VWR International, LLC
VWR Corp (Form: 10-K, Received: 02/24/2017 17:24:50)
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K
 
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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)
Securities registered pursuant to Section 12(b) of the Act:
Common Stock, par value $0.01 per share
The NASDAQ Stock Market LLC
(Title of class)
(Name of exchange on which registered)
Securities registered pursuant to Section 12(g) of the Act: None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☒ Yes ☐ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. ☒ 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
As of June 30, 2016 , the aggregate market value of common stock held by non-affiliates of the registrant was $2,245,978,817 .
On February 17, 2017 , 131,634,086 shares of the registrant’s common stock, $0.01 par value per share, were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our definitive proxy statement for our 2017 annual meeting of stockholders will be filed with the SEC on or before 120 days after our 2016 fiscal year-end and are incorporated by reference into Part III of this report.
 



VWR Corporation and Subsidiaries
Form 10-K
For the fiscal year ended December 31, 2016
Table of Contents
 
Page
 
 



Table of Contents

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
Americas
a segment covering North, Central and South America
A/R Facility
an accounts receivable securitization facility due 2018
AOCI
accumulated other comprehensive income or loss
Biopharma
the combination of the pharmaceutical and biotechnology sectors
Board
the board of directors of VWR Corporation
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
German, French, and UK Plans
the defined benefit plans in Germany, France and the United Kingdom
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
LIFO
last-in, first-out inventory method
SEC
the United States Securities and Exchange Commission
SG&A expenses
selling, general and administrative expenses
U.S. Retirement Plan
the defined benefit plan in the United States
Varietal
Varietal Distribution Holdings, LLC, a significant stockholder and affiliate
VWR Funding
VWR Funding, Inc., our wholly-owned subsidiary
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.
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.


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You should understand that the following important factors, in addition to those discussed in this report, 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.


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PART I
Item 1.
Business
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, a full range of value-added services and custom manufacturing capabilities to meet our customers’ needs. 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 portfolio includes chemicals, reagents, consumables, durable products and scientific equipment and instruments with a range of complexity and sophistication. We offer most of the leading branded products to the customer segments we serve. Our private label products enhance our branded product offerings by providing additional choice at varying price points to our customers. We complement our branded and private label product portfolio with value-added service offerings marketed under the VWRCATALYST ® brand, including sourcing and procurement, logistics, chemical and equipment tracking and sample management. We continue to expand our service offerings to include more complex scientific research support services such as genotyping, bioreactor servicing, compound management, customized kit assembly, clinical trial support and single-use technology configuration. In addition, we offer custom manufacturing solutions, including buffers, reagents, active pharmaceutical ingredients, high purity ingredients, ultra-pure acids and other chemicals used in biopharmaceutical and industrial applications and production processes. We believe these growing value-added service offerings integrate us within our customers’ critical operational processes and further differentiate our value proposition from that of our competitors. We believe our range of offerings and capabilities enhances our ability to expand our addressable market and gain market share leading to incremental net sales and profits.
Business Segments
We report financial results on the basis of two segments organized by geographic region: Americas and EMEA-APAC. Our Americas segment is comprised of operations located principally in the United States and Canada as well as in Puerto Rico, Mexico and select countries in Central and South America, including Costa Rica, Brazil, Argentina and Chile, and includes 67 facilities located in 8 countries. The EMEA-APAC segment is comprised of our operations located principally in Europe as well as in certain Asia-Pacific countries, and includes 110 facilities located in 26 countries.
The following table presents the percentage of net sales from each of our reportable segments:
 
Year ended December 31,
 
2016
 
2015
 
2014
Americas
61
%
 
60
%
 
56
%
EMEA-APAC
39

 
40

 
44

Total
100
%
 
100
%
 
100
%
Both of our segments provide laboratory products, services and solutions to customers in the life science, general research and applied markets, including the Biopharma, agricultural, chemical, environmental, food and beverage, healthcare, microelectronic and petrochemical industries, as well as governmental agencies, universities, primary


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education and research institutes and environmental organizations. Both of our segments offer a similar portfolio of laboratory products and other supplies.
We use operational data and management assumptions to estimate our product and customer mix as a percentage of consolidated net sales. The following charts present estimated net sales by product and customer group as a percentage of the total for the year ended December 31, 2016 :
A2016Q4FORM_CHART-51640.JPG A2016Q4FORM_CHART-52598.JPG

For more information about our reportable segments, see Note 22 to our consolidated financial statements beginning on page F-1 of this report.
Products and Services
Branded and Private Label Laboratory Products
We provide value to our customers by offering a broad portfolio of branded and private label laboratory products, including custom manufacturing. Our portfolio of branded products gives our customers access to some of the most recognized brands in the world. We enhance our customers’ choice by offering a lower cost, private label alternative to branded products. Private label laboratory products represented approximately 19% of our 2016 net sales. During 2016 , we processed nearly 18,000 customer orders per day with an average order size of over $700 .
We classify our branded and private label laboratory products as consumable or durable. Consumable products include chemicals, laboratory and production supplies and science education products. These products are essential to research and quality control laboratories and are generally used on a recurring basis. We offer an extensive selection of branded and private label consumable products. Our private label offering includes custom manufactured chemicals, including buffers, reagents, active pharmaceutical ingredients, high purity ingredients, ultra-pure acids and other chemicals used in biopharmaceutical and industrial applications and production processes. Consumable products represented approximately 73% of our 2016 net sales. We also offer durable products and scientific instruments with varying levels of complexity and sophistication. These products represented approximately 18% of our 2016 net sales.
Value-Added Services
We complement our branded and private label product portfolio with a number of customized value-added services, under the VWRCATALYST ® brand. In addition to procurement, logistics, chemical and equipment tracking and glassware autoclaving, we offer complex scientific research support services such as DNA extraction, bioreactor servicing, compound management and customized kit assembly. This enables us to support a higher level of science on behalf of our customers, enabling them to focus on areas of research. Value-added services represented approximately 4% of our 2016 net sales.


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History
The origins of our business date to 1852 in Sacramento, California when we initially sold glassware and laboratory supplies to the mining industry. We first became a publicly-owned company in 1986 after a spin-off from Univar Corporation. In 1999, we were acquired by Merck KGaA and soon combined with its European distribution operations to become a leader in the global laboratory products market under the name “VWR International Corporation.” In 2004, we were divested by Merck KGaA and acquired by Clayton, Dubilier & Rice, a private equity firm, in a leveraged transaction.
In 2007, we were acquired by Varietal, an entity owned by investment funds affiliated with Madison Dearborn Partners, certain co-investors and members of management. As a result of our 2014 IPO and subsequent secondary offerings of our stock, Varietal now owns 35% of our common stock.
Customers
Our customer base is diverse and stable. We provided solutions to about 105,000 customers in 2016 , including a significant number of the companies on the Fortune 500 list, about 5,000 leading academic institutions and thousands of smaller businesses in multiple industries. We centrally manage and actively collaborate with our largest global customers and provide them with value-added services, optimize the efficiency of their research, production and procurement activities and support them with dedicated on-site professionals and technicians. In addition, we manage relationships with our regional customers on a local basis, with a focus on their particular customer segment-specific needs. We estimate that we shipped products to more than 250,000 unique customer sites in 2016 .
We seek long-term, collaborative relationships with our customers. The substantial majority of our 50 largest customer relationships are governed by three to five year contracts that typically include pricing and volume incentives intended to earn the majority of their laboratory products and services business.
We are a significant provider of laboratory products, chemicals, safety equipment and life science supplies to a majority of the world’s 20 largest pharmaceutical companies. In 2016 , our top 20 customers accounted for approximately 20% of our net sales, with no single customer representing more than 4% of our net sales. At December 31, 2016 , our top ten customers have had relationships with us averaging nearly 11 years .
Suppliers
We distribute branded and private label products sourced from over 4,000 laboratory product suppliers located across the globe, including most of the leading developers and manufacturers of those products who sell through distributors. We seek strong relationships with our largest suppliers, most of which have partnered with us for more than 20 years . Our ten largest suppliers in 2016 accounted for 32% of our purchases, with no individual supplier accounting for more than 8% .
Our supplier relationships are based on contracts that vary in geographic scope, duration, product and service type, and some include exclusivity provisions. Those relationships may include distribution, sales and marketing support as well as servicing of instruments and equipment.
We manufacture a portion of our private label products, primarily laboratory and production chemicals, and source the remainder from third-parties, including our established branded suppliers. We utilize a disciplined process to ensure the high quality of our private label products. Private label products provide our customers with a value-focused alternative to branded products and generally provide us higher margins.


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Sales and Marketing
We reach customers through a well-trained global sales force, comprehensive websites and targeted catalogs. Our sales force is comprised of over 3,700 sales and sales support professionals, including over 300 sales specialists in areas such as life science, chromatography, production, chemicals and furniture, selected for their in-depth industry and product knowledge. Our sales professionals include native speakers for each of the countries in which we operate, allowing them to have high impact interactions with our customers across the globe.
Our e-commerce platform plays a vital role in how we conduct business with our customers. Over half of the orders that we process originate from our e-commerce platform, including websites that feature our full product offering on a multi-language platform. Our websites utilize Google ® search analytics and feature personalized search tools, customer specific web solutions and enhanced data on 2.6 million products that optimize our customers’ online purchasing experience and better integrate our customers’ processes with our own. Our websites are designed to integrate acquisitions, drive geographical expansion and serve segmented market needs with relative ease.
We also publish flyers, brochures, magazines and catalogs in about 20 languages distributed worldwide. Our general catalogs are supplemented by specialty catalogs and brochures for specific industries, scientific applications and product lines. For example, we have developed “all you need” catalogs for brewing, dairy, life science and genomics. In addition, we produce several serial publications that engage our customers with informative articles and a focused product offering, timed to release during prime purchasing seasons.
Distribution Network, Facilities and Infrastructure
Our global infrastructure consists of over 170 facilities to deliver a broad array of products to our customers within 24 to 48 hours . We have a unique pan-European platform, reaching customers throughout Europe with industry-leading efficiency and service levels. Our network includes over 4.7 million square feet of distribution space from strategically-located distribution centers, smaller regional service centers, “just-in-time” facilities and customer contact centers. Below is a summary of these facilities:
our distribution centers receive products from manufacturers, manage inventory and fill and ship customer orders;
our regional service centers are located near selected customer locations and are designed to supply a limited number of products to those customers that require a high level of service;
we also operate “just-in-time” facilities at or near customer sites to meet their needs promptly;
customer contact centers are responsible for order entry and service; and
our two service centers employ more than 1,000 associates who provide commercial and administrative support services to us and our customers and suppliers.
We also contract with third parties to ship products directly to our customers.
Our global headquarters is in Radnor, Pennsylvania, and our European headquarters is in Darmstadt, Germany.
Technology
We have a highly automated ERP system that promotes standardization and simplicity. Our global web infrastructure provides seamless integration with our customers. These technology platforms support rapid development and deployment of enhancements so that we may quickly adapt to meet the technology needs of our customers and seamlessly integrate new acquisitions. We have made significant investments in our IT platform to implement a common ERP and e-commerce platform to enhance the customer experience. In 2016 , over half of


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our orders were derived from our electronic platforms including EDI and e-commerce. We have more than 175,000 customer accounts on our website.
Our IT operating strategy is to act globally when possible and locally where necessary to strategically facilitate our business objectives and to develop a stable, growth oriented infrastructure and global informational system platform. Our IT infrastructure has evolved into a cohesive group of global computing platforms. This development has reduced costs while improving our overall quality and delivering more value.
Competition
We operate in a highly competitive environment with a diverse and fragmented base of competitors, many of whom focus on specific regions and market segments. Competitive factors in the customer segments we serve include service and delivery, breadth of product line, price, customer support, e-commerce capabilities and the ability to meet the special and local needs of our customers.
In our Americas laboratory products business, we compete primarily with Fisher Scientific. Most of our other competitors are laboratory equipment manufacturers that sell directly to their customers and smaller distributors that focus on specific geographies and product categories. In our services business, we compete with life science companies that offer laboratory management services such as Fisher Scientific, PerkinElmer and Agilent Technologies, local service providers and other service outsourcing companies.
In our EMEA-APAC laboratory products business, we have a unique Pan-European platform that provides us with an important competitive advantage. We principally compete with Fisher Scientific for certain global customers and with regional competitors. In our services business, we predominantly compete with small businesses operating on a regional basis.
We believe that our competitive strengths position us well in our customer segments and the geographies we serve. We leverage our scale, customer access, depth of product and service offerings, marketing strategies and sales force, financial profile and management team to deliver superior solutions to our customers and to provide extensive market channel access to our suppliers.
Employees
As of December 31, 2016 , we had over 10,200 employees, including nearly 4,700 in North America, 4,100 in Europe, 1,200 in Asia-Pacific (including over 1,000 employees in our shared service centers) and over 200 in Central and South America. Of these employees, nearly 3,400 or 33% are in customer facing roles. As of December 31, 2016 , about 4% of our employees in North America were represented by unions, and virtually all of our employees in Europe are represented by workers’ councils and/or unions. We believe our relations with our employees are good.
Trademarks and Tradenames
We believe the VWR tradename is well recognized in the global laboratory products market and by scientists and is therefore a valuable asset to us. We use a number of different registered and unregistered trademarks and service marks for our products and services, substantially all of which are owned by us. However, we have not registered all of our trademarks or service marks in each country in which we do business. Generally, registered trademarks have perpetual lives, provided that they are renewed on a timely basis and continue to be used properly as trademarks, subject only to the rights of third parties to seek cancellation of the marks.
Our business is not dependent to a material degree on patents, copyrights or trade secrets although we consider our catalogs, websites and proprietary software integral to our operations. Although we believe we have adequate policies and procedures in place to protect our intellectual property, we have not sought patent protection for our processes nor have we registered the copyrights in any of our catalogs, websites or proprietary software. Other


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than licenses to commercially available third party software, we have no licenses to intellectual property that are significant to our business.
Government Regulation
Some of the products we offer and our operations are subject to complex and stringent laws and regulations governing the production, storage, handling, transportation, import, export and distribution of chemicals, drugs and other similar products. Included among these laws are regulations are the operating and security standards of the United States Drug Enforcement Administration, the Alcohol and Tobacco Tax and Trade Bureau, the Food and Drug Administration, the Bureau of Industry and Security and various state boards of pharmacy as well as comparable state and foreign agencies. In addition, our operational activities must comply with the rules and regulations of the Department of Transportation, the Federal Aviation Administration and similar foreign agencies. We are also required to abide by the anti-corruption and anti-bribery laws of all countries in which we operate, including the United States Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”). While we believe we are in compliance in all material respects with such laws and regulations, any non-compliance could result in substantial fines, penalties or assessments or otherwise restrict our ability to provide competitive distribution services and thereby have an adverse impact on our financial condition.
Environmental, Health and Safety Matters
We are subject to a broad range of foreign, federal, state and local environmental, health and safety laws and regulations, including those pertaining to air emissions, water discharges, the manufacturing, handling, disposal and transport of hazardous materials and solid waste, the investigation and remediation of contamination and otherwise relating to health and safety and the protection of the environment and natural resources. As our global operations have involved and continue to involve the manufacturing, handling, transport and distribution of materials that are, or could be, classified as toxic or hazardous, there is a risk of contamination and environmental damage inherent in our operations and the products we manufacture, handle, transport and distribute. Our environmental, health and safety liabilities and obligations may result in significant capital expenditures and other costs, which could negatively impact our business, financial condition and results of operations. We may be fined or penalized by regulators for failing to comply with environmental, health and safety laws and regulations. In addition, contamination resulting from our current or past operations may trigger investigation or remediation obligations, which may have a material adverse effect on our business, financial condition and results of operations.
Based on current information, we believe that any costs we may incur relating to environmental, health and safety matters will not be material. We cannot be certain, however, that identification of presently unidentified environmental, health and safety conditions, new regulations, more vigorous enforcement by regulatory authorities or other unanticipated events will not arise in the future and give rise to additional environmental liabilities, business interruptions, compliance costs or penalties which could have a material adverse effect on our business, financial condition and results of operations. In addition, environmental laws and regulations are constantly evolving, and it is not possible to predict accurately the effect they, or any new regulations or legislation, may have in future periods.
Insurance
We maintain commercial insurance programs with third parties in the areas of executive risk, commercial property, business interruption and casualty (including product liability). We also self-insure certain risks inherent in our business which, taken together with the deductible levels and exclusions contained within our third party programs, results in our recording of accruals for incurred claims. Our ultimate exposure may be mitigated by amounts we expect to recover from third parties associated with such claims.


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Available Information
We file or furnish annual and quarterly reports and other information with or to the SEC. You may read and copy any documents we file at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the Public Reference Room. Our SEC filings are also available to the public free of charge at the SEC’s website at www.sec.gov.
You may also access our press releases, financial information and reports filed with or furnished to the SEC (for example, our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K and any amendments to those forms) online at www.vwr.com. Copies of any documents on our website are available without charge, and reports filed with or furnished to the SEC will be available as soon as reasonably practicable after they are filed with or furnished to the SEC. The information found on our website is not part of this or any other report filed with or furnished to the SEC.
Corporate Information
Our principal executive offices are located at Radnor Corporate Center, Building One, Suite 200, 100 Matsonford Road, Radnor, PA 19087. Our telephone number is (610) 386-1700. Our Internet website is located at www.vwr.com.
Item 1A.
Risk Factors
There are many factors that affect our business and our results of operations, some of which are beyond our control. The following is a description of some important factors that may cause our results of operations or financial condition in future periods to differ materially from those currently expected or desired.
Risks Related to Our Business
Our business is affected by general economic conditions in the United States, Europe and the other regions in which we operate, and unfavorable global economic conditions or instability in the capital and credit markets could adversely impact our business.
With operations in many parts of the world, the global economy has a significant impact on our business. Unfavorable economic conditions in the United States, Europe and other regions in which we operate and volatility in the global capital and credit markets could materially and adversely affect us. In particular, a deterioration of global economic conditions, geopolitical conditions or a prolonged period of market instability, could present the following additional risks and uncertainties for our business:
a reduction in revenues from and/or less favorable pricing or terms with new and existing customers;
the inability to expand our customer base in existing or new markets;
difficulties in collecting trade accounts receivable;
an increase in product prices from our suppliers that we are not able to pass through to our customers;
an acceleration of payment terms with our suppliers and/or the imposition of more restrictive credit terms and other contractual requirements;
an increased risk of excess and obsolete inventory;
a reduction in research, development or production spending by our customers, especially those in the Biopharma industry;


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the inability to access additional capital or refinance existing indebtedness;
a limited availability to enter into new derivative financial instruments; and
the need to record impairment charges against our goodwill, other intangible and/or other long-lived assets.
Our business, financial condition and results of operations may be harmed if our customers discontinue, outsource or spend less on research, development and production and other scientific endeavors or discontinue or lessen their relationship with us.
Our customers are engaged in research, development and production in the Biopharma, agricultural, chemical, environmental, food and beverage, healthcare, microelectronic and petrochemical industries as well as in the education and government sectors. The amount of customer spending on research, development and production has a large impact on our sales and profitability. Our customers determine the amounts that they will spend on the basis of, among other things, general economic conditions, their financial condition and liquidity, spending priorities and their need to develop new products, which, in turn, is dependent upon a number of factors, including their competitors’ research, development and production initiatives.
In addition, consolidation in the industries in which our customers operate may have an impact on such spending as customers integrate acquired operations, including research and development departments and their budgets. Our customers finance their research and development spending from private and public sources. Government funding of scientific research and education has varied for several reasons, including general economic conditions, growth in population, political priorities, changes in the number of students and other demographic changes.
A deterioration in general economic conditions or a return to a period of economic contraction could result in reductions, or further reductions as the case may be, in spending by our customers across all customer segments that we serve, including the Biopharma industry as our largest customer segment. In addition, certain of our customers who depend on U.S. federal funding to finance their scientific research may be adversely impacted by U.S. federal spending cuts required by the “sequestration” mechanism in the Budget Control Act of 2011 and the Bipartisan Budget Act of 2013. The sequestration mechanism, which went into effect in March 2013, creates limits on discretionary federal spending. While the Congressional Budget Office has determined that the budgetary cuts required by sequestration have not been triggered in 2014 through 2016, there can be no assurances that sequestration is not triggered in any subsequent years. A reduction in spending by our customers could have a material adverse effect on our business, financial condition and results of operations.
The substantial majority of our 50 largest customer relationships are governed by three to five year contracts. In many cases, our customers will undertake a competitive process at the expiration of these contracts and have on occasion not selected us to continue as their provider of laboratory products and services. The loss of one or more of our large customers, a material reduction in their purchase of products or services from us, extended disruptions or interruptions in their operations or material changes in the contract terms could have a material adverse effect on our business, financial condition and results of operations.
The life science industry has and will continue to experience significant changes that could adversely affect our business.
Many of our customers in the life science industry have experienced significant changes in the last several years and are expected to continue to experience significant changes, including reductions in governmental payments for pharmaceutical products, expirations of significant patents, lower funding for research and development and adverse changes in legislation or regulations regarding the delivery or pricing of general healthcare services or mandated benefits and we expect there will be additional changes in such legislation or regulations in the future particularly in light of the change in administrations following the 2016 U.S. presidential election. In response to


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these and other changes, some of our life science customers have implemented or may in the future implement actions in an effort to control and reduce costs, including:
development of large and sophisticated group purchasing organizations that reduces spending on laboratory products;
consolidation of pharmaceutical companies resulting in a rationalization of research expenditures;
purchasing the products that we supply directly from manufacturers;
closing of domestic facilities and the establishment of facilities at low-cost offshore locations; and
significant reductions in and/or outsourcing of research, development and production activities, including outsourcing to low-cost offshore locations.
The ability of our life science customers to develop new products to replace lost sales from expirations of significant patents, along with the impact of other past or potential future changes in the general healthcare industry may result in our customers significantly reducing their purchases of products and services from us or the prices they are willing to pay for those products or services. In addition, we will need to adapt our business to maintain existing customer relationships and develop new customer relationships as our customers consolidate or outsource certain activities domestically or to low-cost offshore locations.
We operate in a highly competitive market. Failure to compete successfully could have a material adverse effect on our business, financial condition and results of operations.
We compete in the global laboratory products market primarily with Fisher Scientific, which has a portion of its business dedicated to the distribution of laboratory products and services. We also compete with many smaller regional, local and specialty distributors, as well as with manufacturers of all sizes selling directly to their customers. Competitive factors include price, service and delivery, breadth of product line, customer support, e-business capabilities, service offerings and the ability to meet the special requirements of customers.
A few of our competitors have greater financial and other resources than we do. Most of our products are available from several sources, and some of our customers have relationships with several distributors. Our agreements with customers generally provide that the customer can terminate the agreement or reduce the scope of products or services provided pursuant to the agreement with little or no notice. Lack of product availability, stemming from either our inability to acquire products or interruptions in the supply of products from manufacturers, could have a material adverse effect on our ability to compete. Our competitors could also obtain exclusive rights to distribute some products, thereby preventing us from distributing these products. Vertically integrated distributors may also have an advantage with respect to the total delivered product cost of certain of their captive products. Additionally, manufacturers could increase their efforts to sell directly to consumers and effectively bypass distributors like us. Consolidation in the global laboratory products market could result in existing competitors increasing their market share, which could have a material adverse effect on our business, financial condition and results of operations. The entry of new participants in the industry could also have a material adverse effect on our ability to compete.
We are subject to currency risks with respect to our international operations.
We report our consolidated financial results in U.S. dollars. A significant portion of our earnings and net assets are from our operations outside the United States and denominated in foreign currencies, principally the euro but also the British pound sterling and many others. Fluctuations in the relative values of currencies occur from time to time and could adversely affect our operating results. For example, the announcement of Brexit, the difficulties and debt burden experienced by a number of European countries and the outcome of the U.S. presidential election each have caused, and may continue to cause, significant volatility in currency exchange rate fluctuations.


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Fluctuations in currency could also adversely affect our financial results when translated into U.S. dollars for financial reporting purposes. Specifically, during times of a strengthening U.S. dollar, our reported international sales and earnings will be reduced because the local currency will translate into fewer U.S. dollars.
Our business, financial condition and results of operations depend upon maintaining our relationships with suppliers.
We offer products from a wide range of suppliers. While there is generally more than one source of supply for most of the categories of products that we sell, we currently do not manufacture the majority of our products and are dependent on these suppliers for access to those products. Our ability to sustain our gross margins has been, and will continue to be, dependent in part upon our ability to obtain favorable terms from our suppliers. These terms may change from time to time, and such changes could adversely affect our gross margins over time. In addition, our results of operations and cash flows could be adversely impacted by the acceleration of payment terms to our suppliers and/or the imposition of more restrictive credit terms and other contractual requirements.
Some of our competitors are increasing their manufacturing operations both internally and through acquisitions of manufacturers, including manufacturers that supply products to us. In addition, we manufacture certain products that may compete directly with products we source from our suppliers. To date, we have not experienced an adverse impact on our ability to continue to source products from manufacturers that have been vertically integrated or otherwise compete with us, although there is no assurance that we will not experience such an impact in the future.
The loss of one or more of our large suppliers, a material reduction in their supply of products or provision of services to us, extended disruptions or interruptions in their operations or material changes in the terms we obtain from them, could have a material adverse effect on our business, financial condition and results of operations.
Our future operating results may fluctuate significantly and our current operating results may not be a good indication of our future performance. Fluctuations in our quarterly financial results could affect our stock price in the future.
Our net sales and operating results have historically varied from period-to-period, and we expect that they will continue to do so as a result of a number of factors, many of which are outside of our control. If our quarterly financial results or our predictions of future financial results fail to meet the expectations of securities analysts and investors, our stock price could be negatively affected. Any volatility in our quarterly financial results may make it more difficult for us to raise capital in the future or pursue acquisitions that involve issuances of our stock. Our operating results for prior periods may not be effective predictors of future performance.
Part of our growth strategy is to engage in acquisitions, which will subject us to a variety of risks that could harm our business.
As part of our business strategy, we intend to continue to review and complete selective acquisition opportunities focusing initially in North America and Europe and, over the longer term, in other select geographies. There can be no assurances that we will be able to complete suitable acquisitions for a variety of reasons, including the identification of and competition for acquisition targets, the need for regulatory approvals, the inability of the parties to agree to the structure or purchase price of the transaction and our inability to finance the transaction on commercially acceptable terms. In addition, any completed acquisition will subject us to a variety of other risks, including:
we will need to allocate substantial operational, financial and management resources in integrating new businesses, technologies and products, and management may encounter difficulties in integrating the operations, personnel or systems of the acquired businesses;


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acquisitions may have a material adverse effect on our business relationships with existing or future suppliers, in particular, to the extent we consummate acquisitions that vertically integrate portions of our business;
we may assume substantial actual or contingent liabilities, known or unknown;
acquisitions may not meet our expectations of future financial performance;
we may experience delays or reductions in realizing expected cost or commercial synergies;
we may incur substantial unanticipated costs or encounter other problems associated with acquired businesses or devote time and capital investigating a potential acquisition and not complete the transaction;
we may be unable to achieve our intended objectives for the transaction; and
we may not be able to retain the key personnel, customers and suppliers of the acquired business.
In addition, we may be unable to maintain uniform standards, controls, procedures and policies as we attempt to integrate the acquired businesses, and this may lead to operational inefficiencies. These factors related to our acquisition strategy, among others, could have a material adverse effect on our business, financial condition and results of operations.
The international scope of our operations may adversely affect our business.
We are continuing to expand our sourcing, commercial operations and administrative activities internationally, and we derive a significant portion of our net sales from operations outside the United States. Our ability to manage our business and conduct our operations internationally require considerable management attention and resources and is subject to the challenges of supporting a rapidly growing business in an environment of multiple languages, cultures, customs, legal and regulatory systems, alternative dispute systems and commercial markets. Expansion has required and will continue to require us to invest significant funds and other resources.
Accordingly, we face certain risks, including:
restrictions on foreign ownership of subsidiaries;
tariffs and other trade barriers and restrictions;
operating in jurisdictions that do not protect intellectual property rights to the same extent as the United States;
differing laws or administrative practices;
recruiting and retaining talented and capable employees in foreign countries and maintaining our corporate culture across all geographies;
business practices that are inconsistent with local or U.S. law, such as the FCPA, or other applicable anti-bribery regulations;
violating sanctions established by the Office of Foreign Assets Control of the U.S. Department of the Treasury, with respect to threats to the national security, foreign policy or the economy of the United States;
geopolitical risks and uncertainties;


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disruptions in the efficiency and effectiveness of, and difficulty in overseeing and managing, operations, supply chain, quality assurance standards and certain important administrative functions, including those that have been or in the future may be transferred to our shared services operations;
restrictions imposed by foreign governments on international cash transfers;
fluctuations in foreign currency exchange rates;
potentially adverse tax consequences of operating in multiple international jurisdictions;
enforcement of contractual obligations; and
changes in trade policies and trade relations.
In addition, an adverse change in laws or administrative practices in countries within which we operate could have a material adverse effect on us. Our operations outside the United States also may present additional risk with respect to compliance with government regulations and licensing requirements. If we are unable to manage the complexity of our global operations successfully, our business, financial condition and operating results could be adversely affected.
In recent years, we incurred, and we may in the future incur, impairment charges related to our goodwill and other intangible assets, which could negatively impact our results of operations.
We carry significant amounts of goodwill and other intangible assets, including indefinite-lived intangible assets, on our balance sheet as a result of our 2007 merger and subsequent acquisitions. Our intangible assets with finite useful lives primarily relate to customer and supplier relationships and are amortized over their respective estimated useful lives on a straight-line basis. Our indefinite-lived intangible assets relate to certain of our trademarks and tradenames.
Goodwill and other intangible assets with indefinite useful lives are not amortized and are tested annually for impairment, and they must also be tested for impairment between the annual tests if an event or change in circumstance occurs that would more likely than not reduce the fair value of the asset below its carrying amount. Other amortizable intangible assets are reviewed for impairment whenever an indication of potential impairment exists.
See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies and Estimates — Testing Goodwill and Other Intangible Assets for Impairment” for more information.
As of December 31, 2016 , goodwill and other intangible assets represented approximately $3.3 billion or 66% of our total assets. We may recognize additional impairment charges in the future should our operating results, market conditions or fair value assumptions decline due to, among other things, ongoing or worsening economic instability and volatility or other macroeconomic or industry-specific pressures, including but not limited to rising interest rates.
We are subject to laws and regulations governing government contracts, and failure to address these laws and regulations or comply with government contracts could harm our business by leading to a reduction in sales to these customers or penalties.
We sell products to government entities and, as a result, we are subject to various statutes and regulations that apply to companies doing business with the government. The laws governing government contracts differ from the laws governing private contracts and government contracts may contain pricing terms and conditions that are not applicable to private contracts. We are also subject to investigation for compliance with the regulations


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governing government contracts. A failure to comply with these regulations could result in suspension of these contracts, criminal, civil and administrative penalties or debarment.
If we do not comply with existing government regulations or if we or our suppliers become subject to more onerous government regulations, we could be adversely affected.
Some of the products we offer and our operations are subject to a number of complex and stringent laws and regulations governing the production, handling, transportation, storage, import, export and distribution of chemicals, drugs and other similar products, including the operating and security standards of the United States Drug Enforcement Administration, the Alcohol and Tobacco Tax and Trade Bureau, the Food and Drug Administration, the Bureau of Industry and Security, the U.S. Office of Foreign Assets Control and various state boards of pharmacy as well as comparable state and foreign agencies. In addition, our operational activities must comply with the rules and regulations of the Department of Transportation, the Federal Aviation Administration and similar foreign agencies. We are also required to abide by the anti-corruption and anti-bribery laws of all countries in which we operate, including the FCPA. Despite our training and compliance programs, our internal control policies and procedures may not always protect us from reckless or criminal acts committed by our employees or agents. While we believe we are in compliance in all material respects with such laws and regulations, any non-compliance could result in substantial fines, penalties or assessments or otherwise restrict our ability to provide competitive products and solutions and thereby have an adverse impact on our financial condition.
We cannot assure you that existing laws and regulations will not be revised or that new, more restrictive laws will not be adopted or become applicable to us or the products that we manufacture and distribute. Further, the recent presidential and congressional elections in the United States could result in significant changes in, and uncertainty with respect to, legislation, regulation and government policy.
While it is not possible to predict whether and when any such changes will occur, changes at the local, state or federal level could impact our business and the industries in which we compete. Specific legislative and regulatory proposals discussed during and after the election that could have a material impact on us include, but are not limited to, reform of the federal tax code and modifications to international trade policy, public company reporting requirements, environmental regulations and antitrust enforcement.
Additionally, if our suppliers become subject to more stringent laws, they may seek to recover any or all increased costs of compliance from us by increasing prices, and we may not be able to recover all such increased prices from our customers. If our suppliers have violated or are alleged to have violated any laws or regulations during the performance of their obligations to us, it is possible that we could suffer financial and reputational harm or other negative outcomes. Accordingly, we cannot assure you that our business and financial condition will not be materially and adversely affected by future changes in applicable laws and regulations applicable to our suppliers.
If any of our operations are found not to comply with applicable antitrust or competition laws, our business may suffer.
Our operations are subject to applicable antitrust and competition laws in the countries in which we conduct our business, in particular in the United States and in the European Union. These laws prohibit, among other things, anticompetitive agreements and practices. If any of our commercial agreements are found to violate or infringe upon such laws, we may be subject to civil and other penalties and third party claims for damages. Further, agreements that infringe upon these laws may be void and unenforceable, in whole or in part, or require modification in order to be lawful and enforceable. If we are unable to enforce any of our commercial agreements, whether at all or in material part, our business could be adversely affected.


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We are subject to environmental, health and safety laws and regulations, and costs to comply with such laws and regulations, or any liability or obligation imposed under such laws or regulations, could negatively impact our business, financial condition and results of operations.
We are subject to a broad range of foreign, federal, state and local environmental, health and safety laws and regulations, including those pertaining to air emissions, water discharges, the manufacturing, handling, disposal and transport of hazardous materials and solid waste, the investigation and remediation of contamination and otherwise relating to health and safety and the protection of the environment and natural resources. As our global operations have involved and continue to involve the manufacturing, handling, transport and distribution of materials that are, or could be classified as toxic or hazardous, there is a risk of contamination and environmental damage inherent in our operations and the products we manufacture, handle, transport and distribute. Our environmental, health and safety liabilities and obligations may result in significant capital expenditures and other costs, which could negatively impact our business, financial condition and results of operations. We may be fined or penalized by regulators for failing to comply with environmental, health and safety laws and regulations. In addition, contamination resulting from our current or past operations may trigger investigation or remediation obligations, which may have a material adverse effect on our business, financial condition and results of operations.
Based on current information, we believe that any costs we may incur relating to environmental, health and safety matters will not be material. We cannot be certain, however, that identification of presently unidentified environmental, health and safety conditions, new regulations, more vigorous enforcement by regulatory authorities or other unanticipated events will not arise in the future and give rise to additional environmental liabilities, business interruptions, compliance costs or penalties which could have a material adverse effect on our business, financial condition and results of operations. In addition, environmental, health and safety laws and regulations are constantly evolving and it is not possible to predict accurately the effect they, or any new regulations or legislation may have in future periods.
We are subject to product liability and other claims in the ordinary course of business.
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. 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 Asia-Pacific 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


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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 this litigation has historically been 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.
If we are unable to hire, train and retain key personnel, our business, financial condition and results of operations could be adversely affected.
Our success depends in large part upon our continuing ability to identify, hire, retain and motivate skilled professionals. We face intense competition for these professionals from our competitors, customers, suppliers and other companies within the industries in which we compete and the geographical regions in which we operate. Any failure on our part to hire, train and retain a sufficient number of qualified professionals could have a significant adverse impact on our business.
We depend heavily on the services of our senior management. We believe that our future success will depend upon the continued services of our senior management. Our business may be harmed by the loss of one or more members of our senior management. We currently do not maintain key-man life insurance with respect to our executive officers.
We rely upon our distribution centers and third parties to ship products to our customers, and significant interruptions in the operations of our distribution centers or the operations of such third parties could harm our business, financial condition and results of operations.
Our infrastructure primarily consists of strategically located distribution centers and smaller regional service centers where we receive products from manufacturers, manage inventory and fill and ship customer orders. We also ship a significant amount of our orders through independent package delivery providers. Prompt shipment of our products is important to our business. Any significant disruptions to the operations of our distribution centers or such third parties for any reason, including labor relations issues, power interruptions, severe weather, fire or other circumstances beyond the control of us or such third parties, could cause our operating expenses to increase or seriously harm our ability to fulfill our customers’ orders on a timely basis, or both. In addition, an increase in prices by our third party carriers, due to increases in fuel prices or otherwise, could adversely impact our financial condition and results of operations if we are unable to find alternative providers or make adjustments to our selling prices.
Problems with or failure of our information services and their connectivity to our customers, suppliers and/or certain service providers could significantly disrupt our operations, which could reduce our customer or supplier base and could harm our business, financial condition and results of operations.
Our businesses rely on sophisticated information systems to obtain, rapidly process, analyze and manage data to facilitate the purchase and distribution of millions of inventory items from numerous distribution centers; to receive, process and ship orders on a timely basis; to account for other product and service transactions with customers; to manage the accurate billing and collections for thousands of customers; and to process payments to suppliers. Our business and results of operations may be adversely affected if these systems are interrupted or damaged by unforeseen events or if they fail for any extended period of time, including due to the actions of third parties. To reduce our risks against unforeseen events, we continually deploy, test and refine disaster recovery and business continuity preparedness plans.
Information security risks have generally increased in recent years because of the proliferation of new technologies and the increased sophistication and activities of perpetrators of cyber attacks. A failure in or breach of our operational or information security systems, or those of our third party service providers, as a result of cyber attacks or information security breaches could disrupt our business and/or our supply chain, result in the improper disclosure or misuse of confidential or proprietary information, damage our reputation and/or increase


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our costs. As a result, cyber security and the continued development and enhancement of the controls and processes designed to protect our systems, computers, software, data and networks from attack, damage or unauthorized access remain a high priority for us. Although we believe that we have robust information security procedures and other safeguards in place, as cyber threats continue to evolve, we may be required to expend additional resources to continue to enhance our information security measures and/or to investigate and remediate any information security vulnerabilities. Perceived or actual security vulnerabilities in our products or services, or the perceived or actual failure by us to comply with applicable legal requirements, may not only cause us significant reputational harm but may also lead to claims against us by our customers and/or governmental agencies and involve fines, penalties, cost for remediation and defense and settlement expenses.
In addition, we accept payment by credit card and similar payment instruments for a material portion of our sales, and our ability to accept, process and settle credit card transactions is subject to rules and regulations issued and/or amended from time to time by payment card companies such as American Express, VISA, MasterCard and Discover. These rules and regulations, which vary based on annual transaction volume and transaction experience, require us to safeguard customer information, including applying the minimum security standards for the manner in which we capture, store, process and transmit such information. Our failure to comply with such changing rules and standards can subject us to fines, restrictions or expulsion from these card acceptance programs, which could have a material adverse effect on our business, financial condition and results of operations.
We maintain enterprise resource planning systems throughout our business and we plan to continue to make technology and infrastructure investments, including with respect to our enterprise resource planning and e-commerce capabilities. Our technology initiatives are designed to enhance the security, confidentiality, integrity and availability of data and systems, to ensure our operations continue to provide a high quality service to our customers and to provide important information to our management. We are continually assessing the risks and costs associated with potential problems and interruptions that could reduce the efficiency and effectiveness of our operations in the near term, looking for opportunities to transfer or share these risks with specialized information systems security providers and insuring against these risks where appropriate. Despite these efforts, the cost and potential problems and interruptions associated with the implementation of our technology initiatives could disrupt or reduce our productivity, including our ability to process orders, ship products, provide services and customer support, send invoices and track payments, fulfill contractual obligations or otherwise operate our business, as well as disrupt or impair our ability to provide important information to our management and investors.
We have not registered and in some cases do not own the existing applications and registrations for our material trademarks or service marks in every country in which we do business.
We serve our customers globally through our operations in 34 countries and use a number of registered and unregistered trademarks and service marks for our products and services, substantially all of which are owned by us. Although we have registered our material trademarks in the United States and the primary European countries in which we conduct business, we have not registered and in some cases do not own the existing applications and registrations for our material trademarks or service marks in all countries in which we conduct business. Our efforts to protect our intellectual property rights in certain countries, especially those in Asia-Pacific, may only provide us with limited protection. In addition, in some countries, we may be blocked from registering or otherwise protecting certain of our marks by others who have already registered identical or similar marks for similar goods or services, and in those cases, we run the risk of being sued for infringement or being unable to effectively establish brand identity.
The failure to own and have enforceable rights in the trademarks and service marks used in our business could have a material adverse effect on our business, financial condition and results of operations.


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Unanticipated increases to our income tax liabilities could adversely impact our results of operations.
As a global corporation, our business is subject to a wide variety of U.S. federal, state and non-U.S. laws, regulations and policies. There can be no assurance that laws, regulations and policies will not be changed in ways that will impact our income tax provision or our income tax assets and liabilities. We are also subject to income tax audits in the United States and numerous foreign jurisdictions. The tax laws to which we are subject are inherently complex and ambiguous, and we must interpret the applicable laws and make subjective judgments about both the expected outcome upon challenge by the applicable taxing authorities and our global provision for income taxes and other tax liabilities. Although we believe that our tax estimates are reasonable, we cannot assure you that the final determination of tax audits or tax disputes will not be different from what is reflected in our historical income tax provisions and accruals. Tax authorities in the various jurisdictions in which we have a presence and conduct business may disagree with our tax positions and assess additional taxes.
In addition, our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets and liabilities, changes in tax laws, and the discovery of new information in the course of our tax return preparation process. The carrying value of deferred tax assets, which are predominantly in the United States, is dependent on our ability to generate future taxable income in the United States. Increases in our income tax liabilities or risks related to the realization of our deferred tax assets as a result of any of the foregoing could adversely affect our financial position or results of operations.
As a U.S. company doing business in international markets through subsidiaries, we are subject to intercompany pricing rules in the jurisdictions where we operate. Tax rates vary from country to country, and if regulators determine that our profits in one jurisdiction should be increased, we might not be able to fully offset the adjustment in the other jurisdictions, which would increase our effective tax rate. Additionally, the Organization for Economic Cooperation and Development, or OECD, has adopted guidelines regarding base erosion and profit shifting. As a result of the adoption by the OECD, individual taxing jurisdictions have also adopted some form of these guidelines as well. As such, we may need to change our approach to intercompany transfer pricing in order to maintain compliance under the new rules. Our effective tax rate may increase or decrease depending on the current location of global operations at the time of the change.
Risks Related to Our Indebtedness
Our substantial indebtedness could have a material adverse effect on our financial condition and prevent us from fulfilling our debt or contractual obligations.
We have a substantial amount of debt, which requires us to make significant interest and principal payments. At December 31, 2016 , we had outstanding indebtedness of $2.0 billion , including our senior credit facility, 4.625% senior notes and our A/R Facility. Our high level of debt could have important consequences to us including the following:
making it more difficult for us to satisfy our debt or contractual obligations;
exposing us to the risk of increased interest rates as certain of our borrowings, including borrowings under our senior credit facility and our A/R Facility, are at variable rates of interest;
requiring us to dedicate a substantial portion of our cash flow from operations to debt service payments, which would reduce the funds available for working capital, capital expenditures, investments, acquisitions and other general corporate purposes;
limiting our flexibility in planning for, or reacting to, changes in our business, future business opportunities and the industry in which we operate;


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placing us at a competitive disadvantage compared to any of our less leveraged competitors;
increasing our vulnerability to a downturn in our business and both general and industry-specific adverse economic conditions; and
limiting our ability to obtain additional financing at a favorable cost of borrowing, or if at all, to fund future working capital, capital expenditures, investments, acquisitions or other general corporate requirements.
Despite current indebtedness levels and restrictive covenants, we may incur additional indebtedness in the future, which would intensify our leverage risks.
Although the terms of the credit agreement governing the senior credit facility and the indenture governing the 4.625% senior notes restrict us and our restricted subsidiaries from incurring additional indebtedness, these restrictions are subject to significant exceptions and qualifications, including with respect to our ability to incur additional senior secured debt. The risks that we and our subsidiaries face as a result of our leverage could intensify to the extent that we incur a significant amount of additional indebtedness.
Our debt agreements contain restrictions on our ability to operate our business and to pursue our business strategies, and our failure to comply with, cure breaches of, or obtain waivers for covenants could result in an acceleration of the due date of our indebtedness.
The credit agreement governing our senior credit facility and the indenture governing the 4.625% senior notes contain, and agreements governing future debt issuances may contain, covenants that restrict our ability to finance future operations or capital needs, to respond to changing business and economic conditions or to engage in other transactions or business activities that may be important to our growth strategy or otherwise important to us. The credit agreement and the indenture restrict, among other things, our ability and the ability of our subsidiaries to:
incur or create additional indebtedness;
pay dividends or make distributions in respect of our capital stock or to make certain other restricted payments;
purchase or redeem stock;
make investments;
create liens;
sell assets and subsidiary stock;
enter into transactions with affiliates;
enter into agreements that restrict dividends and liens;
change our lines of business or our fiscal year; and
enter into mergers, consolidations and sales of substantially all assets.
Additionally, our senior credit facility contains a financial maintenance covenant requiring us to maintain a ratio of first lien indebtedness, net of unrestricted cash to EBITDA, as defined (the “First Lien Net Leverage Ratio”) of not more than 4.00:1.00 . The financial maintenance covenant is tested at the end of each fiscal quarter. We cannot assure you that we will be able to maintain compliance with the covenants related to our debt in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders or noteholders and/or amend the


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covenants. In particular, if our financial condition or operating results deteriorate, our relations with our lenders and noteholders may be materially and adversely affected, which could impact our ability to obtain waivers if necessary.
Any breach of the covenants in the credit agreement or the indenture could result in a default of the obligations under such debt and cause a default under other debt. If there were an event of default under the credit agreement related to our senior credit facility that was not cured or waived, the lenders under our senior credit facility could cause all amounts outstanding with respect to the borrowings under the senior credit facility to be due and payable immediately. Our assets and cash flow may not be sufficient to fully repay borrowings under our senior credit facility and our obligations under the 4.625% senior notes if accelerated upon an event of default. If, as or when required, we are unable to repay, refinance or restructure our indebtedness under, or amend the covenants contained in, our senior credit facility, the lenders under our senior credit facility could institute foreclosure proceedings against the assets securing borrowings under the senior credit facility. Any such acceleration may also constitute a termination event under our A/R Facility, which could result in the amount outstanding under that facility becoming due and payable.
We may not be able to generate sufficient cash flows or access sufficient additional capital to meet our debt obligations or to fund our other liquidity needs.
Our business may not generate sufficient cash flow from operations, or future borrowings under our senior credit facility, our A/R Facility or from other sources may not be available to us in an amount sufficient to enable us to make required interest payments on our indebtedness or to fund our other liquidity needs, including capital expenditure requirements, investments, acquisitions and other transactions that are important to the execution of our business strategy. As our debt matures, we may not be able to refinance our maturing debt on favorable terms, or at all, based on general economic or market conditions, our historical or projected growth or other factors, including those beyond our control. If our cash flow from operations or other liquidity sources are not sufficient to make required interest payments or we are not able to refinance maturing debt on favorable terms, we may have to take actions such as selling assets, seeking additional equity or debt capital on commercially unreasonable terms or reducing or delaying important business transactions. Our senior credit facility and the indenture governing our 4.625% senior notes restrict our ability to sell assets and use the proceeds from such sales for purposes other than debt payment obligations.
Risks Related to Ownership of our Common Stock
Our common stock price may be volatile or may decline regardless of our operating performance, and holders of our common stock could lose a significant portion of their investment.
The market price for our common stock is likely to be volatile. Our stockholders may not be able to resell their shares of common stock at or above the price at which they purchased their shares due to fluctuations in the market price of our common stock, which may be caused by a number of factors, many of which we cannot control, including those described under “Risks Related to Our Business” and “Risks Related to Our Indebtedness” and the following:
changes in financial estimates by any securities analysts who follow our common stock, our failure to meet these estimates or failure of securities analysts to initiate or maintain coverage of our common stock;
downgrades by any securities analysts who follow our common stock;
future sales of our common stock by our officers, directors and significant stockholders, including Varietal, which is strongly influenced by Madison Dearborn Partners;
market conditions or trends in our industry or the economy as a whole;


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investors’ perceptions of our prospects;
announcements by us or our competitors of significant contracts, acquisitions, joint ventures or capital commitments; and
changes in key personnel.
In addition, the stock markets have experienced extreme price and volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies, including companies in our industry. In the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were involved in securities litigation, we could incur substantial costs, and our resources and the attention of management could be diverted from our business.
Madison Dearborn Partners has the ability to strongly influence corporate activities, and their interests may not coincide with yours.
Madison Dearborn Partners beneficially owns, through its control of Varietal, approximately 35% of our common stock. As a result of its beneficial ownership, Madison Dearborn Partners, so long as it continues to beneficially own a significant amount of our outstanding common stock, will have the ability to strongly influence the outcome of matters submitted to a vote of stockholders and, through the Board, the ability to strongly influence decision-making with respect to our business direction and policies. Matters over which Madison Dearborn Partners, directly or indirectly, exercises significant influence include:
the election of the Board and the appointment and removal of our officers;
mergers and other business combination transactions, including proposed transactions that would result in our stockholders receiving a premium price for their shares;
other acquisitions or dispositions of businesses or assets;
incurrence of indebtedness and the issuance of equity securities;
repurchase of stock and payment of dividends; and
the issuance of shares to management under our equity incentive plans.
Under our amended and restated certificate of incorporation, Madison Dearborn Partners and its affiliates will not have any obligation to present to us, and Madison Dearborn Partners and its affiliates may separately pursue, corporate opportunities of which they become aware, even if those opportunities are ones that we would have pursued if granted the opportunity.
In addition, in connection with our IPO, we entered into a director nomination agreement with Varietal that provides Varietal the right to designate nominees for election to our Board for so long as Varietal beneficially owns 10% or more of the total number of shares of our common stock then outstanding. The director nomination agreement provides that Madison Dearborn Partners may cause Varietal to assign such right to Madison Dearborn Partners or to a Madison Dearborn Partners’ affiliate so long as Madison Dearborn Partners and its affiliates are the beneficial owners of 50% or more of Varietal’s voting equity interests.


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Conflicts of interest may arise because some of our directors are principals of our largest stockholders.
Each of Messrs. Alexos and Sullivan, who are officers of Madison Dearborn Partners, and Mr. Kraemer, who is associated with Madison Dearborn Partners, serve on the Board. Varietal, which is controlled by Madison Dearborn Partners, continues to hold a significant amount of our outstanding common stock. Madison Dearborn Partners and the entities it controls may hold equity interests in entities that directly or indirectly compete with us, and companies in which they currently invest may begin competing with us. As a result of these relationships, when conflicts between the interests of Madison Dearborn Partners, on the one hand, and of other stockholders, on the other hand, arise, these directors may not be disinterested. Although our directors and officers have a duty of loyalty to us under Delaware law and our amended and restated certificate of incorporation, transactions that we enter into in which a director or officer has a conflict of interest are generally permissible so long as (i) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to the Board and a majority of our disinterested directors approves the transaction, (ii) the material facts relating to the director’s or officer’s relationship or interest as to the transaction are disclosed to our stockholders and a majority of our disinterested stockholders approve the transaction or (iii) the transaction is otherwise fair to us. Our amended and restated certificate of incorporation provides that any principal, officer, member, manager and/or employee of Madison Dearborn Partners or any entity that controls, is controlled by or under common control with Madison Dearborn Partners (other than us or any company that is controlled by us) or a Madison Dearborn Partners-managed investment fund is not required to offer any transaction opportunity of which they become aware to us and could take any such opportunity for themselves or offer it to other companies in which they have an investment, unless such opportunity is offered to them solely in their capacities as our directors.
Future sales of our common stock, or the perception in the public markets that these sales may occur, may depress our stock price.
Sales of substantial amounts of our common stock in the public market, or the perception that these sales could occur, could adversely affect the price of our common stock and could impair our ability to raise capital through the sale of additional shares. On February 17, 2017 , 131,634,086 shares of common stock were outstanding. The shares of common stock sold in our IPO and subsequent registered secondary offerings are freely tradable without restriction under the Securities Act, except that any shares of our common stock that may be acquired by our directors, executive officers and other affiliates, as that term is defined in the Securities Act, may be sold only in compliance with certain volume limitations and other restrictions of Rule 144 of the Securities Act.
The remaining 45,750,000 shares, representing 35% of our total outstanding shares of common stock, will continue to be “restricted securities” within the meaning of Rule 144 and subject to certain restrictions on resale. Restricted securities may be sold in the public market only if they are registered under the Securities Act or are sold pursuant to an exemption from registration such as Rule 144 or Rule 701 under the Securities Act.
In the future, we may also issue our securities in connection with investments or acquisitions. The number of shares of our common stock issued in connection with an investment or acquisition could constitute a material portion of our then-outstanding shares of our common stock.
Anti-takeover provisions in our charter documents and as provided under Delaware law might discourage or delay acquisition attempts for us that you might consider favorable.
Our charter documents contain provisions that may make it more difficult for us to be acquired without the approval of the Board. These provisions:
authorize the issuance of undesignated preferred stock, the terms of which may be established and the shares of which may be issued without stockholder approval, and which may include super voting, special approval, dividend, or other rights or preferences superior to the rights of the holders of common stock;


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generally prohibit stockholder action by written consent, requiring all stockholder actions be taken at a meeting of our stockholders;
provide that special meetings of the stockholders can only be called by a majority of the Board through a special resolution;
establish advance notice requirements for nominations for elections to the Board or for proposing matters that can be acted upon by stockholders at stockholder meetings; and
provide that the Board is expressly authorized to make, alter or repeal our amended and restated by-laws.
These anti-takeover provisions and other provisions under Delaware law could discourage, delay or prevent a transaction involving a change in our control, even if doing so would benefit our stockholders. These provisions could also discourage proxy contests and make it more difficult for you and other stockholders to elect directors of your choosing and to cause us to take other corporate actions you desire.
Our amended and restated certificate of incorporation designates the Court of Chancery of the State of Delaware as the sole and exclusive forum for certain types of actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation requires, to the fullest extent permitted by law, that (i) any derivative action or proceeding brought on our behalf, (ii) any action asserting a claim of breach of a fiduciary duty owed by any of our directors, officers or other employees to us or our stockholders, (iii) any action asserting a claim against us arising pursuant to any provision of the General Corporation Law of the State of Delaware (the “DGCL”), our certificate of incorporation or our by-laws or (iv) any other action asserting a claim against us that is governed by the internal affairs doctrine may, in each case, be brought only in the Court of Chancery in the State of Delaware and if brought outside of Delaware, the stockholder bringing the suit will be deemed to have consented to service of process on such stockholder’s counsel. Any person or entity purchasing or otherwise acquiring any interest in shares of our capital stock shall be deemed to have notice of and to have consented to the provisions of our amended and restated certificate of incorporation described above. This choice of forum provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and employees. Alternatively, if a court were to find these provisions of our amended and restated certificate of incorporation inapplicable to, or unenforceable in respect of, one or more of the specified types of actions or proceedings, we may incur additional costs associated with resolving such matters in other jurisdictions, which could adversely affect our business and financial condition.
Because we do not intend to pay cash dividends in the foreseeable future, you may not receive any return on investment unless you are able to sell your common stock for a price greater than your purchase price.
We do not anticipate that we will pay any cash dividends on shares of our common stock for the foreseeable future. Any determination to pay dividends in the future will be at the discretion of the Board and will depend upon results of operations, financial condition, contractual restrictions, including those under the senior credit facility and the indenture governing the 4.625% senior notes, any potential indebtedness we may incur, restrictions imposed by applicable law, tax considerations and other factors the Board deems relevant. Accordingly, if we do not pay dividends in the future, realization of a gain on your investment will depend on the appreciation of the price of our common stock, which may never occur.


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We are required to pay our existing owners for certain tax benefits to the extent realized by us (or deemed realized by us in the case of a change of control, certain divestitures or certain other events), which amounts are expected to be material and, in some instances, may exceed the tax benefits realized by us.
We have entered into an ITRA with our existing stockholder, Varietal. The ITRA provides for the payment by us to Varietal of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that we along with our domestic subsidiaries actually realize as a result of the utilization of our pre-IPO net operating loss carryforwards.
These payment obligations are our obligations and not obligations of any of our subsidiaries. The actual timing of any payments under the ITRA will vary depending upon a number of factors, including the amount, character and timing of our and our domestic subsidiaries’ taxable income in the future. Payments made under the ITRA have been material and may continue to be material in future periods.
At December 31, 2016 , we reported a liability of $85.0 million for the ITRA, which represents 85% of the remaining cash savings from applicable net operating loss carryforwards. Future changes in the realization of our net operating loss carryforwards that were generated prior to our IPO, if any, may impact the amount that will ultimately be paid to Varietal. We expect to pay the obligation within the carryforward period of the tax attributes without expiration.
In addition, the ITRA provides that upon certain mergers, stock and asset sales, other forms of business combinations or other changes of control, the ITRA will terminate and we will be required to make a payment equal to the present value (at a discount rate of LIBOR plus 1.00%) of anticipated future payments under the ITRA. Such payment would be based on certain assumptions, including those relating to our and our domestic subsidiaries’ future taxable income, and may therefore significantly exceed the actual tax benefits we ultimately realize from our net operating losses. We will have a similar obligation to make a present value accelerated payment based on certain assumptions if we dispose of certain subsidiaries or if we breach any of our material obligations under the ITRA, each of which also may result in a payment significantly in excess of the actual tax benefits we ultimately realize from our net operating losses. In these situations, our obligations under the ITRA could have a negative impact on our liquidity and could have the effect of delaying, deferring or preventing certain mergers, asset sales, other forms of business combinations or other changes of control. Additionally, under the terms of the ITRA, Varietal may be permitted to assign its rights under the agreement without our consent, in which case we may be required to deal with an unrelated counterparty under the agreement.
Varietal will not reimburse us for any payments previously made under the ITRA if such benefits are subsequently disallowed (although future payments would be adjusted to the extent possible to reflect the result of such disallowance). As a result, in certain circumstances, payments could be made under the ITRA in excess of our ultimate cash tax savings. To the extent that we are unable to make timely payments under the ITRA for any reason, such payments will be deferred and will accrue interest at a rate of LIBOR plus 3.00% per annum until paid. We have agreed under the ITRA not to incur, and not to permit any of our domestic subsidiaries to incur, any new restrictions that would limit our ability to make payments under such agreement or the ability of our domestic subsidiaries to make payments to us for that purpose. This restriction could make it more difficult or costly for us to refinance our outstanding indebtedness.
We are a holding company and rely on dividends, distributions and other payments, advances and transfers of funds from our subsidiaries to meet our obligations.
We are a holding company that does not conduct any business operations of our own. As a result, we are largely dependent upon cash dividends and distributions and other transfers from our subsidiaries to meet our obligations. The agreements governing the indebtedness of our subsidiaries impose restrictions on our subsidiaries’ ability to pay dividends or other distributions to us. Additionally, deterioration of the earnings from, or other available assets of, our subsidiaries for any reason could also limit or impair their ability to pay dividends or other distributions to us.


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Item 1B.
Unresolved Staff Comments
Not applicable.
Item 2.
Properties
We operate more than 170 facilities with over six million square feet for offices, distribution and manufacturing. Our global headquarters is in Radnor, Pennsylvania, and our European headquarters is in Darmstadt, Germany.
The following table presents information about our principal facilities by segment:
 
 
Owned/Leased
 
Size (sq. ft.)
 
Type of Facility
Americas:
 
 
 
 
 
 
Batavia, Illinois
 
Owned
 
360,000

 
Distribution
Bridgeport, New Jersey
 
Owned
 
369,000

 
Distribution
Buford, Georgia
 
Leased
 
130,000

 
Distribution and manufacturing
Claremont, California
 
Leased
 
86,000

 
Distribution and manufacturing
Denver, Colorado
 
Leased
 
130,000

 
Distribution
Eaglesville, Pennsylvania
 
Owned
 
62,000

 
Distribution and manufacturing
Manati, Puerto Rico
 
Owned
 
130,000

 
Distribution
Mississauga, Ontario, Canada
 
Leased
 
114,000

 
Distribution
Overland, Missouri
 
Owned
 
90,000

 
Distribution and manufacturing
Radnor, Pennsylvania
 
Leased
 
150,000

 
Offices
Rochester, New York
 
Owned
 
339,000

 
Distribution, assembly and offices
Solon, Ohio
 
Leased
 
226,000

 
Distribution, manufacturing and offices
Sugar Land, Texas
 
Leased
 
62,000

 
Distribution
Suwanee, Georgia
 
Leased
 
169,000

 
Distribution
Visalia, California
 
Owned
 
503,000

 
Distribution
Wangara, Australia
 
Leased
 
62,000

 
Distribution, manufacturing and offices
EMEA-APAC:
 
 
 
 
 
 
Barcelona, Spain
 
Leased
 
73,000

 
Distribution
Briare, France
 
Owned
 
303,000

 
Distribution, repackaging and mixing
Bruchsal, Germany
 
Owned
 
219,000

 
Distribution
Darmstadt, Germany
 
Leased
 
56,000

 
Offices
Debrecen, Hungary
 
Leased
 
68,000

 
Distribution, repackaging and mixing
Dublin, Ireland
 
Leased
 
77,000

 
Distribution
Karlskoga, Sweden
 
Leased
 
131,000

 
Distribution
Kelsterbach, Germany
 
Leased
 
60,000

 
Distribution
Leuven, Belgium
 
Owned
 
207,000

 
Distribution and manufacturing
Lutterworth, United Kingdom
 
Leased
 
185,000

 
Distribution
Singapore
 
Leased
 
74,000

 
Distribution
Our facilities located in Batavia, Illinois and Visalia, California are subject to mortgage liens under the senior credit facility.


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Item 3.
Legal Proceedings
For information about legal proceedings and matters, see Note 10 to our consolidated financial statements beginning on page F-1 of this report, which information is incorporated herein by reference.
Item 4.
Mine Safety Disclosures
Not applicable.
Executive Officers
The following table presents information about our directors and executive officers at February 17, 2017 :
 
Age
 
Position
Manuel Brocke-Benz
58
 
Director, President and Chief Executive Officer
Gregory L. Cowan
63
 
Senior Vice President and Chief Financial Officer
Mark T. McLoughlin
61
 
Senior Vice President and President, Americas Lab and Distribution Services
Dr. Nils Clausnitzer
47
 
Senior Vice President and President, EMEA-APAC Lab and Distribution Services
George Van Kula
53
 
Senior Vice President, Human Resources, General Counsel and Secretary
Gerard J. Christian
48
 
Senior Vice President and Chief Global Business Services Officer
Ulf Kepper
51
 
Senior Vice President, VWR Services
Douglas J. Pitts
58
 
Vice President and Corporate Controller
Unless indicated to the contrary, the business experience summaries provided below describe positions held by the named individuals during the last five years.
Manuel Brocke-Benz  has been our President and Chief Executive Officer since January 2013. From July 2012 to January 2013, Mr. Brocke-Benz served as our interim Chief Executive Officer while also serving as the Senior Vice President and Managing Director of Europe, Lab and Distribution Services, a position he held since January 2006. Mr. Brocke-Benz was elected to the Board in September 2012 and currently is the Chair of the Finance Committee. Mr. Brocke-Benz initially joined us in 1987.
Gregory L. Cowan  has been our Senior Vice President and Chief Financial Officer since June 2009. Prior to assuming his current position, Mr. Cowan served as our Vice President and Corporate Controller from December 2004 to May 2009.
Mark T. McLoughlin  became our Senior Vice President and President, Americas Lab and Distribution Services in November 2014. Mr. McLoughlin served as our Senior Vice President and President, U.S. Lab and Distribution Services from July 2012 to November 2012 and as Senior Vice President of Category Management and Senior Vice President of Emerging Businesses from September 2008 to June 2012.
Dr. Nils Clausnitzer  became our Senior Vice President and President, EMEA-APAC Lab and Distribution Services in January 2016. Prior to joining us in January 2016, Dr. Clausnitzer served in various leadership roles at Qiagen N.V. from July 2010 to December 2015, including president and head of commercial operations, EMEA from October 2013 to December 2015, VP and head of commercial operations, EMEA from July 2013 to October 2013 and VP, head of commercial operations MDX Europe from July 2010 to June 2013.
George Van Kula  has been our Senior Vice President, Human Resources, General Counsel and Secretary since March 2013. From May 2006 to March 2013, Mr. Van Kula served as Senior Vice President, General Counsel and Secretary.


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Gerard J. Christian  became our Senior Vice President and Chief Global Business Services Officer in March 2016. Mr. Christian was our Senior Vice President and Chief Information Officer from August 2012 to March 2016. From January 2011 until August 2012, Mr. Christian served as Vice President of Shared Services as well as Vice President, Pricing and Contract Administration. From March 2007 until December 2010, Mr. Christian served as Vice President and Country Manager for VWR Ireland.
Ulf Kepper  became our Senior Vice President, VWR Services in June 2014. Mr. Kepper served as Vice President for Global Marketing Services from 2009 to May 2014 and was responsible for product data management, marketing communications and e-business.
Douglas J. Pitts  became our Vice President and Corporate Controller in July 2013. Mr. Pitts served as Vice President, Internal Audit from 2011 to June 2013 and Vice President and Assistant Corporate Controller from 2007 to 2010.
PART II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Principal Markets for Common Stock
Our common stock is listed on NASDAQ under the symbol “VWR.” The following table presents quarterly high and low sales prices of our common stock:
 
2016
 
2015
 
High
 
Low
 
High
 
Low
First quarter
$
28.20

 
$
21.56

 
$
26.86

 
$
23.18

Second quarter
30.66

 
25.17

 
28.83

 
25.16

Third quarter
31.75

 
26.55

 
27.80

 
24.43

Fourth quarter
29.29

 
24.53

 
28.58

 
23.65

On February 17, 2017 , NASDAQ reported that the closing price of our common stock was $27.00 .
Holders of Common Stock
On February 17, 2017 , we had only one holder of record of our common stock, Varietal. This does not include holdings in street or nominee names.
Dividends
We currently do not expect to pay any dividends on our common stock.
Our subsidiaries are party to certain debt agreements that restrict their ability to pay dividends or make other distributions to us. For more information, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” and Note 24 to our consolidated financial statements beginning on page F-1 of this report.


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Stock Performance Graph
The following graph compares the return on a $100 investment in our common stock made on October 2, 2014, the day we first began trading on NASDAQ, with a $100 investment also made on October 2, 2014 in the S&P MidCap 400 ® Index and the S&P MidCap 400 ® Health Care Index. The S&P MidCap 400 ® Index is a broad equity market index of companies having market capitalization similar to ours. The S&P MidCap 400 ® Health Care Index is an industry-specific equity market index that we believe closely aligns to us based on the following: (i) the index follows companies of a similar size to us in terms of net sales and market capitalization; (ii) the index includes health care distributors, the segment of the Global Industry Classification Standard that we believe most closely aligns to us; and (iii) the index includes companies in the Biopharma and healthcare industries, two of our primary customer groups that together comprise approximately half of our net sales.
The information in this section is not “soliciting material,” is not deemed “filed” with the SEC and is not to be incorporated by reference in any of our filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, whether made before or after the date of this Annual Report on Form 10-K, except to the extent that we specifically incorporate such information by reference. The stock performance shown below is not necessarily indicative of future performance.
A2016Q4FORM_CHART-51492.JPG
Equity Compensation Plans
The information required with respect to securities authorized for issuance under equity compensation plans is incorporated herein by reference to our definitive proxy statement for our 2017 annual meeting of stockholders.


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Item 6.
Selected Financial Data
The information in this item is only a summary and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes beginning on page F-1 of this report.
(dollars in millions, except per share amounts and prices of one euro)
Year ended December 31,
2016
 
2015
 
2014
 
2013
 
2012
Average price of one euro (1)
$
1.11

 
$
1.11

 
$
1.33

 
$
1.33

 
$
1.29

 
 
 
 
 
 
 
 
 
 
Statement of Operations Data: (2)
 
 
 
 
 
 
 
 
 
Net sales
$
4,514.2

 
$
4,318.8

 
$
4,375.3

 
$
4,187.8

 
$
4,129.4

Cost of goods sold
3,252.4

 
3,121.7

 
3,131.9

 
2,991.5

 
2,962.0

Gross profit
1,261.8

 
1,197.1

 
1,243.4

 
1,196.3

 
1,167.4

Selling, general and administrative expenses (3)
946.2

 
876.9

 
925.5

 
942.3

 
915.4

Operating income
315.6

 
320.2

 
317.9

 
254.0

 
252.0

Interest expense, net (4)
(79.7
)
 
(102.8
)
 
(166.3
)
 
(190.7
)
 
(199.5
)
Other income (expense), net (5)
(1.1
)
 
45.4

 
90.9

 
(38.8
)
 
(15.1
)
Loss on extinguishment of debt (6)
(0.5
)
 
(32.7
)
 
(5.1
)
 
(2.0
)
 
(25.5
)
Income before income taxes
234.3

 
230.1

 
237.4

 
22.5

 
11.9

Income tax provision
(86.1
)
 
(75.8
)
 
(84.8
)
 
(8.4
)
 
(8.1
)
Net income
148.2

 
154.3

 
152.6

 
14.1

 
3.8

Accretion of dividends on redeemable convertible preferred stock (7)

 

 
(29.4
)
 
(47.9
)
 
(45.5
)
Net income (loss) applicable to common stockholders
$
148.2

 
$
154.3

 
$
123.2

 
$
(33.8
)
 
$
(41.7
)
Earnings (loss) per share: (7)
 
 
 
 
 
 
 
 
 
Basic
$
1.13

 
$
1.17

 
$
2.50

 
$
(338.00
)
 
$
(417.00
)
Diluted
1.12

 
1.17

 
2.49

 
(338.00
)
 
(417.00
)
 
 
 
 
 
 
 
 
 
 
Other Financial Data: (2)
 
 
 
 
 
 
 
 
 
Net cash provided by (used in): (8)
 
 
 
 
 
 
 
 
 
Operating activities
$
266.2

 
$
225.0

 
$
191.1

 
$
200.9

 
$
34.7

Investing activities
(202.7
)
 
(97.9
)
 
(123.0
)
 
(89.5
)
 
(160.9
)
Financing activities
(26.8
)
 
(96.1
)
 
(71.8
)
 
(117.9
)
 
98.3

Depreciation and amortization
130.1

 
124.5

 
129.3

 
130.0

 
125.9

Cash paid for income taxes, net
78.3

 
48.0

 
39.3

 
37.3

 
45.7

Net cash paid to acquire businesses (8)
142.8

 
59.1

 
89.9

 
44.4

 
113.3

Capital expenditures
59.9

 
40.9

 
33.6

 
45.3

 
51.8

Gross margin
28.0
%
 
27.7
%
 
28.4
%
 
28.6
%
 
28.3
%
Dividends paid per share (7)
$

 
$

 
$
0.25

 
$

 
$



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(in millions, except prices of one euro)
December 31,
2016
 
2015
 
2014
 
2013
 
2012
Spot price of one euro (1)
$
1.06

 
$
1.09

 
$
1.21

 
$
1.38

 
$
1.32

 
 
 
 
 
 
 
 
 
 
Balance Sheet Data:
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
168.7

 
$
136.3

 
$
118.0

 
$
135.6

 
$
139.8

Total assets
4,962.5

 
4,793.8

 
4,977.1

 
5,187.7

 
5,374.9

Total debt (4)
2,017.0

 
1,989.0

 
2,100.2

 
2,833.1

 
3,121.5

Total redeemable equity (7)
21.2

 
38.8

 
51.4

 
670.6

 
627.9

Total stockholders’ equity (7)
1,494.4

 
1,336.4

 
1,339.7

 
425.8

 
406.1

 
(1)
Changes in foreign currency exchange rates significantly affect our statement of operations, balance sheet and other financial data. The annual prices of one euro are provided to illustrate the five-year trend in our most significant foreign currency.
(2)
For information about changes from 2014 to 2016, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
(3)
In 2016 and 2013, restructuring charges of $20.3 million and $32.5 million, respectively, impacted the trend in SG&A expenses.
(4)
In October 2014, we completed our IPO resulting in a significant capital contribution. We used proceeds to repay debt, which significantly reduced our interest expense compared to 2013 and 2012.
(5)
Significant euro-denominated debt instruments are held by a subsidiary in the United States, causing us to record remeasurement gains or losses in earnings to the extent not hedged. In 2015, we designated most of that debt as a hedge of our net investment in foreign operations, which has reduced the impact to earnings.
(6)
In 2012, we extinguished senior notes and incurred a loss of $25.5 million.
(7)
In 2014 in anticipation of our IPO, we recapitalized our equity and paid a $25.0 million dividend to Varietal. The recapitalization ended the accretion of dividends on our redeemable convertible preferred stock because we converted all prior equity and redeemable equity into newly-issued shares of common stock. This significantly changed the number of shares used to calculate earnings per share beginning in 2014.
(8)
Short-term changes in working capital have caused volatility in historical operating cash flows, while changes in investing cash flows were primarily caused by the relative number and size of business acquisitions completed each year. We manage changes in operating and investing cash flows by utilizing availability under our credit facilities, which contributes to changes in financing cash flows. Absent these changes, operating cash flows have generally increased as a result of year-over-year improvements to our earnings, excluding non-cash items such as depreciation and amortization and deferred income tax provision.


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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
This item should be read with our consolidated financial statements and related notes beginning on page F-1 of this report. This item also 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” and Item 1A, “Risk Factors” for additional information.
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, a full range of value-added services and custom manufacturing capabilities to meet our customers’ needs. 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.
Trends Affecting our Performance and Financial Condition
The following summarizes our views about trends that are affecting our business. Many of these trends could affect our performance and financial condition in future periods.
We have been reducing our leverage and our interest
During the last three years, we have repaid over $600 million of long-term debt. Proceeds from our IPO together with growth in earnings and operating cash flows have allowed us to significantly reduce our balance sheet leverage. We plan to continue using operating cash flows to repay debt over the next few years.
During the fourth quarter of 2016, we repaid €50 million of our term B loan and amended it to lower the interest we pay. In 2015, we refinanced substantially all of our debt for lower rates of interest. To complete the debt refinancings of 2016 and 2015, we paid $0.9 million and $41.9 million of fees, respectively, some of which were immediately expensed and some of which were deferred to future periods.
Earlier in 2016, we entered into two interest rate swaps that effectively converted the variable interest rate on $500 million of our term A loan into a fixed rate of about 3%.
Taken as a whole, these initiatives have reduced our ongoing interest expense, the cash we pay for interest and our exposure to changes in variable interest rates while increasing the principal amounts we must pay prior to maturity. For additional information, see Note 8 to the consolidated financial statements beginning on page F-1 of this report.


30

Table of Contents

We have been acquiring businesses that provide us new product and service platforms
Over the past few years, we have been focused on broadening our product and service offerings through acquisitions, especially in the bioprocessing, biochemical and services sectors. We have also acquired companies that strengthen our existing market positions and expand our geographic presence. We acquired five businesses in 2016 and another business in January 2017, and we expect to acquire more companies in future periods. For additional information, see Note 5 to our consolidated financial statements beginning on page F-1 of this report.
We are continually reviewing our business model to identify cost savings measures
Our ongoing plan is to utilize information technology, our operational footprint and ongoing process improvement to leverage our cost structure over time. As part of this process, we initiated a restructuring program in the fourth quarter of 2016 that we expect to result in savings over the next two years. In connection with this program, we incurred charges of $20.3 million in the fourth quarter of 2016 and anticipate additional charges of $14.7 million , most of which we expect to incur in 2017.
We have experienced significant changes in foreign currency exchange rates
Our operations span the globe. A significant portion of our earnings and net assets are denominated in foreign currencies, principally the euro but also the British pound sterling and many others. We also carry a significant amount of euro-denominated debt in the United States. Because we translate or remeasure these items into U.S. dollars, changes in foreign currency exchange rates can have a significant impact on our reported results.
Following a referendum by the British people to leave the European Union, the British pound sterling weakened significantly during 2016. The euro also reached a historic low against the U.S. dollar in late 2016. These trends followed a significant weakening of most foreign currencies against the U.S. dollar during the second half of 2014.
Since 2015, we have designated hedges that reduce the earnings impact of remeasuring the euro-denominated debt held by our U.S. subsidiary. For more information, see Note 9 to our consolidated financial statements beginning on page F-1 of this report.
Foreign currency exchange rates also impact some of our cross-border purchasing and service arrangements. These changes generally have not been material to our results, but we have experienced greater effects on earnings due to the historic changes described above.
We are not able to predict the impact that future changes in foreign currency exchange rates may have on our operating results, but their impact could be significant. Item 7A, “Qualitative and Quantitative Disclosures about Market Risk,” provides additional information about the impact such changes could have on our financial position and results of operations.
Our product and customer mix continues to evolve
We offer a broad portfolio of branded and private label laboratory products and a full range of value-added services. These products and services are sold at different gross margins, with the highest margins coming from private label and custom-manufactured products. Private label and self-manufactured products represented 19% of our 2016 product sales. The mix of products sold by us in any given period will impact our gross margin. We intend to selectively expand our private label product offerings to augment our branded product offerings. We are also enhancing our capabilities as a manufacturer of high quality biochemicals, chemicals and reagents to the extent we do not conflict with the offerings of our existing supplier base.
We serve a wide variety of customers in different industries. Biopharma was our largest and fastest growing customer group in 2016, representing 43% of our consolidated net sales, but year-over-year sales growth for this


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Table of Contents

group moderated in the second half of 2016. Meanwhile, we have observed higher growth rates from customers in the healthcare and industrial sectors.
Seasonality and inflation continue not to have a significant impact
Although the prices we pay for our products may increase, we believe that we can continue to pass through the majority of these increases to our customers. However, our earnings and cash flows could be adversely affected if we are unable to pass through future cost increases arising from inflation to our customers.
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 operating income and Adjusted EPS , which we discuss in materials furnished to the SEC and other public materials related to our presentation of quarterly results. Both are non-GAAP financial measurements that exclude the amortization of acquired intangible assets, restructuring charges, impairment charges, changes in foreign currency exchange rates related to financing decisions and certain other items. For Adjusted EPS, we then add or subtract an estimated incremental income tax effect applicable to those items. We believe that these measurements are useful to investors as an additional way to analyze the underlying trends in our business consistently across the periods presented. These measurements are 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 beginning on page F-1


32

Table of Contents

of this report and in publicly filed reports in their entirety and not rely solely on any one, single financial measurement or communication.
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.”
Results of Operations — Comparison of Years Ended December 31, 2016 and 2015
Executive Summary
 
Year ended December 31,
 
Reported change
(dollars in millions, except per share amounts)
2016
 
2015
 
Amount
 
%
Net sales
$
4,514.2

 
$
4,318.8

 
$
195.4

 
4.5
 %
Organic net sales growth
3.2
%
 
 
 
 
 

Gross margin
28.0
%
 
27.7
%
 
30

basis points
Operating income
$
315.6

 
$
320.2

 
$
(4.6
)
 
(1.4
)%
Operating income margin
7.0
%
 
7.4
%
 
(40
)
basis points
Net income
$
148.2

 
$
154.3

 
$
(6.1
)
 
(4.0
)%
Diluted earnings per share
1.12

 
1.17

 
(0.05
)
 
(4.3
)%
The effect of currency translation moderated in 2016 and was most impacted by the weakening of the British pound sterling. Net sales also benefited from acquisitions. As a result, net sales grew 4.5% and operating income declined 1.4% while organic net sales growth was 3.2% and constant-currency operating income was nearly flat. Net income and diluted earnings per share declined compared to 2015.
Organic net sales benefited from worldwide growth from Biopharma customers, which moderated in the second half of 2016, as well as emerging growth from healthcare and industrial customers. Growth from these customers continued to outperform public sector customers in EMEA-APAC, where net sales were slightly down.
Gross margin increased 30 basis points, reflecting efficient pricing and favorable product mix especially in the Americas.
Operating income declined, but excluding currency translation it was nearly flat. This was the result of organic net sales growth and gross margin improvement that was offset by compensation growth and over $20 million of restructuring charges. Operating income margin decreased 40 basis points due to currency translation and the restructuring charges.
Net income and diluted earnings per share each decreased due to a number of factors. Pretax income increased over $50 million with a full year of lower interest under our refinanced debt and the absence of the 2015 refinancing loss. Pretax income also decreased over $45 million due to the absence of a significant non-cash net foreign currency remeasurement gain from 2015. The tax provision increased over $10 million due to a higher effective tax rate in 2016. Since October 2015, almost all of our euro-denominated debt has been part of a hedge, so changes to foreign currency rates no longer have such a significant impact on our earnings.


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Table of Contents

Net Sales and Organic Net Sales Growth
 
Year ended December 31,
 
Non-GAAP reconciliation
 
 
Reported change
 
Currency translation
 
Acquisitions
 
Organic net sales growth
(dollars in millions)
2016
 
2015
 
Amount
 
%
 
 
 
Amount
 
%
Americas
$
2,737.7

 
$
2,577.3

 
$
160.4

 
6.2
%
 
$
(10.0
)
 
$
92.7

 
$
77.7

 
3.0
%
EMEA-APAC
1,776.5

 
1,741.5

 
35.0

 
2.0
%
 
(38.2
)
 
13.7

 
59.5

 
3.4
%
Total
$
4,514.2

 
$
4,318.8

 
$
195.4

 
4.5
%
 
$
(48.2
)
 
$
106.4

 
$
137.2

 
3.2
%
Net sales increased $195.4 million or 4.5% , up 3.2% on an organic basis.
Americas net sales increased $160.4 million or 6.2% , up 3.0% on an organic basis, driven by mid single-digit growth from Biopharma customers. Sales to government customers grew by a high single-digit rate, and sales to education, industrial and healthcare customers grew by low single-digit rates. From a product perspective, net sales of chemicals increased high single-digit rates while other consumables and capital goods increased by low single-digit rates. Overall, sales in the Americas benefited primarily from acquisitions and efficient pricing.
EMEA-APAC net sales increased $35.0 million or 2.0% , up 3.4% on an organic basis with mid single-digit growth in sales to Biopharma, healthcare and industrial customers, while sales to government and education customers declined slightly. From a product perspective, sales of chemicals grew by a low single-digit rate, sales of other consumables increased by a mid single-digit rate and capital goods grew by a low single-digit rate. Overall, sales in EMEA-APAC reflected higher volume and modest improvement from acquisitions partially offset by unfavorable currency translation.
Gross Profit and Gross Margin
 
Year ended December 31,
 
Non-GAAP reconciliation
 
 
Reported change
 
Currency translation
 
Constant-currency change
(dollars in millions)
2016
 
2015
 
Amount
 
%
 
 
Amount
 
%
Gross profit
$
1,261.8

 
$
1,197.1

 
$
64.7

 
5.4
%
 
$
(15.1
)
 
$
79.8

 
6.7
%
Gross margin
28.0
%
 
27.7
%
 
30

basis points
Gross profit increased 5.4% , up 6.7% on a constant-currency basis reflecting net sales growth and gross margin improvement. Gross margin was 28.0% , up 30 basis points compared to prior year primarily due to efficient pricing and favorable product mix.
SG&A Expenses
 
Year ended December 31,
 
Non-GAAP reconciliation
 
 
Reported change
 
Currency translation
 
Constant-currency change
(dollars in millions)
2016
 
2015
 
Amount
 
%
 
 
Amount
 
%
SG&A expenses
$
946.2

 
$
876.9

 
$
69.3

 
7.9
%
 
$
(10.8
)
 
$
80.1

 
9.1
%
% of net sales
21.0
%
 
20.3
%
 
70

basis points
SG&A expenses increased $69.3 million or 7.9% , up 9.1% on a constant-currency basis. The increase includes $20.3 million of charges related to our 2016 restructuring program, a $6.0 million increase from adjustments to


34


contingent consideration for business acquisitions and about 2% annual base compensation growth. The remaining increase was due to business acquisitions and higher variable and stock-based compensation expense.
Operating Income
 
Year ended December 31,
 
Non-GAAP reconciliation
 
 
Reported change
 
Currency translation
 
Constant-currency change
(dollars in millions)
2016
 
2015
 
Amount
 
%
 
 
Amount
 
%
Operating income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
174.9

 
$
162.5

 
$
12.4

 
7.6
 %
 
$

 
$
12.4

 
7.6
 %
EMEA-APAC
140.7

 
157.7

 
(17.0
)
 
(10.8
)%
 
(4.3
)
 
(12.7
)
 
(8.1
)%
Total
$
315.6

 
$
320.2

 
$
(4.6
)
 
(1.4
)%
 
$
(4.3
)
 
$
(0.3
)
 
(0.1
)%
Operating income margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
6.4
%
 
6.3
%
 
10

basis points
EMEA-APAC
7.9
%
 
9.1
%
 
(120
)
basis points
Total
7.0
%
 
7.4
%
 
(40
)
basis points
Consolidated operating income decreased $4.6 million or 1.4% , nearly flat on a constant-currency basis. Operating income margin declined 40 basis points compared to prior year.
Americas operating income increased $12.4 million or 7.6% , with margins up 10 basis points compared to prior year, the result of net sales growth and gross margin improvement offset by higher SG&A expenses including $1.8 million of restructuring charges and a $4.6 million increase from adjustments to contingent consideration for business acquisitions.
EMEA-APAC operating income decreased $17.0 million or 10.8% , down 8.1% on a constant-currency basis, with operating income margin down 120 basis points. EMEA-APAC operating income was negatively impacted by $18.5 million of restructuring charges and a $1.4 million increase from adjustments to contingent consideration for business acquisitions.
Net Income and Diluted Earnings per Share
 
Year ended December 31,
 
Reported change
(in millions, except per share amounts)
2016
 
2015
 
Amount
 
%
Operating income
$
315.6

 
$
320.2

 
$
(4.6
)
 
(1.4
)%
Interest expense
(79.7
)
 
(102.8
)
 
23.1

 
22.5
 %
Other income (expense), net
(1.1
)
 
45.4

 
(46.5
)
 
n/m

Loss on extinguishment of debt
(0.5
)
 
(32.7
)
 
32.2

 
n/m

Income tax provision
(86.1
)
 
(75.8
)
 
(10.3
)
 
(13.6
)%
Net income
$
148.2

 
$
154.3

 
$
(6.1
)
 
(4.0
)%
 
 
 
 
 
 
 
 
Diluted earnings per share
$
1.12

 
$
1.17

 
$
(0.05
)
 
(4.3
)%
Net income decreased $6.1 million due to a number of offsetting factors:
Lower operating income, down $4.6 million compared to prior year, as previously discussed;


35


Lower interest expense, down $23.1 million from a full year of lower interest under our refinanced debt;
The absence of a $32.7 million extinguishment loss from our 2015 debt refinancing. That loss included the redemption premium on the 7.25% senior notes, the write-off of unamortized deferred financing costs and fees paid to term loan lenders who continued from our prior credit facility to the new facility;
The absence of a $45.4 million non-cash net foreign currency remeasurement gain from our debt in 2015. Since October 2015, almost all of our euro-denominated debt has been part of a hedge, so changes to foreign currency rates no longer have such a significant impact on our earnings; and
Higher income tax provision, up $10.3 million . The effective tax rate was higher in 2016 as described in Note 18 to the consolidated financial statements beginning on page F-1 of this report.
These factors drove diluted earnings per share of $1.12 , a decrease of $0.05 .
Results of Operations — Comparison of Years Ended December 31, 2015 and 2014
Executive Summary
 
Year ended December 31,
 
Reported change
(dollars in millions, except per share amounts)
2015
 
2014
 
Amount
 
%
Net sales
$
4,318.8

 
$
4,375.3

 
$
(56.5
)
 
(1.3
)%
Organic net sales growth
4.4
%
 
 
 
 
 
 
Gross margin
27.7
%
 
28.4
%
 
(70
)
basis points
Operating income
$
320.2

 
$
317.9

 
$
2.3

 
0.7
 %
Operating income margin
7.4
%
 
7.3
%
 
10

basis points
Net income
$
154.3

 
$
152.6

 
$
1.7

 
n/m

Diluted earnings per share
1.17

 
2.49

 
(1.32
)
 
(53.0
)%
A stronger U.S. dollar negatively impacted our reported results, and net sales benefited from acquisitions. As a result, net sales declined 1.3% and operating income was nearly flat while organic net sales growth was 4.4% and constant-currency operating income increased 9.1% .
Organic net sales growth reflected continuing worldwide strength in Biopharma. The Americas experienced its seventh consecutive quarter of year-over-year organic net sales growth in the fourth quarter. EMEA-APAC growth included more sales of integrated procurement services and other specialized offerings to our largest customers.
Gross margin decreased 70 basis points from the effects of a stronger U.S. dollar and a supply chain disruption with a major supplier. In addition, a less favorable product sales mix in 2015 and changes to certain supply agreements negatively impacted the comparison.
Operating income increased, despite significant currency impacts, due to the leverage of organic net sales growth and controlling costs. Those same factors caused our operating income margin to increase by 10 basis points. Excluding currency translation, gross profit increased 4.5% while SG&A expenses only increased 2.9%, resulting in operating income growth of 9.1%.
Net income benefited from significant reductions to interest expense caused primarily by the 2014 repayment of our 10.75% subordinated notes as well as our 2015 debt refinancing, which lowered our variable interest rate margins. Net income also reflected volatility from the remeasurement of euro-denominated debt. Since October 2015, almost all of our euro-denominated debt has been part of a hedging program, so changes to foreign currency rates no longer have such a significant impact on our earnings.


36


Diluted earnings per share decreased $1.32 on relatively flat net income, reflecting the change in diluted shares outstanding following our 2014 recapitalization.
Net Sales and Organic Net Sales Growth
 
Year ended December 31,
 
Non-GAAP reconciliation
 
 
Reported change
 
Currency translation
 
Acquisitions
 
Organic net sales growth
(dollars in millions)
2015
 
2014
 
Amount
 
%
 
 
 
Amount
 
%
Americas
$
2,577.3

 
$
2,430.1

 
$
147.2

 
6.1
 %
 
$
(39.0
)
 
$
61.3

 
$
124.9

 
5.1
%
EMEA-APAC
1,741.5

 
1,945.2

 
(203.7
)
 
(10.5
)%
 
(295.5
)
 
24.0

 
67.8

 
3.5
%
Total
$
4,318.8

 
$
4,375.3

 
$
(56.5
)
 
(1.3
)%
 
$
(334.5
)
 
$
85.3

 
$
192.7

 
4.4
%
Net sales decreased $56.5 million or 1.3%, up 4.4% on an organic basis. Organic net sales growth was caused by continued strength in Biopharma for both segments and spread across most product groups, but particularly strong for chemicals in the Americas and private label products, integrated procurement services and other value-added services in both segments.
Americas net sales increased $147.2 million or 6.1%, up 5.1% on an organic basis. Organic net sales growth was balanced between volume and pricing. The growth reflected strength in equipment and instrumentation sales in addition to Biopharma, chemicals, private label products and value-added services as noted previously. As a result, the Americas experienced its seventh consecutive quarter of year-over-year organic net sales growth in the fourth quarter of 2015.
EMEA-APAC net sales decreased $203.7 million or 10.5%, up 3.5% on an organic basis. Organic net sales in EMEA-APAC reflected higher volumes from Biopharma, private label products and value-added services as previously discussed, as well as strong private sector growth that was tempered by lower government spending.
Gross Profit and Gross Margin
 
Year ended December 31,
 
Non-GAAP reconciliation
 
 
Reported change
 
Currency translation
 
Constant-currency change
(dollars in millions)
2015
 
2014
 
Amount
 
%
 
 
Amount
 
%
Gross profit
$
1,197.1

 
$
1,243.4

 
$
(46.3
)
 
(3.7
)%
 
$
(102.2
)
 
$
55.9

 
4.5
%
Gross margin
27.7
%
 
28.4
%
 
(70
)
basis points
Gross profit decreased 3.7%, up 4.5% on a constant-currency basis as a result of the changes to net sales and a decrease to gross margin. Gross margin decreased 70 basis points and included: (i) the strengthening of the U.S. dollar against most foreign currencies, which tempered our ability to adjust pricing to offset cross-border denominated purchases; and to a lesser extent (ii) a supply chain disruption with a major supplier. In addition, a less favorable product sales mix in the 2015 period and changes to our supply agreements with a major supplier in April 2014 negatively impacted the comparison.


37


SG&A Expenses
 
Year ended December 31,
 
Non-GAAP reconciliation
 
 
Reported change
 
Currency translation
 
Constant-currency change
(dollars in millions)
2015
 
2014
 
Amount
 
%
 
 
Amount
 
%
SG&A expenses
$
876.9

 
$
925.5

 
$
(48.6
)
 
(5.3
)%
 
$
(75.6
)
 
$
27.0

 
2.9
%
% of net sales
20.3
%
 
21.2
%
 
(90
)
basis points
SG&A expenses decreased $48.6 million or 5.3%, up 2.9% on a constant-currency basis. Contributing to the increase were acquired businesses and (i) a gain on the partial settlement of our U.S. retirement plan in 2014 that did not recur in 2015, (ii) an increase in stock-based compensation expense of $2.9 million, (iii) an impairment charge of $3.2 million for an amortizable intangible asset in 2015, (iv) $2.8 million of legacy facility exit charges in 2015 and (v) $1.5 million of secondary equity offering costs in 2015. Those increases were partially offset by lower overall personnel costs in 2015.
Operating Income
 
Year ended December 31,
 
Non-GAAP reconciliation
 
 
Reported change
 
Currency translation
 
Constant-currency change
(dollars in millions)
2015
 
2014
 
Amount
 
%
 
 
Amount
 
%
Operating income:
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
$
162.5

 
$
141.0

 
$
21.5

 
15.2
 %
 
$
(0.2
)
 
$
21.7

 
15.4
%
EMEA-APAC
157.7

 
176.9

 
(19.2
)
 
(10.9
)%
 
(26.4
)
 
7.2

 
4.1
%
Total
$
320.2

 
$
317.9

 
$
2.3

 
0.7
 %
 
$
(26.6
)
 
$
28.9

 
9.1
%
Operating income margin:
 
 
 
 
 
 
 
 
 
 
 
 
 
Americas
6.3
%
 
5.8
%
 
50

basis points
EMEA-APAC
9.1
%
 
9.1
%
 


Total
7.4
%
 
7.3
%
 
10

basis points
Operating income increased $2.3 million or 0.7%, up 9.1% on a constant-currency basis. Operating income margin increased 10 basis points compared to prior year.
Americas operating income increased $21.5 million or 15.2%, up 15.4% on a constant-currency basis, reflecting the leverage of organic net sales growth and lower overall personnel costs in 2015, partially offset by the legacy facility exit charges, secondary equity offering costs, the 2014 settlement gain that did not recur and the increase to stock-based compensation expense previously discussed.
EMEA-APAC operating income decreased $19.2 million or 10.9%, up 4.1% on a constant-currency basis, reflecting the leverage of organic net sales growth and cost control initiatives in 2015, which were partially offset by the impairment charge and the factors affecting gross margin previously discussed.
Operating income margins improved, particularly in the Americas, due to the leverage of organic net sales growth in both segments that was partially offset by the factors impacting our gross margins.


38


Net Income and Diluted Earnings per Share
 
Year ended December 31,
 
Reported change
(dollars in millions)
2015
 
2014
 
Amount
 
%
Operating income
$
320.2

 
$
317.9

 
$
2.3

 
0.7
%
Interest expense
(102.8
)
 
(166.3
)
 
63.5

 
38.2
%
Other income (expense), net
45.4

 
90.9

 
(45.5
)
 
n/m

Loss on extinguishment of debt
(32.7
)
 
(5.1
)
 
(27.6
)
 
n/m

Income tax provision
(75.8
)
 
(84.8
)
 
9.0

 
10.6
%
Net income
$
154.3

 
$
152.6

 
$
1.7

 
1.1
%
 
 
 
 
 
 
 
 
Diluted earnings per share
$
1.17

 
$
2.49

 
$
(1.32
)
 
n/m

Net income increased $1.7 million due to a number of offsetting factors:
Lower interest expense, down $63.5 million due to the 2014 repayment of our 10.75% subordinated notes, our 2015 debt refinancing and the strengthening of the U.S. dollar which lowered interest expense for our euro-denominated borrowings;
Fluctuations in other income (expense), net, which consisted primarily of non-cash net foreign currency remeasurement gains from our debt due to the strengthening of the U.S. dollar;
A $32.7 million loss in 2015 caused by the refinancing of substantially all of our debt. The loss included the redemption premium on the 7.25% senior notes, the write-off of unamortized deferred financing costs and fees paid to term loan lenders who continued from our prior credit facility to the new facility. The $5.1 million loss in 2014 was caused by the write-off of unamortized deferred financing costs following the repayment of our 10.75% subordinated notes; and
Lower income tax provision, down $9.0 million , primarily due to the change in pretax income and changes in foreign tax rates as described in Note 18 to our consolidated financial statements beginning on page F-1 of this report.
Liquidity and Capital Resources
We fund short-term cash requirements primarily from operating cash flows and unused availability under our credit facilities. Most of our cash resides outside of the United States, which we do not intend to repatriate. Most of our long-term financing is from debt.
We use cash to satisfy our contractual obligations and to fund other business needs. Our most significant contractual obligations are scheduled principal and interest payments for debt. We also have obligations to make payments under operating leases, to purchase certain products and services, to fund pension obligations and to pay Varietal under the ITRA. In addition to contractual obligations, we use cash to fund business acquisitions, capital expenditures and taxes. Changes in working capital may be a source or a use of cash depending on our operations during the period.
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.


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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
At December 31, 2016 , we had aggregate unused availability of $216.8 million under our credit facilities, detailed as follows:
(in millions)
A/R 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
)
 
(1.7
)
 
(12.7
)
Outstanding borrowings
(163.9
)
 
(31.6
)
 
(195.5
)
Unused availability
$
0.1

 
$
216.7

 
$
216.8

Borrowings under these facilities are the most significant source of our liquidity. Daily average borrowings outstanding under these facilities in 2016 was $130.6 million . Our liquidity needs change daily, which causes our unused availability to fluctuate, and current availability under the accounts receivable securitization facility depends upon maintaining a sufficient borrowing base of eligible trade accounts receivable.
Subject to continuing compliance with our covenants, we may request incremental term loan borrowings and/or revolving loan commitments under the senior credit facility in an amount up to (i) $450.0 million or (ii) the maximum amount at such time that could be incurred without causing VWR Funding to exceed a specified net leverage ratio, in each case subject to certain other restrictions. The actual extension of any such incremental term loans or increases in revolving loan commitments would be subject to us and our lenders reaching agreement on applicable terms and conditions, which will depend on market conditions at the time of any request.
Most of our cash resides outside the United States. Foreign exchange ceilings imposed by local governments, regulatory requirements applicable to certain of our subsidiaries and the sometimes lengthy approval processes which foreign governments require for international cash transfers may restrict our internal cash movements. We expect to reinvest all of our cash and earnings outside of the United States because we anticipate that a significant portion of our opportunities for future growth will be abroad. As of December 31, 2016 , $142.8 million of our cash and cash equivalents was held by our foreign subsidiaries. We do not intend to repatriate our foreign cash and cash equivalents. If these foreign cash and cash equivalents were repatriated to the United States, we may be required to pay income taxes on the amounts repatriated.
Debt
Most of our long-term financing is from debt. This discussion supplements the disclosures provided in Notes 8 and 24 to our consolidated financial statements beginning on page F-1 of this report and “Trends Affecting our Performance and Financial Condition.”
Our debt agreements contain a number of affirmative and negative covenants which we consider to be customary and usual. The senior credit facility includes a financial maintenance covenant requiring us to maintain a first lien net leverage ratio, as defined, of not more than 4.00:1.00. The financial maintenance covenant is tested at the end of each fiscal quarter. The A/R Facility includes a consolidated interest expense test if our available liquidity is less than $115.0 million.


40


VWR Funding, as the borrower under the senior credit facility and the issuer of the 4.625% senior notes, is currently limited under the terms of such agreements in its ability to declare any cash dividends on, or making any payment on account of, its capital stock, or making any other distribution in respect thereof (collectively, a “restricted payment”), including for the purpose of enabling us to pay dividends on our capital stock. Under the senior credit facility, until such time as Total Net Leverage (as defined in the senior credit facility) is no greater than 3.75:1.00, after giving effect to such restricted payment, VWR Funding can make lifetime restricted payments to us up to (i) the greater of $175.0 million and 4.375% of Total Assets (as defined in the senior credit facility) and (ii) an additional amount equal to $100.0 million plus 50% of its consolidated net income since July 1, 2015 (the “cumulative net income basket”) and any amounts it has received from sales of certain equity or capital contributions that are not used for certain other restricted payments, provided that solely with respect to restricted payments made in reliance on the cumulative net income basket there is no event of default under the senior credit facility and VWR Funding meets a certain total net leverage ratio after giving effect to any such restricted payment. Similarly, VWR Funding can make lifetime restricted payments to us under the indenture governing the 4.625% senior notes up to (i) $35.0 million and (ii) an additional amount equal to $100.0 million plus 50% of its consolidated net income since January 1, 2015 and any amounts it has received from sales of equity or capital contributions since the issue date of such senior notes that are not used for other restricted payments, provided that there is no default under the indenture and that VWR Funding meets a certain fixed charge coverage ratio after giving effect to any such restricted payment. We do not believe that these restrictions impact our ability to meet our cash obligations. Over time, we expect those restrictions will be reduced to the extent that we are able to generate net income and/or certain types of cash inflows in future periods.
At December 31, 2016 , we were in compliance with all of our covenants.
Contractual Obligations
The following table presents our contractual obligations at December 31, 2016 :
 
Payments due by period
(in millions)
Total
 
Less than 1 year
 
1-3 years
 
3-5 years
 
More than 5 years
Debt: (1)
 
 
 
 
 
 
 
 
 
Principal (2)
$
2,033.2

 
$
54.5

 
$
338.7

 
$
701.4

 
$
938.6

Interest
282.7

 
70.1

 
117.7

 
87.3

 
7.6

Operating leases
144.3

 
33.4

 
50.1

 
28.0

 
32.8

Purchase obligations (3)
203.2

 
99.6

 
101.7

 
1.9

 

Other liabilities:
 
 
 
 
 
 
 
 
 
Underfunded pension obligations (4)
85.4

 
2.0

 
4.4

 
5.5

 
73.5

Due to Varietal — ITRA (5)
85.0

 
27.7

 
57.3

 

 

Total
$
2,833.8

 
$
287.3

 
$
669.9

 
$
824.1

 
$
1,052.5

 
(1)
Includes capital lease obligations, which were not material. To calculate payments due 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, 2016 through maturity.
(2)
Our senior credit facility 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.


41


(4)
The amounts in the table reflect estimated cash payments to be made by us over the next five years and thereafter with respect to the underfunded pension obligations of our German, French and UK Plans. See Note 15 to our consolidated financial statements beginning on page F-1 of this report.
(5)
In March 2017, $27.7 million will be paid to Varietal under the ITRA. The timing and estimated amount of all other payments under the ITRA are not certain. For purposes of inclusion in the table above, we have estimated the timing of payments based on our expectations of when we might realize the benefits of our net operating loss carryforwards, if ever. However, our estimates may not be accurate, and such payments could occur earlier or later than depicted in the table. For more information about the ITRA, see Note 20 to our consolidated financial statements beginning on page F-1 of this report.
Deferred income tax liabilities of $477.2 million at December 31, 2016 are not included in the table above because they do not have a direct connection with the amount of cash taxes to be paid in any future periods and do not relate to liquidity needs. In addition, we have excluded uncertain tax liabilities of $61.8 million at December 31, 2016 due to the uncertainty of the period of payment. In addition, we do not provide for deferred income tax liabilities or foreign withholding taxes on $842.8 million of cumulative undistributed earnings of our foreign subsidiaries as of December 31, 2016 , as we consider these earnings to be permanently reinvested. We believe that cash flows generated by our domestic operations and availability under our credit facilities will be sufficient to allow us to satisfy our domestic liquidity requirements, including mandatory principal and interest payments.
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 offers under these provisions was $11.1 million as of December 31, 2016 .
Other Uses of Cash
We fund business acquisitions through a combination of cash and cash equivalents on hand and incremental borrowings under our credit facilities. The funding of an acquisition immediately causes our net leverage to increase. We invested net cash of $142.8 million , $59.1 million and $89.9 million to acquire businesses in 2016 , 2015 and 2014 , respectively.
Most of our capital expenditures are discretionary and for the purpose of maintaining and improving our facilities, infrastructure and information technology. Capital expenditures were $59.9 million , $40.9 million and $33.6 million for the years ended December 31, 2016 , 2015 and 2014 , respectively. We plan to continue making investments in our business to support our strategy of continued growth.
Working capital impacts our liquidity and capital resources because changes in working capital directly impact our operating cash flows, and our trade accounts receivable balance affects the amount of credit available to us under our A/R Facility. Working capital amounts can vary from period to period based on the short-term needs of our business. Additional information about changes in working capital balances are provided in the section entitled “Historical Cash Flows.”


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Historical Cash Flows
The following table presents a summary of historical cash flows (in millions):
 
Year ended December 31,
(in millions)
2016
 
2015
 
2014
Net cash provided by (used in):
 
 
 
 
 
Operating activities
$
266.2

 
$
225.0

 
$
191.1

Investing activities
(202.7
)
 
(97.9
)
 
(123.0
)
Financing activities
(26.8
)
 
(96.1
)
 
(71.8
)
Historical Cash Flows — Year Ended December 31, 2016
Net cash provided by operating activities increased $41.2 million from prior year due primarily to lower investments in net working capital year-over-year.
Changes in trade accounts receivable used cash of $25.8 million due primarily to organic net sales growth. Changes in inventories used cash of $63.1 million , which follows the organic net sales growth and reflects a greater stock of private label products, increased manufacturing capabilities and our initiatives to expand our product offerings and improve customer service levels. Changes in accounts payable provided cash of $15.0 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 $32.3 million of cash, driven by new restructuring liabilities of $11.1 million and an increase to employee-related liabilities.
Cash paid for interest was $79.2 million , a decrease of $25.7 million from prior year caused primarily by savings from our 2015 debt refinancing. Cash paid for income taxes was $78.3 million , an increase of $30.3 million from prior year primarily due to the limitation on our use of net operating losses following the change in control described in Note 1 to our consolidated financial statements beginning on page F-1 of this report.
Investing Activities
Net cash used in investing activities was $202.7 million . We paid net cash of $142.8 million to acquire five businesses. Capital expenditures were $59.9 million , an increase of $19.0 million compared to 2015, reflecting investments to consolidate our U.S. chemical manufacturing businesses.
Financing Activities
Net cash used in financing activities was $26.8 million , the net result of $78.1 million paid to Varietal under the ITRA and $50.6 million of net proceeds from debt.
Historical Cash Flows — Year Ended December 31, 2015
Operating Activities
Net cash provided by operating activities increased $33.9 million from the prior year due to growth from earnings, excluding non-cash items such as depreciation and amortization, net foreign currency remeasurement gain or loss, loss on extinguishment of debt and deferred income tax provision, which was partially offset by greater investments in net working capital year-over-year.
Net cash used for working capital changes consisted primarily of changes in trade accounts receivable, which used cash of $30.2 million due primarily to organic net sales growth. Inventories and accounts payable each


43


increased, following the growth in net sales, and together used net cash of $18.7 million reflecting a greater stock of private label products and chemicals, part of a global initiative to improve customer service levels. Changes to other assets and liabilities used cash of $37.7 million reflecting a decrease to employee-related liabilities and the timing of interest payments for our refinanced debt.
Investing Activities
Net cash used in investing activities was $97.9 million. We paid net cash of $59.1 million to acquire four businesses. Capital expenditures were $40.9 million, an increase of $7.3 million compared to 2014, reflecting new investments in custom manufacturing capabilities and capacity.
Financing Activities
Net cash used in financing activities was $96.1 million. We paid debt issuance costs and a redemption premium of $41.9 million in connection with our debt refinancing, made $43.2 million of net repayments of debt and paid $9.8 million to Varietal under the ITRA.
Historical Cash Flows — Year Ended December 31, 2014
Operating Activities
Net cash provided by operating activities was $191.1 million, driven by earnings excluding non-cash items such as depreciation and amortization, net foreign currency remeasurement gain or loss and deferred income tax provision and partially offset by investments in working capital.
Net cash used for working capital changes consisted primarily of changes in trade accounts receivable, which used cash of $30.1 million due primarily to organic net sales growth. Inventories and accounts payable each increased, following the growth in net sales, and together used net cash of $14.0 million reflecting a greater stock of private label products and chemicals, part of a global initiative to improve customer service levels.
Investing Activities
Net cash used in investing activities was $123.0 million. We paid net cash of $89.9 million to acquire four businesses. Capital expenditures were $33.6 million.
Financing Activities
Net cash used in financing activities was $71.8 million. We used net proceeds from our IPO of $582.6 million in part to fund net debt repayments of $611.6 million. We also paid $25.0 million dividend to Varietal and repurchased $8.9 million of redeemable equity.
Critical Accounting Policies and Estimates
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect reported amounts throughout the consolidated financial statements and notes thereto. 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, including the current economic environment. Unfavorable global economic conditions, when present, increase the uncertainty inherent in such estimates and assumptions. 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.
The policies and estimates discussed below are considered by management to be critical to an understanding of our consolidated financial statements because their application places the most significant demands on


44


management’s judgment. Specific risks for these critical accounting policies are described in the following sections. For all of these policies, we caution that future events rarely develop exactly as forecast, and such estimates routinely require adjustment. We have reviewed these critical accounting policies and estimates and related disclosures with our Audit Committee.
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 applying our critical accounting policies and estimates. For a summary 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
As a result of the 2007 merger, and to a lesser extent our subsequent acquisition of businesses, we carry significant amounts of goodwill and other intangible assets on our consolidated balance sheets. At December 31, 2016 , the combined carrying value of goodwill and other intangible assets, net of accumulated amortization and accumulated impairment charges, was $3.3 billion , representing 66% of our total assets. We believe that testing goodwill and other intangible assets for impairment represents a critical accounting policy because of the significant judgments and estimates that we must make to estimate the fair value of our reporting units and other intangible assets, especially in determining the assumptions used in those estimates such as projected future earnings, applicable discount rates, the selection of peer earnings multiples and the relative weighting of different value indicators.
The following table presents information about impairment testing we performed during the year ended December 31, 2016 :
(in millions)
Testing date
 
Reason
 
Carrying value
 
Excess of fair value over carrying value
Reporting units:
 
 
 
 
 
 
 
Americas
October 1, 2016
 
Required annual assessment
 
$
2,173.4

 
over $1,100