 
 
 
Portion of net investment in foreign operations
12.6

 
0.9

 
33.7

 
23.1

Portion of term B loan
(5.6
)
 
1.1

 
(14.5
)
 
1.1

4.625% senior notes
(7.0
)
 
(2.0
)
 
(19.2
)
 
(24.2
)
All of these hedges were fully effective for the periods presented.
The following table presents the net loss reclassified from AOCI into interest expense for these instruments (in millions):
 
Three months ended September 30, 2016
 
Nine months ended September 30, 2016
$375.0 interest rate swap
$
(0.5
)
 
$
(0.9
)

12

(8)
Commitments and Contingencies
Our business involves risk of product liability, patent infringement and other claims in the ordinary course of business arising from the products that we source from various manufacturers or produce ourselves, as well as from the services we provide. Our exposure to such claims may increase as we seek to increase the geographic scope of our sourcing activities and sales of private label products and to the extent that we expand our manufacturing operations or service offerings. We maintain insurance policies, including product liability insurance, and in many cases the manufacturers of the products we distribute have indemnified us against such claims. We cannot assure you that our insurance coverage or indemnification agreements with manufacturers will be available in all pending or any future cases brought against us. Furthermore, our ability to recover under any insurance or indemnification arrangements is subject to the financial viability of our insurers, our manufacturers and our manufacturers’ insurers, as well as legal enforcement under the local laws governing the arrangements. In particular, as we seek to expand our sourcing from manufacturers in the Asia-Pacific region and other developing locations, we expect that we will increase our exposure to potential defaults under the related indemnification arrangements. Insurance coverage in general or coverage for certain types of liabilities, such as product liability or patent infringement in these developing markets may not be readily available for purchase or cost-effective for us to purchase. Furthermore, insurance for liability relating to asbestos, lead and silica exposure is not available, and we do not maintain insurance for product recalls. Accordingly, we could be subject to uninsured and unindemnified future liabilities, and an unfavorable result in a case for which adequate insurance or indemnification is not available could result in a material adverse effect on our business, financial condition and results of operations.
We are also involved in various disputes, litigation and regulatory matters incidental to our business, including employment matters, commercial disputes, government contract compliance matters, disputes regarding environmental clean-up costs, and other matters arising out of the normal conduct of our business. We intend to vigorously defend ourselves in such matters. From time to time, we are named as a defendant in cases as a result of our distribution of laboratory supplies, including litigation resulting from the alleged prior distribution of products containing asbestos by certain of our predecessors or acquired companies. While the impact of these disputes or litigation has historically been immaterial, and we believe the range of reasonably possible loss from current matters continues to be immaterial, there can be no assurance that the impact of the pending and any future claims will not be material to our business, financial condition or results of operations in the future.
Employment Agreements
The employment agreements with our executive officers include provisions for the payment of severance and continuing health benefits following termination without cause or resignation for good reason, as those terms are defined in the employment agreements. The aggregate of potential payments for all executive officers under these provisions was $10.3 million at September 30, 2016.
Registration Rights Agreement
We are party to a registration rights agreement with Varietal that could require us to pay securities registration costs in future periods. Under the registration rights agreement, Varietal is entitled to request that we register (i) any shares of our common stock that it held at October 7, 2014 and (ii) any shares held by Madison Dearborn Partners. Should we register such common stock, we would be required to pay costs related to the registration as well as Varietal’s expenses in connection with its exercise of these rights.
During the three and nine months ended September 30, 2016, we incurred expenses of $0.4 million and $1.2 million, respectively, pursuant to the registration rights agreement. See Note 12.

13

(9)
Share-Based Compensation
The following table presents the components of share-based compensation expense, a component of selling, general and administrative expenses (in millions):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
2014 Plan
$
2.3

 
$
1.2

 
$
5.9

 
$
3.4

Other
—

 
0.1

 
0.2

 
0.3

Total
$
2.3

 
$
1.3

 
$
6.1

 
$
3.7

At September 30, 2016, remaining share-based compensation expense of $27.7 million related to unvested awards will be recognized over a weighted average period of 3.2 years.
2014 Plan
The 2014 Plan authorized up to 11.5 million shares of common stock to be issued in the form of stock options, stock appreciation rights, restricted stock or other stock-based awards. At September 30, 2016, 5.6 million shares were available for future issuance. No award shall be granted pursuant to the 2014 Plan on or after September 9, 2024.
The following table presents information about stock options under the 2014 Plan (in millions, except per option amounts and years):
 
Nine months ended September 30, 2016
 
Number of stock options
 
Weighted average exercise price per option
 
Aggregate intrinsic value
 
Weighted average remaining term in years
Outstanding at beginning of period
3.2

 
$
21.03

 
 
 
 
Granted
2.8

 
24.64

 
 
 
 
Forfeited
(0.1
)
 
21.36

 
 
 
 
Outstanding at end of period
5.9

 
22.74

 
$
32.9

 
5.7
Expected to vest
5.6

 
22.76

 
31.1

 
5.7
Exercisable
0.1

 
21.00

 
1.1

 
5.0
In 2016, we granted stock options to management under the 2014 Plan. The stock options vest 25% on the first anniversary of the date of grant and 6.25% quarterly thereafter through the fourth anniversary of the date of grant and have a seven-year term.
The following table presents information about the fair value of stock options granted in 2016:
Weighted average grant date fair value
$
6.69

Expected stock price volatility
30
%
Risk free interest rate
1.16
%
Expected dividend rate
nil

Expected life of options in years
4.6


14

On October 1, 2016, 1.2 million stock options became exercisable at $21.00 per option with an aggregate intrinsic value of $8.4 million and a remaining term of 5.0 years.
(10)    Benefit Plans
The following tables present the components of net periodic pension (income) cost (in millions):
 
U.S. Retirement Plan
 
German, French and UK Plans
 
Three months ended September 30,
 
Three months ended September 30,
 
2016
 
2015
 
2016
 
2015
Service cost
$
0.2

 
$
0.2

 
$
0.4

 
$
0.4

Interest cost
1.7

 
2.0

 
1.1

 
1.3

Expected return on plan assets
(3.3
)
 
(3.6
)
 
(1.2
)
 
(1.2
)
Recognized net actuarial loss
—

 
—

 
0.8

 
0.9

Net periodic pension (income) cost
$
(1.4
)
 
$
(1.4
)
 
$
1.1

 
$
1.4

 
U.S. Retirement Plan
 
German, French and UK Plans
 
Nine months ended September 30,
 
Nine months ended September 30,
 
2016

2015
 
2016

2015
Service cost
$
0.5

 
$
0.6

 
$
1.1

 
$
1.2

Interest cost
5.1

 
5.8

 
3.4

 
3.9

Expected return on plan assets
(9.8
)
 
(10.7
)
 
(3.6
)
 
(3.6
)
Recognized net actuarial loss
—

 
—

 
2.5

 
2.7

Net periodic pension (income) cost
$
(4.2
)
 
$
(4.3
)
 
$
3.4

 
$
4.2

During the nine months ended September 30, 2016, we made no contributions to the U.S. Retirement Plan and $0.7 million of aggregate contributions to the German, French and UK Plans. For the remainder of 2016, we expect to make no contributions to the U.S. Retirement Plan and aggregate contributions of $8.0 million to the German, French and UK Plans.
(11)
Comprehensive Income or Loss
The following table presents changes in the components of AOCI, net of tax (in millions):
 
Foreign currency translation
 
Derivative instruments
 
Defined benefit plans
 
Total
Balance at December 31, 2015
$
(365.3
)
 
$
2.0

 
$
(43.0
)
 
$
(406.3
)
Net unrealized gain (loss) arising during the period
27.3

 
(0.2
)
 
—

 
27.1

Reclassification of net (gain) loss into earnings
—

 
(1.3
)
 
1.5

 
0.2

Balance at September 30, 2016
$
(338.0
)
 
$
0.5

 
$
(41.5
)
 
$
(379.0
)

15

The following table presents information about the reclassification of net (gain) loss from AOCI into earnings (in millions):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Derivative instruments:
 
 
 
 
 
 
 
Cost of goods sold
$
(1.1
)
 
$
(0.9
)
 
$
(2.3
)
 
$
(1.3
)
Interest expense
0.5

 
0.1

 
0.9

 
0.3

Loss on extinguishment of debt
—

 
0.4

 
—

 
0.7

Income tax provision
0.1

 
0.1

 
0.1

 
0.2

Net income
$
(0.5
)
 
$
(0.3
)
 
$
(1.3
)
 
$
(0.1
)
Defined benefit plans:
 
 
 
 
 
 
 
Selling, general and administrative expenses
$
0.6

 
$
1.1

 
$
2.3

 
$
3.0

Income tax provision
(0.3
)
 
(0.3
)
 
(0.8
)
 
(0.9
)
Net income
$
0.3

 
$
0.8

 
$
1.5

 
$
2.1

The following table presents the income tax effects of the components of comprehensive income or loss (in millions):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Foreign currency translation:
 
 
 
 
 
 
 
Net unrealized income tax benefit arising during the period
$
5.0

 
$
0.6

 
$
13.2

 
$
9.3

Derivative instruments:
 
 
 
 
 
 
 
Net unrealized income tax (provision) benefit arising during the period
(1.6
)
 
(1.1
)
 
0.6

 
(1.2
)
Reclassification of net income tax provision into earnings
0.1

 
0.1

 
0.1

 
0.2

Defined benefit plans:
 
 
 
 
 
 
 
Reclassification of net income tax benefit into earnings
(0.3
)
 
(0.3
)
 
(0.8
)
 
(0.9
)
(12)
Related Party Transactions
Due to Varietal — ITRA
We are party to an ITRA with Varietal. The ITRA provides for the payment of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax realized as a result of utilizing net operating losses that were generated in periods prior to the IPO. As noted previously, Madison Dearborn Partners owns a controlling interest in Varietal.

16

The timing of payments under the ITRA corresponds to the year subsequent to the year in which the net operating loss carryforwards are claimed on our tax return. We made a payment under the ITRA of $78.1 million during the nine months ended September 30, 2016. At September 30, 2016, the remaining amount due to Varietal under the ITRA was $85.0 million, $37.4 million of which is classified as current and represents our estimate of the payment that will become due in March 2017.
Registration Rights Agreement
During the nine months ended September 30, 2016, Varietal completed registered sales of 25.2 million shares of our common stock. We received no proceeds from these sales and issued no additional shares of our common stock. Pursuant to our registration rights agreement with Varietal (see Note 8), we incurred expenses of $0.4 million and $1.2 million related to the registered sales during the three and nine months ended September 30, 2016, respectively.
(13)
Segment Financial Information
The following table presents segment financial information (in millions):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Net sales:
 
 
 
 
 
 
 
Americas
$
707.7

 
$
667.9

 
$
2,069.3

 
$
1,925.0

EMEA-APAC
428.4

 
427.6

 
1,314.6

 
1,281.3

Total
$
1,136.1

 
$
1,095.5

 
$
3,383.9

 
$
3,206.3

Operating income:
 
 
 
 
 
 
 
Americas
$
47.2

 
$
47.2

 
$
134.2

 
$
124.1

EMEA-APAC
36.0

 
33.9

 
113.3

 
108.4

Total
$
83.2

 
$
81.1

 
$
247.5

 
$
232.5

Inter-segment activity has been eliminated; therefore, net sales for each segment are all from external customers. We determined that disclosing net sales for each group of similar customers, products and services would be impracticable.
(14)
Subsequent Event
In November 2016, our Board approved incurring charges of approximately $30 million over the next few quarters to achieve additional efficiencies in our operating model.

17

Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read with our condensed consolidated financial statements and related notes included in Part I, Item 1 — “Financial Statements.” This discussion and analysis contains forward-looking statements, which are subject to risks and uncertainties. Actual results may differ materially from those forward-looking statements. Refer to “Cautionary Factors Regarding Forward-Looking Statements” for additional information.
Basis of Presentation
Pursuant to SEC 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 since December 31, 2015, the date of our Annual Report. Therefore, we encourage you to read this discussion and analysis in conjunction with the Annual Report.
We report financial results on the basis of two segments organized by geographic region: the Americas and EMEA-APAC.
Overview
We are a leading global independent provider of product and service solutions to laboratory and production customers. We have significant market positions in Europe and North America. We also have operations in Asia-Pacific and other key emerging markets to support our multinational customers across the globe. We serve a critical role in connecting customer sites with laboratory product suppliers across multiple industries and geographies. We offer a broad portfolio of branded and private label laboratory products. We also offer a full range of value-added services, including custom manufacturing, to meet our customers’ needs. These services represent a growing but currently small portion of our overall net sales. We offer a wide selection of unique products and have developed an extensive global infrastructure including thousands of sales and service-focused professionals. We deliver value to our customers by improving the costs, efficiency and effectiveness of their research laboratories and production operations. We deliver value to our suppliers by providing them with cost-effective channel access to a global and diverse customer base.
Our growth strategies include expanding our global strategic relationships, developing complementary new services, expanding our customer and supplier base, implementing best practices across our operations, broadening our offerings to underserved customer segments, executing targeted acquisitions and deploying capital to create stockholder value.

18

Key Indicators of Performance and Financial Condition
To evaluate our performance, we monitor a number of key indicators of our performance and financial condition.
•
Net sales, organic net sales growth, operating income and operating income margin, which we discuss in the section entitled “Results of Operations.” Organic net sales growth is a non-GAAP financial measurement that eliminates the contribution from recently acquired businesses and the impact of changes in foreign currency exchange rates from our reported net sales. We believe that this measurement is useful to investors as an additional way to measure and evaluate our underlying commercial operating performance consistently across the periods presented. This measurement is used by our management for the same reason;
•
Constant-currency changes in gross profit, SG&A expenses and operating income, which we discuss in the section entitled “Results of Operations.” These are non-GAAP financial measurements that exclude the impact of changes in foreign currency exchange rates from our reported results. We believe that these measurements are useful to investors as an additional way to measure and evaluate our underlying commercial operating performance excluding the effects of currency changes, which we cannot control. These measurements are used by our management for the same reason;
•
Gross margin, net income and diluted earnings per share, which we discuss in the section entitled “Results of Operations;”
•
Adjusted EPS, which we discuss in materials furnished to the SEC and other public materials related to our presentation of quarterly results. Adjusted EPS is a non-GAAP financial measurement that eliminates the effect of the amortization of acquired intangible assets, changes in foreign currency exchange rates related to financing decisions and certain other items. We then add or subtract an estimated incremental income tax effect applicable to those items. We believe that this measurement is useful to investors as an additional way to analyze the underlying trends in our business consistently across the periods presented. This measurement is used by our management for the same reason; and
•
Cash flows, particularly cash flows from operating activities, which we discuss in the section entitled “Liquidity and Capital Resources — Historical Cash Flows.”
Cautionary Statement about Non-GAAP Financial Measurements
As previously noted, we supplement our results of operations determined in accordance with GAAP with certain non-GAAP financial measurements that are used by management, and which we believe are useful to investors, as supplemental operational measurements to evaluate our financial performance. These measurements should not be considered in isolation or as a substitute for reported GAAP results because they may include or exclude certain items as compared to similar GAAP-based measurements, and such measurements may not be comparable to similarly-titled measurements reported by other companies. Rather, these measurements should be considered as an additional way of viewing aspects of our operations that provide a more complete understanding of our business. We strongly encourage investors to review our consolidated financial statements included elsewhere herein and in publicly filed reports in their entirety and not rely solely on any one, single financial measurement.
Reconciliations of our non-GAAP measurements appearing in this report to their most directly comparable GAAP-based financial measurements are included throughout the section entitled “Results of Operations.”

19

Results of Operations
This discussion and analysis includes a summary of our historical results of operations below, followed by detailed comparisons of our results. We have derived this data from our condensed consolidated financial statements included elsewhere in this report.
The following table presents a summary of our results of operations (dollars in millions, except per share data):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
Change
 
2016
 
2015
 
Change
Net sales
$
1,136.1

 
$
1,095.5

 
$
40.6

 
$
3,383.9

 
$
3,206.3

 
$
177.6

Organic net sales growth
1.6
%
 
 
 
 
 
3.9
%
 
 
 

Gross margin
27.6
%
 
27.3
%
 
30
 bps

28.0
%
 
27.7
%
 
30
 bps
Operating income
$
83.2

 
$
81.1

 
$
2.1

 
$
247.5

 
$
232.5

 
$
15.0

Operating income margin
7.3
%
 
7.4
%
 
(10
) bps

7.3
%
 
7.3
%
 
—

Net income
$
40.6

 
$
11.0

 
$
29.6

 
$
121.2

 
$
100.8

 
$
20.4

Diluted earnings per share
$
0.31

 
$
0.08

 
$
0.23

 
$
0.92

 
$
0.76

 
$
0.16

The following summarizes third quarter 2016 results compared to the prior year:
•
Net sales increased 3.7%, 1.6% on an organic basis. Americas net sales increased 6.0%, 1.7% on an organic basis. EMEA-APAC net sales increased 0.2%, 1.4% on an organic basis;
•
Gross margin improved 30 basis points as a result of efficient pricing and favorable customer mix;
•
Operating income margin declined 10 basis points, with Americas operating income margin declining 40 basis points and EMEA-APAC operating income margin increasing by 50 basis points. EMEA-APAC operating income was impacted by a $3.2 million impairment charge in the prior year. Excluding this impairment charge, operating income margins declined due to increased levels of variable and share-based compensation expense.
•
Net income and diluted earnings per share increased due to lower interest expense and the absence of a significant loss on extinguishment of debt.
In the first nine months of the year, net sales increased 5.5%, up 3.9% on an organic basis, and operating income increased 6.5%. Operating income margin was flat at 7.3%.

20

Net Sales and Organic Net Sales Growth
The following tables present information about net sales and organic net sales growth (dollars in millions):
 
September 30,
 
Reported change
 
Non-GAAP reconciliation
 
 
 
Currency translation
 
Acquisitions
 
Organic net sales growth
 
2016
 
2015
 
Amount
 
%
 
 
 
Amount
 
%
Three months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
707.7

 
$
667.9

 
$
39.8

 
6.0
%
 
$
0.1

 
$
28.2

 
$
11.5

 
1.7
%
EMEA-APAC
428.4

 
427.6

 
0.8

 
0.2
%
 
(8.3
)
 
3.0

 
6.1

 
1.4
%
Total
$
1,136.1

 
$
1,095.5

 
$
40.6

 
3.7
%
 
$
(8.2
)
 
$
31.2

 
$
17.6

 
1.6
%
Nine months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
2,069.3

 
$
1,925.0

 
$
144.3

 
7.5
%
 
$
(10.1
)
 
$
71.1

 
$
83.3

 
4.3
%
EMEA-APAC
1,314.6

 
1,281.3

 
33.3

 
2.6
%
 
(20.8
)
 
11.0

 
43.1

 
3.4
%
Total
$
3,383.9

 
$
3,206.3

 
$
177.6

 
5.5
%
 
$
(30.9
)
 
$
82.1

 
$
126.4

 
3.9
%
Three Months Ended
Net sales increased $40.6 million or 3.7%, up 1.6% on an organic basis.
Americas net sales increased $39.8 million or 6.0%, up 1.7% on an organic basis, driven by solid growth to Biopharma and government customers. Sales to healthcare customers increased, while sales to industrial customers were about flat and sales to education customers were slightly down. From a product perspective, net sales of chemicals increased double-digits, while other consumables and capital goods increased low single-digits. Sales in the Americas benefited primarily from acquisitions and efficient pricing.
EMEA-APAC net sales increased $0.8 million or 0.2%, up 1.4% on an organic basis with growth in sales to industrial, healthcare and Biopharma customers, while sales to government and education customers declined. Performance by customer group included growth in private sector spending, somewhat offset by a lower level of government spending. From a product perspective, sales of chemicals were about flat, other consumables increased by mid single-digits and capital goods were down low single-digits. Sales in EMEA-APAC reflected modest improvements from acquisitions, volume and pricing.
Nine Months Ended
Net sales increased $177.6 million or 5.5%, up 3.9% on an organic basis.
Americas net sales increased $144.3 million or 7.5%, up 4.3% on an organic basis for reasons similar to the three-month period, except that sales were slightly better across most customer and product groups due to the strong first half results.
EMEA-APAC net sales increased $33.3 million or 2.6%, up 3.4% on an organic basis for reasons similar to the three-month period, except that sales to Biopharma customers increased mid single-digits and sales across most other customer and product groups were modestly better due to the strength of our first half 2016 results.


21

Gross Profit and Gross Margin
The following tables present information about gross profit and gross margin (dollars in millions):
 
September 30,
 
Reported change
 
Non-GAAP reconciliation
 
 
 
Currency translation
 
Constant-currency
 
2016
 
2015
 
Amount
 
%
 
 
Amount
 
%
Three months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
$
313.5

 
$
299.5

 
$
14.0

 
4.7
%
 
$
(2.9
)
 
$
16.9

 
5.6
%
Gross margin
27.6
%
 
27.3
%
 
30

bps
 
 
 
 
 
 
Nine months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross profit
$
947.5

 
$
889.2

 
$
58.3

 
6.6
%
 
$
(9.5
)
 
$
67.8

 
7.6
%
Gross margin
28.0
%
 
27.7
%
 
30

bps
 
 
 
 
 
 
For the three months ended September 30, 2016, gross profit increased 4.7%, up 5.6% on a constant-currency basis, reflecting a higher level of net sales and gross margin improvement. Gross margin was 27.6%, up 30 basis points compared to prior year primarily due to pricing benefits and favorable customer mix.
For the nine months ended September 30, 2016, gross profit increased 6.6%, up 7.6% on a constant-currency basis, and gross margin was 28.0%, up 30 basis points, each for reasons similar to the three-month period.
SG&A Expenses
The following tables present information about SG&A expenses (dollars in millions):
 
September 30,
 
Reported change
 
Non-GAAP reconciliation
 
 
 
Currency translation
 
Constant-currency
 
2016
 
2015
 
Amount
 
%
 
 
Amount
 
%
Three months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
SG&A expenses
$
230.3

 
$
218.4

 
$
11.9

 
5.4
%
 
$
(1.8
)
 
$
13.7

 
6.3
%
% of net sales
20.3
%
 
19.9
%
 
40

bps
 
 
 
 
 
 
Nine months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
SG&A expenses
$
700.0

 
$
656.7

 
$
43.3

 
6.6
%
 
$
(7.4
)
 
$
50.7

 
7.7
%
% of net sales
20.7
%
 
20.5
%
 
20

bps
 
 
 
 
 
 
For the three months ended September 30, 2016, SG&A expenses increased $11.9 million or 5.4%, up 6.3% on a constant-currency basis, reflecting increased variable and share-based compensation expense. SG&A expenses also increased from business acquisitions.
For the nine months ended September 30, 2016, SG&A expenses increased $43.3 million or 6.6%, up 7.7% on a constant-currency basis, for reasons similar to the three-month period.

22

Operating Income
The following table presents information about operating income (dollars in millions):
 
September 30,
 
Reported change
 
Non-GAAP reconciliation
 
 
 
Currency translation
 
Constant-currency
 
2016
 
2015
 
Amount
 
%
 
 
Amount
 
%
Three months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
47.2

 
$
47.2

 
$
—

 
—

 
$
—

 
$
—

 
—

EMEA-APAC
36.0

 
33.9

 
2.1

 
6.2
%
 
(1.1
)
 
3.2

 
9.4
%
Total
$
83.2

 
$
81.1

 
$
2.1

 
2.6
%
 
$
(1.1
)
 
$
3.2

 
3.9
%
Operating income margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
6.7
%
 
7.1
%
 
(40
)
bps
 
 
 
 
 
 
EMEA-APAC
8.4
%
 
7.9
%
 
50

bps
 
 
 
 
 
 
Total
7.3
%
 
7.4
%
 
(10
)
bps
 
 
 
 
 
 
Nine months ended:
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
134.2

 
$
124.1

 
$
10.1

 
8.1
%
 
$
(0.1
)
 
$
10.2

 
8.2
%
EMEA-APAC
113.3

 
108.4

 
4.9

 
4.5
%
 
(2.0
)
 
6.9

 
6.4
%
Total
$
247.5

 
$
232.5

 
$
15.0

 
6.5
%
 
$
(2.1
)
 
$
17.1

 
7.4
%
Operating income margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
6.5
%
 
6.4
%
 
10

bps
 
 
 
 
 
EMEA-APAC
8.6
%
 
8.5
%
 
10

bps
 
 
 
 
 
 
Total
7.3
%
 
7.3
%
 
—

 
 
 
 
 
 
Three Months Ended
Consolidated operating income increased $2.1 million or 2.6%, up 3.9% on a constant-currency basis. Operating income margin declined 10 basis points compared to prior year.
Americas operating income was flat with margin down 40 basis points, the result of net sales growth and gross margin improvement offset by higher SG&A expenses.
EMEA-APAC operating income increased $2.1 million or 6.2%, up 9.4% on a constant-currency basis, with operating income margin up 50 basis points. EMEA-APAC operating income was impacted by a $3.2 million impairment charge in the prior year. Excluding this impairment charge, operating income was slightly lower and operating income margin declined for reasons similar to the Americas.
Nine Months Ended
Operating income increased $15.0 million or 6.5%, up 7.4% on a constant-currency basis, with operating income margin flat year-over-year. For both segments, the net sales growth and gross margin improvements were relatively stronger than the increase to SG&A expenses as compared to the quarter, resulting in stronger bottom-line performance.

23

Net Income and Diluted Earnings per Share
The following table presents information about net income and diluted earnings per share (in millions, except per share amounts):
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
Change
 
2016

2015
 
Change
Operating income
$
83.2

 
$
81.1

 
$
2.1

 
$
247.5

 
$
232.5

 
$
15.0

Interest expense
(20.6
)
 
(28.1
)
 
7.5

 
(60.5
)
 
(83.7
)
 
23.2

Other income (expense), net
(0.4
)
 
(4.8
)
 
4.4

 
(0.9
)
 
46.9

 
(47.8
)
Loss on extinguishment of debt
—

 
(30.3
)
 
30.3

 
—

 
(32.7
)
 
32.7

Income tax provision
(21.6
)
 
(6.9
)
 
(14.7
)
 
(64.9
)
 
(62.2
)
 
(2.7
)
Net income
$
40.6

 
$
11.0

 
$
29.6

 
$
121.2

 
$
100.8

 
$
20.4

 
 
 
 
 
 
 
 
 
 
 
 
Diluted earnings per share
$
0.31

 
$
0.08

 
$
0.23

 
$
0.92

 
$
0.76

 
$
0.16

Three Months Ended
Net income increased $29.6 million primarily due to the absence of the extinguishment loss from our third quarter 2015 debt refinancing. Other notable factors include:
•
Higher operating income, up $2.1 million compared to prior year;
•
Lower interest expense, down $7.5 million due to our 2015 debt refinancing; and
•
Higher income tax provision, primarily due to the absence of the debt extinguishment loss. The effective tax rate was similar to the rate for the year ended December 31, 2015 as described in Note 18 to the consolidated financial statements in our Annual Report.
These factors drove diluted earnings per share of $0.31, an increase of $0.23.
Nine Months Ended
Net income increased $20.4 million due to factors similar to those discussed for the three-month period in addition to the absence of significant non-cash net foreign currency remeasurement gain from our debt in 2015. Since October 2015, substantially all of our euro-denominated debt has been part of a hedging program.
Diluted earnings per share increased $0.16 for reasons similar to net income.

24

Liquidity and Capital Resources
We fund short-term cash requirements primarily from operating cash flows and available borrowings under our credit facilities. Most of our cash resides outside of the United States, which we do not intend to repatriate. Most of our long-term financing is from debt.
Our future financial and operating performance, our ability to service or refinance our debt and our ability to comply with covenants and restrictions contained in our debt agreements will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control and will be substantially dependent on the global economy, demand for our products and our ability to successfully implement our business strategies.
We believe that cash generated from operations, together with available borrowings 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
As of September 30, 2016, we had aggregate unused availability of $346.9 million under our credit facilities, calculated as follows (in millions):
 
Accounts receivable securitization facility
 
Multi-currency revolving loan facility
 
Total
Maximum availability
$
175.0

 
$
250.0

 
$
425.0

 
 
 
 
 
 
Current availability
$
175.0

 
$
250.0

 
$
425.0

Undrawn letters of credit outstanding
(11.0
)
 
(2.0
)
 
(13.0
)
Outstanding borrowings
(65.1
)
 
—

 
(65.1
)
Unused availability
$
98.9

 
$
248.0

 
$
346.9

Borrowings under these facilities are the most significant source of our liquidity. The daily average of aggregate borrowings outstanding under these facilities for the three and nine months ended September 30, 2016 was $96.5 million and $122.5 million, respectively. Our liquidity needs change daily, which causes our unused availability to fluctuate. Current availability under the accounts receivable securitization facility depends upon maintaining a sufficient borrowing base of eligible trade accounts receivable.
Historical Cash Flows
The following table presents a summary of historical cash flows (in millions):
 
Nine months ended September 30,
 
2016

2015
Net cash provided by (used in):
 
 
 
Operating activities
$
186.1

 
$
157.3

Investing activities
(106.3
)
 
(68.2
)
Financing activities
(78.2
)
 
(75.5
)

25

Historical Cash Flows — Nine Months Ended September 30, 2016
Operating Activities
Net cash provided by operating activities increased $28.8 million from prior year due primarily to a significant contribution from earnings, excluding non-cash items such as depreciation and amortization and deferred income tax provision. Those increases were partially offset by investments in net working capital.
Changes in trade accounts receivable used cash of $29.8 million due primarily to organic net sales growth. Changes in inventories used cash of $30.0 million, which follows the organic net sales growth and reflects a greater stock of private label products and chemicals, the continuation of a global initiative to expand our product offerings and improve customer service levels. Changes in accounts payable used cash of $34.4 million. Our cash disbursement routines follow a standardized process for payment, and we may experience fluctuations in cash flows associated with accounts payable from period to period. Changes in other assets and liabilities provided $32.1 million of cash, reflecting accruals for variable compensation and a number of other accruals primarily related to cutoff and timing.
Cash paid for interest was $54.7 million, a significant decrease from prior year caused primarily by savings from our 2015 debt refinancing. Cash paid for income taxes was $51.5 million, an increase of $22.4 million from prior year caused by higher taxable income and a limitation on our use of net operating losses following the change in control described in Note 1 to our consolidated financial statements located in Part I, Item 1 — “Financial Statements.”
Investing Activities
Net cash used in investing activities was $106.3 million. We paid net cash of $60.8 million to acquire three businesses. Capital expenditures were $45.5 million, an increase of $20.8 million from prior year driven by the consolidation of our U.S. chemical manufacturing businesses.
Financing Activities
Net cash used in financing activities was $78.2 million, primarily reflecting payment of $78.1 million to Varietal under the ITRA. That payment, which related to our 2015 utilization of net operating losses, was $68.3 million larger than the prior year because of higher taxable income, and in 2014 only one quarter of the year was subject to the ITRA. Cash flows from debt were not significant when considered with the change in cash overdrafts, both of which reflect ordinary timing differences related to our liquidity.
Historical Cash Flows — Nine Months Ended September 30, 2015
Operating Activities
Net cash provided by operating activities included a significant contribution from earnings, excluding non-cash items such as depreciation and amortization, currency remeasurement and deferred income tax provision. This contribution was reduced by i) an increase in trade accounts receivable, which used cash of $41.3 million due primarily to organic net sales growth, and ii) an increase in inventories, which used cash of $26.6 million, part of a global initiative to expand our product offerings and improve customer service levels.
Cash paid for interest was $81.7 million, and cash paid for income taxes was $29.1 million.

26

Investing Activities
Net cash used in investing activities was $68.2 million. We paid net cash of $45.6 million to acquire three businesses, and capital expenditures were $24.7 million.
Financing Activities
Net cash used by financing activities was $75.5 million. We paid debt issuance costs of $40.3 million in connection with the refinancing of substantially all of our debt. In addition, on a net basis we repaid $21.0 million of debt and $9.8 million to Varietal under the ITRA.
New Accounting Standards
For information about new accounting standards, see Note 2 to our condensed consolidated financial statements included in Part I, Item 1 — “Financial Statements.”
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
In the second quarter of 2016, we entered into two interest rate swaps that we designated as cash flow hedges of the variable LIBOR rate on our term A loan. For additional information, see Note 7 to our condensed consolidated financial statements included in Part I, Item 1 — “Financial Statements.” Had both interest rate swaps been in place at December 31, 2015, the exposure we reported from a 100 basis point increase in variable interest rates would have been reduced from $9.7 million per annum to $4.7 million per annum.
There have been no other significant changes since the date we filed our Annual Report.
Item 4.
Controls and Procedures
Management’s Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2016. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2016, our disclosure controls and procedures were effective in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, reported, accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There have been no changes to our internal control over financial reporting during the fiscal quarter ended September 30, 2016 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

27

PART II — OTHER INFORMATION
Item 1.
Legal Proceedings
For information regarding legal proceedings and matters, see Note 8 to our condensed consolidated financial statements included in Part I, Item 1 — “Financial Statements,” which information is incorporated into this item by reference.
Item 1A.
Risk Factors
There have been no material changes to the risk factors included in the Annual Report and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2016.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
None.
Item 3.
Defaults Upon Senior Securities
None.
Item 4.
Mine Safety Disclosures
Not applicable.
Item 5.
Other Information
None.
Item 6.
Exhibits
See the Exhibit Index beginning on page E-1 of this report.

28

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
VWR Corporation
 
 
Date: November 3, 2016
By:
/s/ Douglas J. Pitts
 
 
Name:
Douglas J. Pitts
 
 
Title:
Vice President and Corporate Controller
(Chief Accounting Officer and Duly Authorized Officer)

29

EXHIBIT INDEX
 
Exhibit No.
 
Exhibit Description
 
Method of Filing
 
 
31.1
 
Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed herewith
 
31.2
 
Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
 
Filed herewith
 
32.1
 
Certification of Principal Executive Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
 
Furnished herewith
 
32.2
 
Certification of Principal Financial Officer pursuant to 18 U.S.C. 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
 
Furnished herewith
 
101.INS
 
XBRL Instance Document
 
Filed herewith
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
Filed herewith
 
101.CAL
 
XBRL Taxonomy Calculation Linkbase Document
 
Filed herewith
 
101.LAB
 
XBRL Taxonomy Label Linkbase Document
 
Filed herewith
 
101.PRE
 
XBRL Taxonomy Presentation Linkbase Document
 
Filed herewith
 
101.DEF
 
XBRL Taxonomy Definition Linkbase Document
 
Filed herewith

E-1

VWR Corp Reports