VWR International, LLC
VWR Funding, Inc. (Form: 10-K, Received: 02/25/2011 06:13:51)
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
     
þ   ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2010
or
     
o   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: 333-124100
VWR FUNDING, INC.
(Exact name of registrant as specified in its charter)
     
     
Delaware   56-2445503
(State of incorporation)   (I.R.S. Employer Identification No.)
100 Matsonford Road
P.O. Box 6660
Radnor, PA 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: None

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 o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes þ No o
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 o No þ
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 o No o
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. þ
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 o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
As of December 31, 2010, there was no established public market for the registrant’s common stock, par value $0.01 per share. The number of shares of the registrant’s common stock outstanding at February 18, 2011 was 1,000.
DOCUMENTS INCORPORATED BY REFERENCE

None
 
 

 

 


 

VWR FUNDING, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2010
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  Exhibit 10.4
  Exhibit 10.5
  Exhibit 10.6
  Exhibit 10.11(h)
  Exhibit 12.1
  Exhibit 21.1
  Exhibit 24
  Exhibit 31.1
  Exhibit 31.2
  Exhibit 32.1
  Exhibit 32.2
As used in this Annual Report on Form 10-K, the “Company,” “we,” “us,” and “our” refer to VWR Funding, Inc. and its consolidated subsidiaries.

 

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PART I
ITEM 1.  
BUSINESS
Overview
We are a leader in the global laboratory supply industry. We provide distribution services to a highly fragmented supply chain by offering products from a wide range of manufacturers to a large number of customers. Our business is highly diversified across products and services, geographic regions and customer segments.
Products we distribute include chemicals, glassware, equipment, instruments, protective clothing, production supplies and other assorted laboratory products. We also provide certain services to some of our customers, including technical services, on-site storeroom services and laboratory and furniture design, supply and installation. We maintain operations in 25 countries and process approximately 50,000 order lines daily from a logistical network, which includes 25 strategically located distribution centers. Our principal customers are major pharmaceutical, biotechnology, industrial and government organizations, as well as academic institutions, including schools, colleges and universities.
The roots of our business date back to 1852. Following a series of business combinations, the Company became part of Univar Corporation. In 1986, the Company became a publicly-traded company following a spin-off from Univar Corporation and embarked on a substantial expansion program. In 1995, the Company acquired Baxter International’s industrial distribution business, more than doubling its revenue base. In connection with this acquisition, Merck KGaA acquired 49.9% of the Company’s then outstanding shares and, in 1999, Merck KGaA took the Company private by acquiring the remainder. During the period from 1995 through 1999, Merck KGaA actively built its scientific supplies distribution business in Europe through a series of acquisitions. In 2001, Merck KGaA combined the operations of the U.S. and European distribution businesses, and in 2002, consolidated them under a common U.S. parent company, creating a leader in the global laboratory supply industry. On April 7, 2004, the Company was acquired from Merck KGaA by CDRV Investors, Inc. (“CDRV”) (the “CD&R Acquisition”). CDRV was controlled by a private equity fund managed by Clayton, Dubilier & Rice, Inc. (“CD&R”).
On June 29, 2007, CDRV completed a merger (the “Merger”) by and among CDRV, Varietal Distribution Holdings, LLC, a Delaware limited liability company (“Holdings”), and Varietal Distribution Merger Sub, Inc., a Delaware corporation and subsidiary of Holdings (“Merger Sub”). Pursuant to the Merger, Merger Sub merged with and into CDRV, with CDRV continuing as the surviving corporation and assuming all of the debt obligations of Merger Sub. In addition, in connection with the Merger, CDRV changed its name to VWR Funding, Inc. After giving effect to the Merger and related transactions, the Company became a direct, wholly owned subsidiary of VWR Investors, Inc., a Delaware corporation (“VWR Investors”), which is a direct, wholly owned subsidiary of Holdings. Holdings is a holding company owned by private equity funds managed by Madison Dearborn Partners, LLC (“Madison Dearborn”), other co-investors and certain members of our management who have been given the opportunity to purchase equity in Holdings pursuant to an equity incentive plan established at the time of the Merger, who we collectively refer to as the “equity investors.” See “Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in this Annual Report on Form 10-K for additional information regarding the equity investors.
The Merger, including the redemption of previous debt and the payment of related fees and expenses, was financed by equity contributions of $1,425.0 million, the issuance of $675.0 million aggregate principal amount of 10.25%/11.25% unsecured senior notes due 2015 (“Senior Notes”), the issuance of $353.3 million and €125.0 million aggregate principal amount of 10.75% unsecured senior subordinated notes due 2017 (“Senior Subordinated Notes”) and senior secured term loan borrowings under a senior secured credit facility of $615.0 million and €600.0 million (the “Senior Secured Credit Facility”).
We report our financial results on the basis of the following three business segments: North American laboratory distribution (“North American Lab”), European laboratory distribution (“European Lab”) and Science Education. Both the North American Lab and European Lab segments are engaged in the distribution of laboratory and production supplies to customers in the pharmaceutical, biotechnology, medical device, chemical, technology, food processing, clinical and consumer products industries, as well as governmental agencies, universities and research institutes, and environmental organizations. Science Education is engaged in the assembly, manufacture and distribution of scientific supplies and specialized kits principally to academic institutions, including primary and secondary schools, colleges and universities. Our operations in the Asia Pacific region (“Asia Pacific”) are engaged in regional commercial sales and also support our North American Lab and European Lab businesses. The results of our operations in Asia Pacific, which are not material, are included in our North American Lab segment. We maintain shared services operations in Coimbatore, India and Mauritius to which we have transferred certain functions from our North American and European operations. The costs of operating our shared services functions have been allocated to our business segments based on relative utilization. See Note 15 in “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information about business segments and geographical areas.

 

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Customers and Markets
Management estimates that industry-wide revenues in the global laboratory supply industry in which our North American Lab and European Lab segments operate were approximately $28 billion in 2010 based on trade association data. Our net sales in these segments are influenced by, but not directly correlated with, the growth of research and development spending from a diversified group of end-users, and we expect that demand may vary by type of end-user.
In relation to our Science Education segment, management estimates that industry-wide annual sales of scientific supplies to primary and secondary schools in North America in 2010 were approximately $0.5 billion. Industry sales levels are subject to fluctuations driven by state budgetary status, changes in state and local government funding and spending patterns, the timing of state by state new textbook adoption cycles and population changes. Our Science Education segment is seasonal, with increased net sales and operating income in the third quarter, in connection with school purchases of supplies in preparation for the beginning of the new school year.
We maintain a diverse and stable customer base across a diversified array of end-users and geographies. Our customers include pharmaceutical, biotechnology, medical device, chemical, technology, food processing, clinical and consumer products companies. They also include universities and research institutes, governmental agencies, environmental organizations and primary and secondary schools. We serve our customers globally through our operations in 25 countries. We established a presence in Asia Pacific in 2006 and plan to further expand in this region to respond to the needs of our global customers who are also expanding operations there.
We seek to be the principal provider of laboratory supplies to our customer base. We are a significant provider of laboratory supplies to a majority of the world’s 20 largest pharmaceutical companies. Pharmaceutical and biotechnology companies represented approximately 36% of our 2010 net sales, and together with universities and colleges, accounted for approximately 51% of our 2010 net sales. In 2010, our top 20 customers accounted for approximately 23% of our net sales, with no single customer representing more than 4% of our net sales.
Products
We offer a wide range of products, including chemicals, glassware, plasticware, instruments and other laboratory equipment, protective clothing, laboratory furniture and scientific educational materials for primary and secondary schools. Our average order size is less than $500. Many of our products, including chemicals, laboratory and production supplies and science education products, are consumable in nature. These products are basic and essential supplies required by research and quality control laboratories and represented approximately 75% of our net sales in each of 2010, 2009 and 2008. We also offer durable products, including, but not limited to, centrifuges, fume hoods, workstations, ovens, microscopes and cold storage equipment.
We distribute products sourced from a wide array of manufacturers and are a primary distributor for a variety of major manufacturers. We offer customers a large selection of products designed to meet their individual needs from a combination of premium, “value-for-money” and lower-cost products.
Services
We provide services to customers ranging from single-site laboratories and/or production facilities to large multinational corporations with multiple locations. These services cover a broad range of customer needs and include technical services, on-site storeroom services and laboratory and furniture design, supply and installation. While we believe the provision of services is an important element of our value proposition to our customers, net sales and operating income derived from such services are not material.
Distribution Network
Our distribution network consists of strategically located distribution centers and various smaller regional service centers and “just-in-time” facilities for customer-specific requirements. Customer contact centers have the responsibility for order entry and customer service. Our distribution centers receive products from manufacturers, manage inventory and fill and ship customer orders. We also contract with third parties to ship products directly to our customers based on our instructions.
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 customer needs promptly.

 

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Sales and Marketing
We market to customers through our global sales force, our websites, and our catalogs. We have a global sales, sales support, customer service, pricing, marketing and category management workforce. Supporting the field sales organization are specialist teams who provide advanced sales and technical support for e-business integration, customized services, laboratory furniture, safety, environment, microbiology, chromatography and life science product areas.
The Internet is an important tool for us. Net sales are derived, in part, from e-business sales and marketing channels. Our website features a fully indexed and searchable catalog covering our entire product line, is available in several languages and has been custom-designed for many of the countries in which we do business. This electronic catalog includes product descriptions, technical specifications and cross-referenced data in different languages through individual country sites. This website allows customers to enter orders directly and enables us to communicate new product releases, promotions and other news to our customers.
We also provide printed catalogs and other printed materials. Our general catalogs are printed in several languages. The general catalogs are supplemented by specialty catalogs for specific product lines.
Suppliers
We distribute products from a wide range of manufacturers. This includes a majority of the major manufacturers of laboratory chemicals, glassware, plasticware, instruments and other laboratory equipment, protective clothing and laboratory furniture who sell through distributors. In many cases, we believe we are a principal distributor for these major manufacturers.
Merck KGaA is one of our major suppliers of chemical and other products. The Company has a European Distribution Agreement with Merck KGaA to distribute certain chemical products in Europe. The European Distribution Agreement was originally entered into in April 2004 with a five year term and has been extended for a second five year term through April 2014. Merck KGaA has the right to terminate this agreement if certain events occur. During 2005, the German Federal Cartel Office initiated an investigation with regard to our European Distribution Agreement in Germany. See Note 13(b) under “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information regarding the investigation and related court proceedings.
The Company also has a distribution agreement with affiliates of Merck KGaA to distribute certain chemical products in North America. The North American chemical distribution agreement was originally entered into in April 2004 with a five year term and automatically extended for a second five-year term, ending April 2014. Affiliates of Merck KGaA may terminate the North America chemical distribution agreement if certain events occur.
Merck KGaA and its affiliates supplied products accounting for approximately 11%, 13% and 13% of our consolidated net sales in each of 2010, 2009, and 2008, respectively.
Trademarks and Trade Names
We have more than 50 different registered and unregistered trademarks and service marks for our products and services, substantially all of which are owned by us. In some cases, however, we do not own the existing applications and registrations for our material 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 than licenses to commercially available third party software, we have no licenses to intellectual property that are significant to our business.

 

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Competition
We operate in a highly competitive environment. We compete in the global laboratory supply industry primarily with Thermo Fisher Scientific Inc., 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, including Sigma-Aldrich Corporation, Life Technologies and others. Competitive factors include price, service and delivery, breadth of product line, customer support, e-business capabilities and the ability to meet the special requirements of customers.
Some of our competitors are increasing their manufacturing operations both internally and through acquisitions of manufacturers, including manufacturers that supply products to us. To date, we have not experienced an adverse impact on our ability to continue to source products from manufacturers that have been vertically integrated, although there is no assurance that we will not experience such an impact in the future.
Government Regulation
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, 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 Bureau of Alcohol, Tobacco, Firearms and Explosives, 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 logistics activities must comply with the rules and regulations of the Department of Transportation, the Federal Aviation Administration and similar foreign agencies. While we believe we are in compliance in all material respects with such laws and regulations, any non-compliance could result in substantial fines or otherwise restrict our ability to provide competitive distribution services and thereby have an adverse impact on our financial condition. For information on environmental, health and safety matters, see below under “Environmental, Health and Safety Matters.”
Employees
As of December 31, 2010, we had approximately 7,000 employees, including approximately 3,300 in North America, approximately 2,900 in Europe and approximately 800 in Asia Pacific. As of December 31, 2010, approximately 7% 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. While we believe our relations with our employees are good, there can be no assurance that further union expansion will not occur and cause increased future costs.
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 handling, disposal and transport of solid and hazardous materials and wastes, 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 involve, and have involved, the handling, transport and distribution of materials that are, or could be classified as toxic or hazardous, there is some risk of contamination and environmental damage inherent in our operations and the products we 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 impact on our business, financial condition and results of operations.
Based on current information, we believe that any costs we may incur relating to environmental matters will not be material. We cannot be certain, however, that identification of presently unidentified environmental conditions, more vigorous enforcement by regulatory authorities or other unanticipated events will not arise in the future and give rise to additional environmental liabilities, compliance costs or penalties which could have a material impact 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. We currently do not maintain third-party insurance for most of our current or future environmental liabilities.

 

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Available Information
We file or furnish annual and quarterly reports and other information with or to the U.S. Securities and Exchange Commission (“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 100 Matsonford Road, P.O. Box 6660, Radnor, PA 19087 and our telephone number is (610) 386-1700. Our Internet website is located at www.vwr.com.

 

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ITEM 1A.  
RISK FACTORS
Our business is subject to a number of important risks and uncertainties that are described below. You should carefully consider these risks and all other information included in this Annual Report on Form 10-K .
Risks Related to Our Capital Structure
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 significant interest and principal payments. As of December 31, 2010, we had an aggregate principal amount of debt outstanding of $2,757.7 million. 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;
 
   
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;
 
   
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 indentures governing the Senior Notes and Senior Subordinated Notes and the credit agreement governing the Senior Secured Credit Facility restrict us and our restricted subsidiaries from incurring additional indebtedness, these restrictions are subject to 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 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 Secured Credit Facility and the indentures governing the Senior Notes and Senior Subordinated 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 indentures restrict, among other things, our ability and the ability of our subsidiaries to:
   
incur 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; and
 
   
enter into mergers, consolidations and sales of substantially all assets.

 

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We cannot assure you that we will be able to maintain compliance with such covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders or note holders and/or amend the 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 indentures 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 Secured Credit Facility that was not cured or waived, the lenders under our Senior Secured Credit Facility could cause all amounts outstanding with respect to the borrowings under the Senior Secured Credit Facility to be due and payable immediately. Our assets and cash flow may not be sufficient to fully repay borrowings under our Senior Secured Credit Facility and our obligations under the Senior Notes and Senior Subordinated 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 Secured Credit Facility, the lenders under our Senior Secured Credit Facility could institute foreclosure proceedings against the assets securing borrowings under the Senior Secured Credit Facility.
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 Secured Credit 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. Additionally, the revolving loan portion of our Senior Secured Credit Facility is scheduled to mature in 2013, and significant portions of our other long-term debt are scheduled to mature beginning in 2014, and we will need to refinance or satisfy this debt as it 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 Secured Credit Facility and the indentures governing the Senior Notes and Senior Subordinated Notes restrict our ability to sell assets and use the proceeds from such sales for purposes other than debt payment obligations.
Our ability to make payments on our debt obligations depends on our ability to receive dividends, payments or other distributions from our subsidiaries.
We are a holding company operating principally through VWR International, LLC (“VWR”) and certain of its subsidiaries. As a result, we are substantially dependent on dividends, payments or other distributions from VWR (and such subsidiaries) to make payments on the Senior Notes, Senior Subordinated Notes and borrowings under the Senior Secured Credit Facility. VWR’s ability to make such dividends, payments or other distributions will depend on its and its subsidiaries’ financial and operating performance, which, in turn, is subject to prevailing economic and competitive conditions and financial and business factors, such as the following, which may be beyond our control:
   
operating difficulties;
 
   
increased operating costs;
 
   
decreased demand for the products and services we offer;
 
   
market cyclicality;
 
   
product prices;
 
   
the response of competitors or suppliers;
 
   
regulatory developments;
 
   
failure to successfully complete or integrate acquisitions; and
 
   
delays in implementing or our inability to fund strategic projects.
In addition, the ability of VWR and its subsidiaries to pay such dividends and other distributions also may be restricted by law.

 

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A change in the control of the Company could require us to repay certain of our outstanding indebtedness, and we may be unable to do so.
Upon a change of control, as defined in the indentures governing the Senior Notes and the Senior Subordinated Notes (collectively, the “Notes”), subject to certain conditions, we will be required to offer to repurchase the Notes at 101% of the principal amount thereof, plus accrued and unpaid interest to the date of repurchase. The source of funds for that purchase will be our available cash or cash generated from operations or other potential sources, including borrowings, sales of assets or sales of equity. We may not have sufficient funds from such sources at the time of any change of control to make required repurchases of Notes tendered. In addition, the terms of our Senior Secured Credit Facility limit our ability to repurchase the Notes and certain change of control events will constitute an event of default under the indentures. If the holders of the Notes exercise their right to require us to repurchase all of the Notes upon a change of control, the financial effect of this repurchase could cause a default under our other debt, even if the change of control itself would not cause a default. Accordingly, it is possible that we will not have sufficient funds at the time of the change of control to make the required repurchase of our other debt and the Notes or that restrictions in our Senior Secured Credit Facility and the indentures will not allow such repurchases.
The interests of our controlling stockholders may conflict with your interests.
Private equity funds managed by Madison Dearborn indirectly own a substantial majority of our common stock through their ownership interests in Holdings. The interests of these funds as equity holders may conflict with your interests. The controlling stockholders may have an incentive to increase the value of their investment or cause us to distribute funds at the expense of our financial condition and liquidity position, subject to the restrictions in our Senior Secured Credit Facility and the indentures. In addition, these funds have the indirect power to elect a majority of our Board of Directors and appoint new officers and management and, therefore, effectively could control many other major decisions regarding our operations. Furthermore, our controlling stockholders are in the business of making investments in companies and may, from time to time, acquire and hold interests in businesses that compete directly or indirectly with us. Our controlling stockholders may also pursue acquisition opportunities that may be complementary to our business and, as a result, those acquisition opportunities may not be available to us.
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.
Unfavorable global economic conditions, such as the recent recession 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 our business, financial condition and results of operations. In particular, a deterioration of global economic 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 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 to 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 and development spending by our customers, especially those in the pharmaceutical and biotechnology industries;
 
   
a decrease in the discretionary spending by schools and other customers to which we sell products and services through our Science Education business;
 
   
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 additional impairment charges against our goodwill and/or intangible and other long-lived assets.

 

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The demand for our products depends on the level of our customers’ research and development and other scientific endeavors. Our business, financial condition and results of operations may be harmed if our customers discontinue, outsource and/or spend less on these activities.
Our customers are engaged in research, development and production in the pharmaceutical, biotechnology, medical device, education, chemical, technology, food processing, consumer products and other industries. 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 sluggish economic recovery 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 industry segments that we serve. In particular, we may experience a further reduction in revenues from certain of our customers in the pharmaceutical industry, which have restructured research functions resulting in workforce reductions, facility closures and budget reductions; from certain of our customers in the biotechnology industry, which are experiencing increased economic and liquidity pressures; and from schools in the United States served by our Science Education segment, which have been reducing and adjusting budgeted expenditures in light of reductions in state and local funding. A further reduction in spending by our customers could have a material adverse effect on our business, financial condition and results of operations.
The healthcare industry has and will continue to experience significant changes that could adversely affect our business.
Many of our customers in the healthcare industry have experienced significant changes in the last several years and are expected to continue to experience significant changes, including reductions in governmental support of healthcare services, expirations of significant patents, lower reimbursements for research and development and adverse changes in legislation or regulations regarding the delivery or pricing of healthcare services or mandated benefits. In response to these and other changes, some of our 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;
 
   
consolidation, especially in the case of pharmaceutical companies;
 
   
purchasing the products that we supply directly from manufacturers;
 
   
the closing of domestic facilities and 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 healthcare industry customers to develop new products to replace revenue decreases attributable to expirations of significant patents, along with the impact of other past or potential future changes in the healthcare industry may result in our healthcare industry 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 move facilities to low-cost offshore locations or outsource certain activities domestically or to low-cost offshore locations. For instance, we intend to continue our expansion into the Asia Pacific region, but there is no assurance that we will be successful in maintaining relationships with our existing customers who have established operations in that region or in developing new customer relationships with the outsourcing organizations in that region.
We compete 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 supply industry primarily with Thermo Fisher Scientific Inc., 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, including Sigma-Aldrich Corporation, Life Technologies and others. The bases upon which we compete include price, service and delivery, breadth of customer support, e-business capabilities and the ability to meet the special requirements of customers.

 

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Some 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 foreclosing our ability to distribute 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 supply industry 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 distributors in the industry could also have a material adverse effect on our ability to compete.
Our business, financial condition and results of operations depend upon maintaining our relationships with manufacturers.
We offer products from a wide range of manufacturers. We are dependent on these manufacturers for our supply of products. Our most significant dependence is on Merck KGaA and its affiliates, which supplied products that accounted for approximately 11% of our net sales in 2010. Certain of our chemical distribution agreements with Merck KGaA are currently set to expire in April 2014.
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. To date, we have not experienced an adverse impact on our ability to continue to source products from manufacturers that have been vertically integrated, 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.
A significant part of our growth strategy is to engage in acquisitions, which will subject us to a variety of risks that could harm our business.
We intend to continue to review and complete selective acquisition opportunities throughout the world as a part of our growth strategy. There can be no assurance that we will be able to complete suitable acquisitions for a variety of reasons, including 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 fund the transaction. In addition, any completed acquisition will subject us to a variety of other risks:
   
we may 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;
 
   
future acquisitions might have a material adverse effect on our business relationships with manufacturers; in particular, to the extent we consummate acquisitions that vertically integrate portions of our business;
 
   
we may assume substantial actual or contingent liabilities;
 
   
we may incur substantial unanticipated costs or encounter other problems associated with acquired businesses; and
 
   
we may not be able to retain the key personnel, customers and suppliers of the acquired business.

 

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The international scope of our operations may adversely affect our business.
We derived approximately 46% of our 2010 net sales from operations outside the United States, and we are continuing to expand our sourcing, commercial operations and administrative activities internationally. Accordingly, we face certain risks, including:
   
restrictions on foreign ownership of subsidiaries;
 
   
tariffs and other trade barriers and restrictions;
 
   
political risks;
 
   
differing laws or administrative practices;
 
   
local business practices that are inconsistent with local or U.S. law, such as the U.S. Foreign Corrupt Practices Act of 1977, as amended (the “FCPA”), or other applicable anti-bribery regulations;
 
   
disruptions in the efficiency and effectiveness of, and difficulty in overseeing and managing, operations, supply chain and certain important administrative functions, including those that have been or in the future may be transferred to our shared services operations;
 
   
fluctuations in foreign currency exchange rates; and
 
   
potentially adverse tax consequences of operating in multiple jurisdictions.
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.
In 2008 and 2010, we incurred, and we may in the future incur, impairment charges related to our goodwill and intangible assets, which could negatively impact our results of operations.
We carry significant amounts of goodwill and intangible assets, including indefinite-lived intangible assets, on our balance sheet as a result of the Merger and acquisitions subsequent to the Merger. 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 our trademarks and trade names.
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. The results of our 2010 impairment testing identified impairments of our goodwill and indefinite-lived intangible assets aggregating $48.1 million. We recorded impairment charges in 2008 of $392.1 million. We continue to be subject to the risks which led to the impairment charges recognized during 2010 and 2008. See “Item 7 — Managements Discussion & Analysis of Financial Condition — Critical Accounting Policies — Goodwill & Intangible Assets” in this Annual Report on Form 10-K for more information.
As of December 31, 2010, goodwill and intangible assets represented approximately $3.6 billion or 72% 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 pressures, including but not limited to rising interest rates.

 

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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, 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 Bureau of Alcohol, Tobacco, Firearms and Explosives, 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 logistics activities must comply with the rules and regulations of the Department of Transportation, the Federal Aviation Administration and similar foreign agencies. 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. 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 distribute.
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 the prices at which we purchase products from them, and we may not be able to recover all such increased prices from our customers. 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/or 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. See Note 13(b) of “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for information regarding our appeal of the German Federal Cartel Office’s decision to invalidate in Germany the exclusivity and non-competition provisions of our European Distribution Agreement with Merck KGaA.
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 handling, disposal and transport of solid and hazardous materials and wastes, 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 involve and have involved the handling, transport and distribution of materials that are or could be classified as toxic or hazardous, there is some risk of contamination and environmental damage inherent in our operations and the products we 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 liabilities, 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 may have in future periods. We currently do not maintain third-party insurance for most of our current or future environmental liabilities.

 

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We are subject to product liability and other claims in the ordinary course of business.
Our business involves risks of product liability, patent infringement and other claims in the ordinary course of business arising from the products that we source from various manufacturers. 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 consummate acquisitions that vertically integrate portions of our business. We maintain insurance policies, including certain product liability insurance, and in many cases we have indemnification rights against such claims from the manufacturers of the products we distribute. 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 manufactures’ 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, for many years, new insurance for liability relating to asbestos, lead and silica exposure has not been available on commercially reasonable terms or at all, 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.
From time to time, we are named as a defendant in cases that arise 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 on us has typically 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 and 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 distribution network primarily consists of strategically located distribution centers and various 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 various 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 rise or seriously harm our ability to fulfill our customers’ orders or deliver products 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 its connectivity to our customers, suppliers and 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 success depends, in part, on the secure and uninterrupted performance of our information technology systems and our telephone systems at our customer call centers and distribution centers. Our systems, the systems of our customers, suppliers and service providers, and the connectivity among such systems are vulnerable to disruption and damage from a variety of sources, including system or network failures, malicious human acts and natural disasters. While we have taken appropriate steps to improve system redundancy and disaster recovery procedures, reduce our reliance on legacy systems and reinforce the security of our information services, these steps would not be adequate to prevent or address all potential failures, disruptions, data breaches or unauthorized intrusions that we may encounter. In addition, we currently do not maintain third-party insurance for most of these types of events. Sustained or repeated system failures, service disruptions or unauthorized intrusions that interrupt our ability to receive and process orders, receive and process customer payments and deliver products in a timely manner could have a material adverse effect on our business, financial condition and results of operations.

 

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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 the payment card industry and by individual 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 affect on our business, financial condition and results of operations.
We plan to continue to make significant 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, reliability and effectiveness of our operations to continue to provide high quality service to our customers. The cost and potential problems and interruptions associated with the implementation of our technology initiatives could disrupt or reduce the efficiency of our operations in the near term.
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 25 countries, and we have more than 50 different registered and unregistered trademarks and service marks for our products and services. 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 the Asia Pacific region, 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.
We are subject to currency risks with respect to our international operations and certain outstanding foreign-denominated debt.
While we report our consolidated financial results in U.S. dollars, we derive a significant portion of our sales and incur costs in foreign currencies (principally the Euro, the British pound sterling and the Canadian dollar) from our operations outside the United States. For example, in 2010 approximately 46% of our net sales came from our operations outside the United States, primarily from our operations in Europe and Canada. Fluctuations in the relative values of currencies occur from time to time and could adversely affect our operating results. 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. This could also make it more difficult to pay amounts due on our debt, the majority of which is denominated in U.S. dollars.
Although the majority of our outstanding debt is denominated in U.S. dollars, as of December 31, 2010, we had €715.1 million ($955.5 million on a U.S. dollar equivalent basis as of December 31, 2010) of foreign currency-denominated debt recorded on our U.S. dollar-denominated balance sheet, which constitutes approximately 35% of our total outstanding debt. As a result, our operating results are exposed to foreign currency risk with respect to this indebtedness. Specifically, during times of a weakening U.S. dollar, the relative value of this debt would increase, which could require us to record foreign exchange losses. For example, during the years ended December 31, 2010, 2009 and 2008, we recognized foreign exchange gains (losses) of $66.8 million, $(23.9) million and $22.1 million, respectively.
Unanticipated increases to our income tax liabilities could adversely impact our results of operations.
As a global corporation, we are subject to income taxes and tax audits in the U.S. and numerous foreign jurisdictions. Judgment is required in determining 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 U.S., is dependent on our ability to generate future taxable income in the U.S. Increases in our income tax liabilities as a result of any of the foregoing could adversely affect our financial position, results of operations and cash flows.

 

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ITEM 1B.  
UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2.  
PROPERTIES
We own and lease office and warehouse space globally. We maintain our corporate headquarters in Radnor, Pennsylvania for executive, financial, legal, information systems, marketing and other administrative activities. Our European executive, financial, legal, information systems, marketing and other administrative activities are in Darmstadt, Germany and Haasrode, Belgium. As of December 31, 2010, the following table sets forth information with respect to our significant distribution and other office facilities:
                 
Location   Owned/Leased   Size   Type of Facility
Arlington Heights, Illinois (1)
  Leased   15,418 sq. ft.   Offices
Batavia, Illinois (1) *
  Owned/Leased   350,000 sq. ft.   Distribution
Briare, France (2)
  Owned/Leased   358,675 sq. ft.   Distribution/Repackaging and Mixing
Bridgeport, New Jersey (1) *
  Owned/Leased   416,766 sq. ft.   Distribution
Brisbane, California (1)
  Leased   248,280 sq. ft.   Distribution
Bruchsal, Germany (2)
  Owned/Leased   218,906 sq. ft.   Distribution
Buffalo, New York (3) *
  Owned   121,600 sq. ft.   Distribution/Assembly/Offices
Coimbatore, India (1)(2)(3)
  Leased   33,022 sq. ft.   Shared Services
Darmstadt, Germany (2)
  Leased   58,007 sq. ft.   Offices
Debrecen, Hungary (2)
  Leased   67,188 sq. ft.   Distribution/Repackaging and Mixing
Denver, Colorado (1)
  Leased   130,091 sq. ft.   Distribution
Dublin, Ireland (2)
  Leased   77,067 sq. ft.   Distribution
Edmonton, Alberta, Canada (1)
  Leased   44,449 sq. ft.   Distribution
Franklin, Massachusetts (1)
  Leased   55,486 sq. ft.   Distribution
Haasrode, Belgium (2)
  Owned   201,447 sq. ft.   Offices/Distribution/Repackaging and Mixing
Karlskoga, Sweden (2)
  Leased   129,167 sq. ft.   Distribution
Llinars del Vallés, Spain (2)
  Leased   72,955 sq. ft.   Distribution
Lutterworth, United Kingdom (2)
  Leased   183,205 sq. ft.   Distribution
Manati, Puerto Rico (1)
  Owned   130,450 sq. ft.   Distribution
Mexico City, Mexico (1)
  Leased   63,948 sq. ft.   Distribution
Milan, Italy (2)
  Leased   13,563 sq. ft.   Distribution
Mississauga, Ontario, Canada (1)
  Leased   110,194 sq. ft.   Distribution
Morrisville, North Carolina (1)
  Leased   17,816 sq. ft.   Distribution
Radnor, Pennsylvania (1)(3)
  Leased   149,858 sq. ft.   Offices
Rochester, New York (3) *
  Owned   339,600 sq. ft.   Distribution/Assembly/Manufacturing/Offices
San Dimas, California (1)
  Leased   52,800 sq. ft.   Distribution
Singapore (1)(2)
  Leased   74,034 sq. ft.   Distribution
St. Catharines, Ontario, Canada (3)
  Leased   24,318 sq. ft.   Distribution/Offices
Sugar Land, Texas (1)
  Leased   62,280 sq. ft.   Distribution
Suwanee, Georgia (1)
  Leased   168,925 sq. ft.   Distribution
Tempe, Arizona (1)
  Leased   34,908 sq. ft.   Distribution
Tualatin, Oregon (1)
  Leased   56,400 sq. ft.   Distribution
 
     
*  
Subject to a mortgage lien under the Senior Secured Credit Facility.
 
(1)  
North American Lab
 
(2)  
European Lab
 
(3)  
Science Education
We also lease various regional distribution centers and service facilities in North America, Europe and Asia Pacific that support our sales and warehouse functions. For information regarding our lease commitments, see Note 13(a) under “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.

 

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ITEM 3.  
LEGAL PROCEEDINGS
For information regarding legal and regulatory proceedings and matters, see Note 13(b) under “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K, from which information is incorporated by reference into this item.
ITEM 4.  
REMOVED AND RESERVED
PART II
ITEM 5.  
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
There is no established public trading market for our common stock. The number of shares of our common stock, $0.01 par value, outstanding at February 18, 2011 was 1,000, all of which was held by VWR Investors.
Holdings was initially capitalized through the issuance of preferred units and common units in connection with the Merger, and it has issued additional units and repurchased units since the consummation of the Merger. See “Recent Sales and Purchases of Unregistered Equity Securities” below for more information. There is no established public trading market for the preferred units or common units. As of February 18, 2011, Holdings had 1,410,484 preferred units outstanding and 14,027,724 common units outstanding, and 271 holders of record of its common units. See “Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” in this Annual Report on Form 10-K for information regarding the beneficial ownership of the common units and preferred units of Holdings.
Dividends
Our debt instruments and related agreements include significant restrictions on our and Holdings’ ability to pay dividends on our respective common equity. See “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations — Indebtedness” and Note 8 in “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K. We did not pay any dividends on our common stock in 2009 or 2010. We currently do not expect to pay dividends on our common stock other than in connection with the repayment of intercompany debt, the funding of equity unit purchases by Holdings from terminated management investors and/or the funding of company fees and expenses.
Holdings has not in the past paid any dividends on its common equity and it currently does not expect to pay any dividends on its common equity in the foreseeable future, except for tax distributions to the extent required by Holdings’ limited liability company operating agreement.
Recent Sales and Purchases of Unregistered Equity Securities
VWR Funding, Inc. did not sell or purchase any equity securities in 2010.
In 2010, Holdings sold 1,662.30 preferred units and 67,697.27 common units pursuant to Holdings’ 2007 Securities Purchase Plan (the “Holdings Equity Plan”), which was established upon the consummation of the Merger to permit members of management, board members and consultants the opportunity to purchase equity units of Holdings. The cash purchase price for all issuances to management investors in 2010 was $1,000 per preferred unit and $0.01 per common unit. The proceeds of these issuances have ultimately been contributed to the Company as additional capital contributions. Holdings purchased 52,374.26 common units in 2010 from employees whose employment with VWR was terminated in 2009 or 2010, in each case in accordance with Holdings’ purchase rights under the transaction documents governing the employees’ purchases of the units. These purchases were funded by Holdings’ subsidiaries.
All of the equity issued by Holdings under the Holdings Equity Plan in 2010 were deemed exempt from registration under the Securities Act of 1933 in reliance upon Regulation D, Section 4(2) or Rule 701 of the Securities Act of 1933, as amended, as transactions by an issuer not involving a public offering, or transactions pursuant to compensatory benefit plans and contracts relating to compensation. The recipients of securities in each of such transactions represented their intentions to acquire the securities for investment only and not with a view to or for sale in connection with any distribution of the securities. All recipients were either furnished with or had adequate access to, through their relationship with us, information about Holdings.

 

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See “Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” for additional information regarding the equity investors in Holdings, and see “Item 13 — “Certain Relationships and Related Transactions, and Director Independence — Certain Relationships and Related Transactions — Management Equity Arrangements” for additional information regarding the Holdings Equity Plan. See Note 11 under “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information regarding the Company’s accounting pursuant to the Holdings Equity Plan.
ITEM 6.  
SELECTED FINANCIAL DATA
The selected historical financial data presented below under the captions “Income Statement Data,” “Other Financial Data” and “Balance Sheet Data” as of December 31, 2010, 2009, 2008, and 2007 and for the years ended December 31, 2010, 2009 and 2008 and for the period June 30 through December 31, 2007 are derived from the consolidated financial statements of VWR Funding, Inc. subsequent to the Merger. The selected historical financial data presented below under the captions “Income Statement Data,” “Other Financial Data” and “Balance Sheet Data” as of December 31, 2006 and for the period January 1 through June 29, 2007 and the year ended December 31, 2006 are derived from the consolidated financial statements of the Company prior to the Merger. The term “Predecessor” refers to the Company prior to the Merger. The term “Successor” refers to the Company following the Merger. As a result of the Merger, the Successor and Predecessor periods are each presented on a different cost basis and, therefore, are not comparable.
                                                   
    Successor       Predecessor  
                            June 30 —       January 1 —     Year Ended  
    Year Ended December 31,     December 31,       June 29,     December 31,  
(In millions)   2010     2009     2008     2007       2007     2006  
Income Statement Data:
                                                 
Net sales
  $ 3,638.7     $ 3,561.2     $ 3,759.2     $ 1,822.7       $ 1,699.3     $ 3,257.6  
Cost of goods sold
    2,599.8       2,545.6       2,693.8       1,311.3            1,230.1       2,374.3  
 
                                     
Gross profit
    1,038.9       1,015.6       1,065.4       511.4         469.2       883.3  
SG&A expenses (1)(2)(3)(4)
    853.5       806.8       1,253.7       408.5         408.1       692.3  
 
                                     
Operating income (loss)
    185.4       208.8       (188.3 )     102.9         61.1       191.0  
Interest expense, net (5)
    (202.7 )     (224.5 )     (283.9 )     (127.4 )       (98.5 )     (110.4 )
Other income (expense), net (6)
    66.8       (23.9 )     22.1       (67.2 )       3.5       (1.5 )
 
                                     
Income (loss) before taxes
    49.5       (39.6 )     (450.1 )     (91.7 )       (33.9 )     79.1  
Income tax (provision) benefit
    (28.0 )     25.5       115.5       42.7         8.3       (32.7 )
 
                                     
Net income (loss)
  $ 21.5     $ (14.1 )   $ (334.6 )   $ (49.0 )     $ (25.6 )   $ 46.4  
 
                                     
Other Financial Data:
                                                 
Depreciation and amortization
  $ 116.5     $ 116.6     $ 116.1     $ 53.2       $ 19.4     $ 41.4  
Capital expenditures
    41.6       23.9       29.7       16.3         15.7       23.6  
Gross profit as a percentage of net sales
    28.6 %     28.5 %     28.3 %     28.1 %       27.6 %     27.1 %
Balance Sheet Data:
                                                 
Cash and cash equivalents
  $ 142.1     $ 124.4     $ 42.0     $ 45.0             $ 139.4  
Total assets
    5,001.4       5,127.3       5,084.9       5,615.3               2,646.2  
Total debt
    2,757.7       2,871.7       2,815.6       2,797.4               1,723.7  
Total stockholders’ equity
    965.2       1,042.6       1,008.4       1,407.3               62.9  

 

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(1)  
We recognized share-based compensation expense of $3.4 million, $3.4 million, $3.8 million, $2.7 million, $9.0 million and $4.6 million for the years ended December 31, 2010, 2009 and 2008, for the periods from June 30 through December 31, 2007 and January 1 through June 29, 2007, and for the year ended December 31, 2006, respectively.
 
(2)  
During 2010 and 2008, we recognized aggregate impairment charges of $48.1 million and $392.1 million, respectively, relating to the impairment of goodwill and intangible assets. See Note 3 included in “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information.
 
(3)  
Predecessor expenses associated with the Merger amounted to $36.8 million for the period January 1 through June 29, 2007. These expenses consisted of investment banking, legal, accounting and advisory fees related to the Merger.
 
(4)  
We recognized charges (credits) relating to cost reduction initiatives of $3.1 million, $11.4 million, $4.2 million, $0.3 million, $0.7 million and $(1.0) million, during the years ended December 31, 2010, 2009 and 2008, for the periods from June 30 through December 31, 2007 and January 1 through June 29, 2007, and for the year ended December 31, 2006, respectively.
 
(5)  
Interest rate swap arrangements have contributed to volatility in interest expense, net. See Note 12 included in “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information.
 
(6)  
As a result of the change in our capital structure related to the Merger, we have a significant amount of foreign-denominated debt on our U.S. dollar-denominated balance sheet. See Note 2(c) included in “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information.

 

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary Factors Regarding Forward-Looking Statements
This Annual Report on Form 10-K contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements other than statements of historical fact included in this Form 10-K may constitute forward-looking statements. These statements may be preceded by, followed by or include the words “believes,” “expects,” “anticipates,” “intends,” “plans,” “estimates” or similar expressions. 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.
Forward-looking statements are inherently subject to risks, uncertainties and assumptions. Forward-looking statements are not guarantees of performance. You should not place undue reliance on these statements. Forward-looking statements include information in this Annual Report on Form 10-K regarding, among other things:
   
management’s forecasts, plans and strategies;
 
   
management’s general expectations concerning the global laboratory supply industry;
 
   
efficiencies and cost savings;
 
   
the economy;
 
   
sales, income and margins;
 
   
growth;
 
   
economies of scale;
 
   
future acquisitions and dispositions;
 
   
litigation;
 
   
potential and contingent liabilities;
 
   
taxes; and
 
   
capital markets and liquidity.
You should understand that the following important factors, in addition to those discussed in “Item 1A — Risk Factors” and elsewhere in this Annual Report on Form 10-K, 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:
   
actions by, and our ability to maintain existing business relationships and practices with, suppliers, customers, carriers and other third parties;
 
   
loss of any of our key executive officers;
 
   
our ability to consummate and integrate potential acquisitions;
 
   
the effect of political, economic, credit and financial market conditions, inflation and interest rates worldwide;
 
   
the effect of changes in laws and regulations, including changes in accounting standards, trade, tax, price controls and other regulatory matters;
 
   
increased competition from other companies in our industry and our ability to retain or increase our market shares in the principal geographical areas in which we operate;
 
   
foreign currency exchange rate fluctuations; and
 
   
our ability to generate sufficient funds to meet our debt obligations, capital expenditure program requirements, ongoing operating costs, acquisition financing and working capital needs.

 

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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 Annual Report on Form 10-K. We undertake no obligations to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
The following discussion should be read in conjunction with our consolidated financial statements and related notes included in “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
Overview
We generate our net sales primarily through the sale of products, and also, to a lesser extent, through the provision of services, in the global laboratory supply industry. We offer exclusive, branded and private label products that we source from a wide range of manufacturers. Our customer base is highly diversified. Many of our products, including chemicals, laboratory and production supplies and science education products, are consumable in nature. Our principal customers are major pharmaceutical, biotechnology, industrial and government organizations, as well as academic institutions, including schools, colleges and universities. We report our financial results on the basis of the following three business segments: North American Lab, European Lab and Science Education. See Note 15 in “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for additional information about business segments and geographical areas.
Our results of operations, including our consolidated operating income (loss) and net income (loss), have been volatile. For example, our consolidated net income (loss) for the years ended December 31, 2010, 2009, and 2008 was $21.5 million, $(14.1) million and $(334.6) million, respectively. Our results of operations during the three year period ending December 31, 2010 were impacted, in particular, by the following factors:
   
volatility in customer spending with reductions in spending pronounced during the latter part of 2008 and in 2009 due, in part, to a general deterioration of global economic conditions, especially with respect to (i) certain of our customers in the pharmaceutical industry, which initiated restructuring of research functions resulting in workforce reductions, facility closures and budget reductions; (ii) certain of our customers in the biotechnology industry, which experienced increased economic and liquidity pressures; and (iii) certain of our customers in the primary and secondary educational market, which experienced, and for the most part continue to experience, budget reductions and/or funding deficits;
 
   
our recognition of non-cash impairment charges during 2010 and 2008 associated with goodwill and intangible assets, primarily as a result of macroeconomic and industry-specific factors;
 
   
changes in foreign currency exchange rates as well as changes in variable interest rates;
 
   
acquisitions of certain businesses; and
 
   
foreign currency translation, including our recognition of net unrealized translation gains (losses) on certain portions of our debt.
Strategy
Our primary goal is to enhance our position as a leader in the global laboratory supply industry. Toward this end, we have instituted a number of strategies to drive sustainable, profitable growth through organic sales growth and selective acquisitions. The principal elements of our strategy are outlined below:
Increase Productivity and Profitability. Achieving operational excellence in our customer service and support and distribution operations remains a cornerstone of our strategy. We will continue to leverage our shared service operations to provide cost-effective business support and enhanced service capabilities. Ongoing standardization of processes and systems within our customer service network will bring enhanced service to our customer and supplier base.
Expand Global Presence. We will continue to seek opportunities to expand our presence in emerging markets as well as our global footprint through select acquisitions and expansion of existing operations.
Targeted Acquisitions and Efficient Integration. An important part of our strategy is to accelerate the Company’s growth through selective acquisitions in various locations throughout the world. Selective acquisitions present an opportunity to leverage our existing infrastructure and to establish in-country operations in new geographic areas.
Improve Sourcing Strategy. By utilizing our global scale and strong relationships with our multinational customers and suppliers and maintaining our primary focus on distribution, we intend to continue developing mutually beneficial relationships with leading manufacturers. An important part of our strategy involves providing our customers with a choice of products at varying price points. Global sourcing and supplier integration are key elements of this strategy.

 

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Increase Sales of Private Label Products. Due to increasing demand by our customers for the broadest possible product choice, we will direct our sales and marketing efforts to strike a balance between exclusive, branded and private label product offerings. We believe this strategy is timely as customers seek to realize productivity gains and reduce operating costs.
Factors Affecting Our Operating Results
General
As a result of the acquisition of the Company by affiliates of Madison Dearborn Partners, LLC in June 2007 (the “Merger”), we have a significant amount of goodwill, amortizable and indefinite-lived intangible assets, we are highly leveraged, and we have a significant amount of foreign-denominated debt on our U.S. dollar-denominated balance sheet. These and other related factors have had, and will continue to have, a significant impact on our financial condition and results of operations.
Impairments of Goodwill and Intangible Assets
We carry significant amounts of goodwill and intangible assets, including indefinite-lived intangible assets, on our balance sheet, as a result of the Merger and acquisitions subsequent to the Merger.
During the third quarter of 2010, we recognized aggregate impairment charges of $48.1 million, relating to an impairment of goodwill and intangible assets in Science Education, attributable to ongoing negative industry-specific factors (continued reduction in spending by schools in response to the prolonged negative economic conditions and the resultant uncertainty in state and local sources of funding).
During the fourth quarter of 2008, we recognized aggregate impairment charges of $392.1 million, relating to the impairment of goodwill and intangible assets for each of the Company’s segments ($202.1 million in North American Lab, $88.0 million in European Lab and $102.0 million in Science Education). We believe that these impairment charges were due to a mix of negative macroeconomic (global recession and volatility in financial markets) and industry-specific factors (reduction in discretionary spending by schools).
We did not recognize any impairment charges during 2009.
See Notes 3 and 12(e) included in “Item 8 — Financial Statements and Supplementary Data” for more information on our impairment assessments and associated fair value measurements. 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 pressures, including but not limited to rising interest rates. See “Critical Accounting Policies” below for a discussion of risks and uncertainties associated with accounting for our goodwill and intangible assets.
Foreign Currency
We maintain operations primarily in North America and in Europe. In 2010, approximately 46% of our net sales originated in currencies other than the U.S. dollar, principally the Euro, the British pound sterling and the Canadian dollar. As a result, changes in our reported revenues and operating profits include the impact of changes in foreign currency exchange rates. We provide “constant currency” assessments in the following discussion and analysis to remove the impact of fluctuation in foreign exchange rates and utilize constant currency results in our analysis of segment performance. We calculate the approximate impact of changes in foreign exchange rates by comparing our current period results derived using current period average exchange rates to our current period results recalculated using average foreign exchange rates in effect during the prior period(s). We believe that our constant currency assessments are a useful measure, indicating the actual results of our operations.
Earnings from our subsidiaries are not generally repatriated to the United States; therefore we do not incur significant gains or losses on foreign currency transactions with our subsidiaries.
We have a significant amount of foreign-denominated debt on our U.S. dollar-denominated balance sheet. The translation of foreign-denominated debt obligations that are recorded on our U.S. dollar-denominated balance sheet is recorded in other income (expense), net as a foreign currency exchange gain or loss each period. As a result, our operating results are exposed to fluctuations in foreign currency exchange rates, principally with respect to the Euro. Our net exchange gains for the years ended December 31, 2010 and 2008 of $66.8 million and $22.1 million, respectively, are substantially related to unrealized gains due to the weakening of the Euro against the U.S. dollar. Our net exchange loss of $23.9 million for the year ended December 31, 2009 is substantially related to an unrealized loss due to the strengthening of the Euro against the U.S. dollar.

 

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Recent Acquisitions
The below table depicts the acquisitions made by the Company during 2010, 2009 and 2008. The operating results of acquired businesses are included in our operating results from the date of acquisition and therefore will affect the comparability of our operating results from period to period.
                 
Acquisition       Product / Service       Business
Date   Entity Name   Offering   Location   Segment
 
               
September 1, 2010
  Labart sp. z o.o. (“Labart”)   Laboratory supply   Poland   European Lab
September 1, 2010
  Quantum Scientific, Crown Scientific and Global Science (collectively “EBOS Lab”)   Laboratory supply   Australia & New Zealand   North American Lab
December 1, 2009
  OneMed Lab (“OneMed”)   Laboratory supply   Finland, Norway & Sweden   European Lab
October 1, 2009
  X-treme Geek (“XGeek”)   Internet and catalog retailer marketing to science and technology enthusiasts   United States   Science Education
October 1, 2008
  Omnilab AG (“Omnilab”)   Laboratory supply   Switzerland   European Lab
August 1, 2008
  Spektrum-3D Kft (“Spektrum”)   Laboratory supply   Hungary   European Lab
April 1, 2008
  Jencons (Scientific) Limited (“Jencons”)   Laboratory supply   United Kingdom   European Lab
The acquisitions noted above were funded through a combination of cash and cash equivalents on hand and, to a limited extent, incremental borrowings made under the Company’s Senior Secured Credit Facility.
On February 1, 2011, we acquired AMRESCO Inc. (“AMRESCO”), a domestic manufacturer and supplier of high quality biochemicals and reagents for molecular biology, life sciences, proteomics, diagnostics, molecular diagnostics and histology areas of research and production. AMRESCO has annual net sales of approximately $50 million. The acquisition of AMRESCO was funded through a borrowing made under our Senior Secured Credit Facility.
Seasonality and Inflation
Our results of operations are subject to seasonal trends primarily affecting our Science Education segment, which tend to result in increased net sales and operating income in the third calendar quarter in comparison to other quarters of the year. For example, in 2010, 2009 and 2008, approximately 35%, 36% and 40%, respectively, of our Science Education segment’s total net sales were generated in the quarter ending September 30. This quarterly performance is typically due to increased sales volume as schools purchase supplies in preparation for the beginning of the new school year. Our results of operations are also subject to cyclical trends. For example, the Science Education segment’s publisher kitting business tends to follow a seven to nine-year business cycle based on certain large states’ adoption rates for new textbooks. We believe that 2007 represented the height of the most recent business cycle.
During 2010, 2009 and 2008, inflation has not had a significant impact on our results of operations, as we believe we have been able 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.
Components of Revenues and Expenses
Our net sales are derived primarily from the sale of laboratory supplies and scientific educational materials. Net sales are also derived, to a lesser extent, from the provision of services. Freight costs that are billed to our customers are included in net sales. Provisions for discounts, rebates to customers, sales returns and other adjustments are provided for as a reduction of net sales in the period the related sales are recorded.
Our cost of goods sold consists primarily of the cost of inventory shipped and our cost of labor for services. Cost of goods sold also includes freight expenses incurred to deliver products to customers as well as credits for rebates earned from suppliers.

 

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Selling general and administrative (“SG&A”) expenses primarily reflect the costs of operations dedicated to generating sales, maintaining existing customer relationships, enhancing technology capabilities, receiving and processing customer orders and maintaining our distribution center facilities. SG&A expenses also include our corporate, administrative and shared-service costs and depreciation and amortization expense.
Results of Operations
2010 Compared With 2009
Net Sales
The following table presents net sales by reportable segment for the years ended December 31, 2010 and 2009 and net sales growth (decline) by reportable segment from 2009 to 2010 (in millions):
                         
    Year Ended December 31,  
    2010     % Change     2009  
 
                       
North American Lab
  $ 2,081.0       3.2 %   $ 2,017.0  
European Lab
    1,430.0       1.6 %     1,407.2  
Science Education
    127.7       (6.8 )%     137.0  
 
                   
Total
  $ 3,638.7       2.2 %   $ 3,561.2  
 
                   
Net sales for 2010 increased $77.5 million or 2.2% over 2009. Changes in foreign currency exchange rates caused net sales to decrease by approximately $31.0 million while the acquisitions of XGeek, OneMed, EBOS Lab, and Labart (collectively the “Acquisitions”) increased net sales by approximately $37.0 million. Accordingly, net sales from comparable operations increased approximately $71.5 million or 2.0% in 2010 over 2009.
Net sales in our North American Lab segment for 2010 increased $64.0 million or 3.2% over 2009. Changes in foreign currency exchange rates and the acquisition of EBOS Lab caused net sales to increase by approximately $35.0 million. Accordingly, net sales from comparable operations increased approximately $29.0 million or 1.4% in 2010 over 2009. Net sales in our European Lab segment for 2010 increased $22.8 million or 1.6% over 2009. Changes in foreign currency exchange rates caused net sales to decrease by approximately $52.7 million while the acquisitions of OneMed and Labart increased net sales by approximately $22.0 million. Accordingly, net sales from comparable operations increased approximately $53.5 million or 3.8% in 2010 over 2009.
We believe the comparable increases in net sales across our laboratory distribution businesses are attributable to increased consumer demand in 2010 compared to 2009, when the global economic slowdown generally reduced demand, and further due to securing business with new pharmaceutical customers in 2010. Within our laboratory distribution businesses, net sales of consumable products, including chemicals, experienced low-single digit growth in 2010 compared to 2009 while net sales of capital goods, including equipment, instruments and furniture experienced mid-single digit increases over the same period. Net sales to pharmaceutical and biotechnology customers were flat during 2010 compared to 2009, while net sales to industrial customers increased by mid-single digit rates, net sales to colleges and universities increased by low to mid-single digit rates and net sales to governmental entities increased by low-single digit rates over the same period.
Net sales in our Science Education segment for 2010 decreased $9.3 million or 6.8% from 2009. The acquisition of XGeek increased net sales by approximately $1.7 million. Accordingly, net sales from comparable operations decreased approximately $11.0 million or 8.0% in 2010 from 2009. This decrease was primarily due to reductions in sales volume in the publisher kitting business and reduced order flow from customers outside of North America. Our Science Education segment results continue to be negatively impacted by a reduction in discretionary spending by schools.

 

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Gross Profit
The following table presents gross profit and gross profit as a percentage of net sales for the years ended December 31, 2010 and 2009 (in millions):
                 
    Year Ended December 31,  
    2010     2009  
 
               
Gross profit
  $ 1,038.9     $ 1,015.6  
Percentage of net sales (gross margin)
    28.6 %     28.5 %
Gross profit for 2010 increased $23.3 million or 2.3% over 2009. Changes in foreign currency exchange rates caused gross profit to decrease by approximately $10.2 million while the Acquisitions increased gross profit by approximately $12.4 million. Accordingly, gross profit from comparable operations increased approximately $21.1 million or 2.1% in 2010 over 2009. The comparable increase in consolidated gross profit was partially offset by the adverse impact of lower pricing associated with the sale of certain chemical products, which had experienced tight supply conditions in the first half of 2009, and further offset by an overall reduction in sales volume in our Science Education segment.
Consolidated gross margin for 2010 increased approximately 10 basis points to 28.6% from 28.5% in 2009. Gross margin performance varied among our business segments. North American Lab segment gross margins were favorably impacted due to expansion of private label sales and changes in product and customer mix. European Lab segment gross margins were unfavorably impacted due to lower net pricing, whereby product cost increases exceed customer price increases, compared to the prior year, and in particular lower pricing associated with the sale of certain chemical products. Gross margin attributable to our Science Education segment improved during 2010 from 2009 primarily as a result of lower transportation costs and lower product costs.
SG&A Expenses
The following table presents SG&A expenses and SG&A expenses as a percentage of net sales for the years ended December 31, 2010 and 2009 (in millions):
                 
    Year Ended December 31,  
    2010     2009  
 
               
SG&A expenses
  $ 805.4     $ 806.8  
Percentage of net sales
    22.1 %     22.7 %
SG&A expenses for 2010 decreased $1.4 million or 0.2% from 2009. Changes in foreign currency exchange rates caused SG&A expenses to decrease by approximately $7.2 million while the Acquisitions increased SG&A expenses by approximately $10.1 million. Accordingly, SG&A expenses from comparable operations decreased approximately $4.3 million or 0.5% in 2010 from 2009. The comparable decrease in SG&A expenses primarily reflects an $8.3 million reduction in charges associated with implementing cost reduction initiatives as well as lower performance-based incentive compensation in 2010 compared to 2009, partially offset by increases in wage rates and related costs and net pension expense.
We recognized $3.1 million in charges associated with implementing cost reduction actions in our North American Lab segment in 2010. During the year ended December 31, 2009, we recognized $11.4 million in charges associated with implementing cost reduction initiatives ($3.4 million in North American Lab, $7.8 million in European Lab and $0.2 million in Science Education). Notwithstanding these charges, SG&A expenses from comparable operations increased by approximately $4.0 million or 0.5% in 2010 over 2009.
Impairment of Goodwill and Intangible Assets
During the third quarter of 2010, we recognized aggregate impairment charges of $48.1 million relating to an impairment of goodwill and intangible assets in Science Education. We believe that the impairment charges were due to a mix of macroeconomic and industry-specific factors. We did not recognize any impairment charges during 2009.

 

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Operating Income (Loss)
The following table presents operating income (loss) and operating income (loss) as a percentage of net sales by segment for the years ended December 31, 2010 and 2009 (in millions):
                                 
    Year Ended December 31,  
            % of             % of  
    2010     Net Sales     2009     Net Sales  
Operating income (loss):
                               
North American Lab
  $ 122.3       5.9 %   $ 113.7       5.6 %
European Lab
    111.7       7.8 %     93.1       6.6 %
Science Education
    (48.6 )     (38.1 )%     2.0       1.5 %
 
                           
Total
  $ 185.4       5.1 %   $ 208.8       5.9 %
 
                           
Operating income for 2010 decreased $23.4 million or 11.2% from 2009. As discussed above, impairment charges in our Science Education segment negatively impacted consolidated operating income by $48.1 million in 2010. Changes in foreign currency exchange rates caused operating income to decrease by approximately $3.0 million while the Acquisitions increased operating income by approximately $2.3 million. The following table highlights the changes in operating income (loss) from 2009 to 2010 by segment (in millions):
                                         
            Impairment of     Foreign              
    2009     goodwill &     currency and     Other     2010  
    operating     intangible     the     (explained     operating  
    income     assets     Acquisitions     below)     income (loss)  
 
                                       
North American Lab
  $ 113.7     $     $ 0.5     $ 8.1     $ 122.3  
European Lab
    93.1             (1.2 )     19.8       111.7  
Science Education
    2.0       (48.1 )           (2.5 )     (48.6 )
 
                             
 
  $ 208.8     $ (48.1 )   $ (0.7 )   $ 25.4     $ 185.4  
 
                             
Operating income in our North American Lab segment for 2010 increased $8.6 million or 7.6% over 2009. Changes in foreign currency exchange rates, net of the acquisition of EBOS Lab, increased operating income in 2010 by approximately $0.5 million. Accordingly, operating income from comparable operations increased approximately $8.1 million or 7.1% over 2009. The increase for 2010 was primarily the result of an approximate $15.4 million increase in gross profit due to sales growth and gross margin expansion, partially offset by an approximate $7.3 million increase in SG&A expenses due to increases in employee-related expenses and other costs to expand our global sourcing activities.
Operating income in our European Lab segment for 2010 increased $18.6 million or 20.0% over 2009. Changes in foreign currency exchange rates, net of the acquisitions of OneMed and Labart, decreased operating income in 2010 by approximately $1.2 million. Accordingly, operating income from comparable operations increased approximately $19.8 million or 21.3% over 2009. The increase for 2010 was primarily due to an approximate $10.8 million decrease in SG&A expenses mostly due to lower charges associated with implementing cost reduction initiatives and overall discretionary spending discipline, in addition to an approximate $9.0 million increase in gross profit due to increased sales volume.
Operating income in our Science Education segment decreased $50.6 million from $2.0 million of income in 2009 to a $48.6 million loss in 2010. As discussed above, impairment charges of $48.1 million negatively impacted operating income during 2010. Notwithstanding the impairment charges, operating income from comparable operations decreased approximately $2.5 million from 2009, as a result of a decrease in gross profit of approximately $3.3 million from reduced customer demand, partially offset by a decrease in SG&A expenses of approximately $0.8 million related to a decrease in variable costs associated with reduced business activity and overall discretionary spending discipline.
Interest Expense, Net of Interest Income
Interest expense, net of interest income, was $202.7 million and $224.5 million for 2010 and 2009, respectively. The reduction in net interest expense during 2010 is primarily attributable to changes in the fair value of our interest rate swaps and a decrease of approximately $7.2 million in interest associated with our variable rate debt. We recognized $14.6 million and $0.1 million of unrealized gains on interest rate swaps in 2010 and 2009, respectively, such variability being primarily attributable to changes in forecasted market rates of interest underlying our determination of the fair market value of the interest rate swaps. We do not currently apply hedge accounting for our interest rate swap arrangements and therefore net interest expense may continue to fluctuate in future periods. See Note 12 included in “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information on our interest rate swap arrangements.

 

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Other Income (Expense), Net
Other income (expense), net is primarily comprised of exchange gains and losses. Our net exchange gain was $66.8 million for 2010 compared to a net exchange loss of $23.9 million for 2009. Our net exchange gain for 2010 is substantially related to unrealized gains due to the weakening of the Euro against the U.S. dollar. Our net exchange loss for 2009 is substantially related to unrealized losses due to the strengthening of the Euro against the U.S. dollar. Due to the significant amount of foreign-denominated debt recorded on our U.S. dollar-denominated balance sheet, other income (expense), net may continue to experience significant fluctuations.
Income Taxes
During the year ended December 31, 2010, we recognized an income tax provision of $28.0 million, on pretax income of $49.5 million, resulting in an effective income tax rate of 56.6%. During the year ended December 31, 2009, we recognized an income tax benefit of $25.5 million, on a pretax loss of $39.6 million, resulting in an effective income tax rate of 64.4%.
The tax provision recognized in 2010 is the result of operating profits generated in our foreign operations and net exchange gains recognized in our domestic operations, partially offset by the tax benefit associated with an impairment of indefinite-lived intangible assets in our Science Education segment. Impairment charges associated with the Company’s goodwill are generally not deductible for tax purposes. Accordingly, our 2010 effective tax rate was negatively impacted.
The tax benefit in 2009 reflects our recognition of a deferred tax benefit on domestic net operating losses, a favorable tax rate reduction in Canada, a favorable foreign rate differential on operating profits in our foreign operations and a favorable settlement of a prior year uncertain tax position.
Changes to our uncertain tax positions during 2010 and 2009 are described in Note 9 in “Item 8 — Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
2009 Compared With 2008
Net Sales
The following table presents net sales by reportable segment for the years ended December 31, 2009 and 2008 and net sales decline by reportable segment from 2008 to 2009 (in millions):
                         
    Year Ended December 31,  
    2009     % Change     2008  
 
                       
North American Lab
  $ 2,017.0       (3.6 )%   $ 2,092.2  
European Lab
    1,407.2       (6.4 )%     1,503.4  
Science Education
    137.0       (16.3 )%     163.6  
 
                   
Total
  $ 3,561.2       (5.3 )%   $ 3,759.2  
 
                   
Net sales for 2009 decreased $198.0 million or 5.3% from 2008. Changes in foreign currency exchange rates caused net sales to decrease by approximately $108.8 million while the acquisitions of Jencons, Spektrum, Omnilab, XGeek and OneMed (collectively the “2009/2008 Acquisitions”) increased net sales by approximately $25.5 million. Accordingly, net sales from comparable operations decreased approximately $114.7 million or 3.1% in 2009 from 2008.
Within our laboratory distribution businesses, net sales of consumable products, including chemicals, were flat in 2009 compared to 2008 while net sales of capital goods, including equipment, instruments and furniture experienced a mid to high-single digit decrease over the same period. Further, net sales to pharmaceutical and biotechnology customers experienced low single digit decreases during 2009 compared to 2008, while net sales to colleges and universities increased at about the same rate. Net sales to governmental entities were essentially unchanged while net sales to industrial customers experienced a mid single digit decrease.
Net sales in our North American Lab segment for 2009 decreased $75.2 million or 3.6% from 2008. Changes in foreign currency exchange rates caused net sales to decrease by approximately $21.7 million. Accordingly, net sales from comparable operations decreased approximately $53.5 million or 2.6% in 2009 from 2008. Net sales in our European Lab segment for 2009 decreased $96.2 million or 6.4% from 2008. Changes in foreign currency exchange rates caused net sales to decrease by approximately $87.1 million while the 2009/2008 Acquisitions increased net sales by approximately $22.8 million. Accordingly, net sales from comparable operations decreased approximately $31.9 million or 2.1% in 2009 from 2008. We believe the comparable decreases in net sales across our laboratory distribution businesses are primarily a function of the global economic recession and the resulting decline in spending by the customers we serve.

 

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Net sales in our Science Education segment for 2009 decreased $26.6 million or 16.3% from 2008. The acquisition of XGeek increased net sales by approximately $2.7 million. Accordingly, net sales from comparable operations decreased approximately $29.3 million or 17.9% in 2009 from 2008. This decrease was primarily due to lower volume in our science supplies business and our publisher kitting business. We believe the decreases in volume relate to the unfavorable economic conditions as well as the cyclical nature of the publisher kitting business.
Gross Profit
The following table presents gross profit and gross profit as a percentage of net sales for the years ended December 31, 2009 and 2008 (in millions):
                 
    Year Ended December 31,  
    2009     2008  
 
               
Gross profit
  $ 1,015.6     $ 1,065.4  
Percentage of net sales (gross margin)
    28.5 %     28.3 %
Gross profit for 2009 decreased $49.8 million or 4.7% from 2008. Changes in foreign currency exchange rates caused gross profit to decrease by approximately $35.1 million while the 2009/2008 Acquisitions increased gross profit by approximately $7.5 million. Accordingly, gross profit from comparable operations decreased approximately $22.2 million or 2.1% in 2009 from 2008. Reductions in comparable gross profit are largely due to decreases in sales volume across each of our operating segments. Our Science Education segment accounted for approximately 56% of the consolidated reduction in comparable gross profit.
Consolidated gross margin for 2009 increased approximately 20 basis points to 28.5% from 28.3% in 2008. Our laboratory businesses benefited from efficient pricing actions and, to a lesser extent, from a shift in product mix including an increase in sales of private-label products. In addition, we experienced tight supply conditions in a portion of our chemical product offerings, which did contribute to gross margin improvement in 2009. These benefits were mostly offset by product price increases from our suppliers and by increases in the cost of foreign-sourced goods, especially in our European Lab segment and at our Canadian operations within our North American Lab segment. Gross margin attributable to Science Education declined during 2009 from 2008 primarily as a result of a less favorable sales mix.
SG&A Expenses
The following table presents SG&A expenses and SG&A expenses as a percentage of net sales for the years ended December 31, 2009 and 2008 (in millions):
                 
    Year Ended December 31,  
    2009     2008  
 
               
SG&A expenses
  $ 806.8     $ 861.6  
Percentage of net sales
    22.7 %     22.9 %
SG&A expenses for 2009 decreased $54.8 million or 6.4% from 2008. Changes in foreign currency exchange rates caused SG&A expenses to decrease by approximately $32.3 million while the 2009/2008 Acquisitions increased SG&A expenses by approximately $6.4 million. Accordingly, SG&A expenses from comparable operations decreased approximately $28.9 million or 3.4% in 2009 from 2008. The comparable decrease in SG&A expenses reflects our implementation of cost reduction initiatives across all segments and is further influenced by decreases in net periodic pension costs, partially offset by increases in charges associated with implementing cost reduction initiatives.
Cost reductions were achieved primarily through personnel reductions, operating efficiencies and discretionary spending discipline. Pension costs associated with our primary defined benefit obligations decreased during 2009 primarily in North American Lab where we recognized $3.7 million of pension income in 2009, due to an increase in the expected return on pension plan assets, compared to $1.7 million of pension expense in 2008. Partially offsetting the decreases in SG&A expenses noted above, we recognized $11.4 million in charges associated with implementing cost reduction initiatives during 2009, such charges representing an increase of $7.2 million ($2.9 million in North American Lab, $4.1 million in European Lab and $0.2 million in Science Education) over the comparable 2008 period. See Note 10 included in “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information on our defined benefit obligations.

 

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Impairment of Goodwill and Intangible Assets
We did not recognize any impairment charges during 2009. During the fourth quarter of 2008, we recognized aggregate impairment charges of $392.1 million, relating to the impairment of goodwill and intangible assets. The impairment charges were recognized at each of the Company’s segments ($202.1 million in North American Lab, $88.0 million in European Lab and $102.0 million in Science Education). We believe that the impairment charges recognized in our North American Lab and European Lab segments were primarily a result of macroeconomic factors, while the charges recognized in our Science Education segment were due to a mix of macroeconomic and industry-specific factors.
Operating Income (Loss)
The following table presents operating income (loss) and operating income (loss) as a percentage of net sales by segment for the years ended December 31, 2009 and 2008 (in millions):
                                 
    Year Ended December 31,  
            % of             % of  
    2009     Net Sales     2008     Net Sales  
Operating income (loss):
                               
North American Lab
  $ 113.7       5.6 %   $ (95.3 )     (4.6 )%
European Lab
    93.1       6.6 %     2.8       0.2 %
Science Education
    2.0       1.5 %     (95.8 )     (58.6 )%
 
                           
 
  $ 208.8       5.9 %   $ (188.3 )     (5.0 )%
 
                           
Operating income (loss) increased $397.1 million from a $188.3 million loss in 2008 to $208.8 million of income in 2009. Changes in foreign currency exchange rates caused operating income (loss) to decrease by approximately $2.8 million while the 2009/2008 Acquisitions increased operating income (loss) by approximately $1.1 million. As discussed above, impairment charges negatively impacted operating income (loss) by $392.1 million in 2008. The following table highlights the changes in operating income (loss) from 2008 to 2009 by segment (in millions):
                                         
    2008     Impairment of     Foreign currency              
    operating     goodwill &     and the 2009/2008     Other (explained     2009 operating  
    income (loss)     intangible assets     Acquisitions     below)     income (loss)  
 
                                       
North American Lab
  $ (95.3 )   $ 202.1     $ (1.2 )   $ 8.1     $ 113.7  
European Lab
    2.8       88.0       (0.5 )     2.8       93.1  
Science Education
    (95.8 )     102.0             (4.2 )     2.0  
 
                             
 
  $ (188.3 )   $ 392.1     $ (1.7 )   $ 6.7     $ 208.8  
 
                             
Operating income in our North American Lab segment for 2009 increased $209.0 million from 2008. Impairment charges of $202.1 million negatively impacted our operating income during 2008. Foreign currency decreased operating income in 2009 by approximately $1.2 million. Accordingly, operating income increased approximately $8.1 million over 2008, from comparable operations. The increase for 2009 was primarily the result of a $20.0 million decrease in SG&A expenses due to implemented cost saving initiatives and pension income during the 2009 period, partially offset by an $11.9 million decrease in gross profit as a result of reduced sales volume.
Operating income in our European Lab segment for 2009 increased $90.3 million from 2008. Impairment charges of $88.0 million negatively impacted our operating income during 2008. Foreign currency and the 2009/2008 Acquisitions decreased operating income in 2009 by approximately $0.5 million. Accordingly, operating income increased approximately $2.8 million over 2008, from comparable operations. The increase for 2009 was primarily due to a $2.2 million increase in gross profit as a result of gross margin expansion and a $0.6 million decrease in SG&A expenses attributable to implemented cost saving initiatives, mostly offset by the increase in charges associated with cost saving initiatives.

 

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Operating income in our Science Education segment for 2009 increased $97.8 million from 2008. Impairment charges of $102.0 million negatively impacted our operating income during 2008. Accordingly, operating income decreased approximately $4.2 million over 2008, from comparable operations, as a result of a decrease in gross profit of $12.5 million from reduced customer demand and a less favorable sales mix, offset by a decrease in SG&A expenses of $8.3 million related to a decrease in variable costs associated with reduced business activity and implemented cost reduction initiatives.
Interest Expense, Net of Interest Income
Interest expense, net of interest income, was $224.5 million and $283.9 million for 2009 and 2008, respectively. The decrease in net interest expense during 2009 is primarily attributable to a decrease in our net unrealized gain or loss on interest rate swaps, lower interest rates associated with our variable rate debt, the benefit of changes in foreign currency exchange rates and a decrease in average amounts outstanding under our multi-currency revolving facility during 2009, as compared to 2008. We recognized a net unrealized loss on interest rate swaps of $35.4 million during 2008 compared to a $0.1 million unrealized gain during 2009. As a result of our discontinuance of hedge accounting under our interest rate swap arrangements during 2008, interest expense may continue to fluctuate significantly from period to period, however, such fluctuations will not impact the Company’s operating cash flows until realized. See Note 12 included in “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information on our interest rate swap arrangements.
Other Income (Expense), Net
Other income (expense), net is primarily comprised of exchange gains and losses. Our net exchange loss was $23.9 million for 2009 compared to a net exchange gain of $22.1 million for 2008. Our net exchange loss for 2009 is substantially related to unrealized losses due to the strengthening of the Euro against the U.S. dollar. Our net exchange gain for 2008 is substantially related to unrealized gains due to the weakening of the Euro against the U.S. dollar. Due to the significant amount of foreign-denominated debt recorded on our U.S. dollar-denominated balance sheet, other income (expense), net may continue to experience significant fluctuations.
Income Taxes
During the years ended December 31, 2009 and 2008, we recognized an income tax benefit of $25.5 million and $115.5 million, on pretax losses of $39.6 million and $450.1 million, respectively, resulting in an effective income tax benefit rate of 64.4% and 25.7%, respectively.
The higher tax benefit rate in 2009 reflects our recognition of a deferred tax benefit on domestic net operating losses, a favorable tax rate reduction in Canada, a favorable foreign rate differential on operating profits in our foreign operations and a favorable settlement of a prior year uncertain tax position.
The tax benefit in 2008 primarily reflects tax benefits for the impairment charges associated with our indefinite-lived intangible assets. Impairment charges associated with the Company’s goodwill are generally not deductible for tax purposes. Accordingly, our 2008 tax benefit rate was negatively impacted.
Changes to our uncertain tax positions during 2009 and 2008 are described in Note 9 in “Item 8 — Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Liquidity and Capital Resources
Our future financial and operating performance, ability to service or refinance our debt and 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 overall business strategies. We continue to assess the potential impact of current market conditions on various aspects of our liquidity, financial condition and results of operations, including, but not limited to, the continued availability and general creditworthiness of our financial instrument counterparties, the impact of market conditions on our customers, suppliers and insurers and the general recoverability and realizability of our long-lived assets and certain financial instruments, including investments held under our defined benefit pension plans.
As of December 31, 2010, we had $142.1 million of cash and cash equivalents on hand and our compensating cash balance totaled $85.4 million. We had $2,757.7 million of outstanding indebtedness as of December 31, 2010, including $1,410.0 million of indebtedness under our Senior Secured Credit Facility, $713.0 million under our Senior Notes, $528.2 million under our Senior Subordinated Notes and $85.4 million of compensating cash indebtedness. We also had unused availability of $215.3 million under our multi-currency revolving loan facility (which is a component of our Senior Secured Credit Facility) as of December 31, 2010.

 

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Borrowings under the multi-currency revolving loan facility are a key source of our liquidity. All borrowings under the multi-currency revolving loan facility bear interest at variable rates. The average borrowing outstanding under our multi-currency revolving loan facility during 2010 was approximately $23 million. From time-to-time, our liquidity needs cause the aggregate amount of outstanding borrowings under our multi-currency revolving loan facility to fluctuate. Accordingly, the amount of credit available to us can increase or decrease based on changes in our operating cash flows, debt service requirements, working capital needs and acquisition and investment activities. For example, in January and February 2011, we made borrowings under our multi-currency revolving loan facility to fund our acquisition financing needs and, to a more limited extent, our debt service obligations. As of February 18, 2011, we had unused availability of approximately $127 million under our multi-currency revolving loan facility.
The Senior Secured Credit Facility does not contain any financial maintenance covenants that require the Company to comply with specified financial ratios or tests, such as a minimum interest expense coverage ratio or a maximum leverage ratio, unless the Company wishes to make certain acquisitions, incur additional indebtedness associated with certain acquisitions or make certain restricted payments. The indentures governing the Senior Notes and Senior Subordinated Notes contain covenants that, among other things, limit the Company’s ability and that of its restricted subsidiaries to make restricted payments, pay dividends, incur or create additional indebtedness, issue certain types of common and preferred stock, make certain dispositions outside the ordinary course of business, execute certain affiliate transactions, create liens on assets of the Company and restricted subsidiaries, and materially change our lines of business. As of December 31, 2010, the Company was in compliance with the covenants under the Senior Secured Credit Facility and with the indentures and related requirements governing the Senior Notes and Senior Subordinated Notes.
We had the ability to elect to make non-cash payment-in-kind (“PIK”) interest elections under certain of our debt instruments. On June 25, 2009, we made an election to pay PIK interest on our Senior Notes for the semi-annual interest period commencing July 15, 2009 and ending on January 15, 2010. Accordingly, we classified $35.0 million of accrued but unpaid interest on our Senior Notes as of December 31, 2009 within the long-term portion of debt. The Company did not make an election to pay PIK interest on its Senior Notes for the interest period ending on July 15, 2010, January 15, 2011 or July 15, 2011 and so it has or will satisfy the related interest payments with cash interest. On June 25 and September 21, 2009, we made elections to capitalize an aggregate amount of $5.3 million and €1.9 million ($2.6 million on a U.S. dollar equivalent basis as of December 31, 2010) of cash interest payable on our Senior Subordinated Notes for the June 30 and September 30, 2009 interest payment dates. We made these PIK interest elections in order to enhance our liquidity to fund acquisition and investment opportunities. There are no future eligible PIK interest elections under our debt instruments. See “Indebtedness — Senior Notes and Senior Subordinated Notes” section below for more information.
Subject to the Company’s continued compliance with its covenants, the Company may at any time or from time to time request additional tranches of term loans or increases in the amount of commitments under the Senior Secured Credit Facility. The actual extension of any such incremental term loans or increases in commitments would be subject to the Company and existing and any new lenders reaching agreement on applicable terms and conditions, which may depend on market conditions at the time of any request. Additionally, the total amount outstanding under any incremental new tranches of term loans or incremental new revolving credit commitments may not exceed in aggregate the lesser of $300.0 million or an amount which would cause the Company to exceed certain ratios. To present, the Company has not requested any such incremental term loans or credit commitments.
Based on the terms and conditions of these debt obligations and our current operations and expectations for future growth, we believe that cash generated from operations, together with available borrowings under our multi-currency revolving loan facility will be adequate to permit us to meet our current and expected operating, capital investment, acquisition financing and debt service obligations prior to maturity, although no assurance can be given in this regard. The majority of our long-term debt obligations will mature between 2014 and 2017, although the revolving loan portion of our Senior Secured Credit Facility is scheduled to mature in 2013. We currently intend to reduce our debt to earnings ratio in advance of these maturities, which we believe will be important as we seek to refinance or otherwise satisfy these debt obligations.
Historical Cash Flows
Operating Activities
The following table presents cash flow from operations before investing and financing activities related to operations and working capital (dollars in millions):
                         
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Cash flow from operations, excluding working capital
  $ 130.6     $ 133.9     $ 45.5  
Cash flow from working capital changes, net
    (8.3 )     35.1       (36.8 )
 
                 
Cash flow from operations
  $ 122.3     $ 169.0     $ 8.7  
 
                 

 

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We generated $122.3 million of cash from operating activities during 2010 compared to $169.0 million and $8.7 million during 2009 and 2008, respectively. The decrease in operating cash flows from 2009 to 2010 is primarily due to increased investments in our working capital (due in part to growth in our business in 2010), partially offset by lower cash paid for interest. The increase in operating cash flows from 2008 to 2009 is primarily due to improvements in our working capital components (after consideration of our PIK interest deferrals) and lower cash paid for interest.
We paid cash interest of $167.2 million, $200.7 million and $242.8 million during 2010, 2009 and 2008, respectively. Cash interest decreased in 2010 from 2009 primarily as a result of our election to pay PIK interest of approximately $38.0 million under our Senior Notes for the semi-annual interest period ending in January 2010. Cash interest decreased from 2008 to 2009 primarily as a result of lower interest rates associated with our variable rate debt and, to a lesser extent, as a result of our elections to capitalize approximately $8.0 million of interest under our Senior Subordinated Notes, as discussed above.
Cash flows from working capital components, specifically trade accounts receivable and inventories, decreased in 2010 compared to 2009. This decrease in cash flows is generally attributable to an increase in commercial activity during 2010 after a decline in commercial activity during 2009 due to more challenging economic conditions, which significantly lowered our cash investment in certain working capital components during that year. For example, trade accounts receivable reflect a use of cash of $49.9 million during 2010 compared to a $12.2 million source of cash during 2009. Inventories reflect a use of $34.2 million during 2010, as, in addition to changes in commercial activity, we increased our inventories in an effort to expand our product offerings and develop our fulfillment capabilities in emerging markets, compared to 2009 when inventories provided $30.2 million of cash. Cash flows provided by trade accounts payable were $41.0 million and $18.1 million in 2010 and 2009, respectively. The increase in cash provided by trade accounts payable was primarily due to timing. Our cash disbursement routines follow a standardized process for payment, and so we may experience fluctuations in cash flows associated with trade accounts payable from period to period. Cash flow associated with other current assets decreased during the 2010 period primarily as a result of a change in timing associated with certain of our supplier rebates and further due to increased supplier rebates earned in 2010 compared to 2009.
We experienced generally favorable cash flows from working capital components in 2009 compared to 2008. For example, trade accounts receivable provided cash of $12.2 million during 2009 compared to an $11.7 million use of cash during 2008. In addition, the reduction in inventories in 2009 provided $30.2 million of cash compared to only $2.4 million during 2008. These improvements in our cash flows from trade accounts receivable and inventories are primarily attributable to a decline in commercial activity and, to a lesser extent, our continued focus on cash collections and inventory management. Lastly, our trade accounts payable in 2009 represented an $18.1 million source of cash as compared to a $22.3 million use of cash in 2008. The increase in cash provided by trade accounts payable was primarily due to timing.
Investing Activities
Net cash used in investing activities was $74.4 million, $38.1 million and $74.9 million during 2010, 2009 and 2008, respectively. The change in investing cash flows from period to period is primarily due to differences in the aggregate size and number of acquisitions completed. Net cash used in the 2010 period was primarily associated with the acquisitions of EBOS Lab and Labart and ongoing capital expenditures. Net cash used in the 2009 period was primarily associated with the acquisitions of OneMed and XGeek and ongoing capital expenditures, partially offset by the proceeds from sales of property and equipment. Net cash used in the 2008 period was primarily associated with the acquisitions of Jencons, Spektrum and Omnilab and ongoing capital expenditures, partially offset by proceeds from sales of property and equipment.
Capital expenditures increased in 2010 from 2009 reflecting incremental investments in facilities, infrastructure and information technology. Capital expenditures decreased in 2009 from 2008 partly due to timing of cash outflows and partly reflecting our desire to manage our resources prudently during the economic downturn. We anticipate approximately $50 million of capital expenditures in 2011 and ongoing annual expenditures ranging from $20 million to $40 million thereafter.
Financing Activities
Net cash used in financing activities was $22.3 million and $51.1 million during 2010 and 2009, respectively, while net cash provided by financing activities was $65.0 million during 2008. The decrease in cash used in 2010 from 2009 is primarily related to fluctuations in net repayments of debt.
Cash used in 2010 was primarily due to $23.2 million of net repayments of debt, mostly attributable to an excess cash flow payment we made in March 2010 under our Senior Secured Credit Facility. Cash used in 2009 was primarily related to $41.5 million of net repayments of debt and $6.6 million paid to repurchase redeemable equity units. Cash provided during 2008 was primarily due to $62.5 million in net cash proceeds, drawn primarily from our Senior Secured Credit Facility and used to meet our debt service, acquisition financing and general working capital needs.

 

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Schedule of Contractual Obligations
The following table details the Company’s contractual obligations as of December 31, 2010 (in millions):
                                         
    Total     < 1 year     1 - 3 years     3 - 5 years     > 5 years  
 
                                       
Senior Secured Credit Facility — term loans
  $ 1,388.8     $ 7.4     $ 28.4     $ 1,353.0     $  
Senior Secured Credit Facility — revolving facility
    21.2       21.2                    
Senior Notes due 2015
    713.0                   713.0        
Senior Subordinated Notes due 2017
    528.2                         528.2  
Predecessor Senior Subordinated Notes due 2014
    1.0                   1.0        
Interest (1)
    927.1       186.7       374.1       281.1       85.2  
Capital leases (2)
    19.2       2.5       5.5       4.2       7.0  
Operating leases (2)
    157.0       32.6       43.6       22.3       58.5  
Compensating cash balance and other debt (3)
    86.3       86.3                    
Underfunded pension obligations (4)
    53.1       1.9       4.4       4.7       42.1  
 
                             
Total
  $ 3,894.9     $ 338.6     $ 456.0     $ 2,379.3     $ 721.0  
 
                             
 
     
(1)  
For purposes of calculating interest above, interest rates and effects of foreign currency on the Senior Secured Credit Facility, the Senior Subordinated Notes and our interest rate swap arrangements were assumed to be unchanged from December 31, 2010. In addition, outstanding amounts under our multi-currency revolving loan facility, a component of our Senior Secured Credit Facility, were assumed to remain outstanding through the remaining term of the multi-currency revolving loan facility (2013).
 
(2)  
See Notes 8 and 13 in Item 8 — “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, for more information on our lease commitments.
 
(3)  
Our compensating cash balance represents bank overdraft positions of subsidiaries participating in our global cash pooling arrangement with a third-party bank. Due to the nature of these overdrafts, all amounts have been classified within the short-term portion of debt at each period end. As of December 31, 2010, our compensating cash balance was $85.4 million.
 
(4)  
The amounts in the table reflect estimated cash payments to be made by the Company over the next five years and thereafter with respect to certain underfunded pension obligations. These pension obligations are included in other long-term liabilities on our balance sheet as of December 31, 2010.
Noncurrent deferred income tax liabilities as of December 31, 2010 were $478.8 million. Deferred tax liabilities are calculated based on cumulative temporary differences between the financial reporting and tax bases of assets and liabilities using enacted tax rates. This amount is not included in the table above because this presentation would not be meaningful. These liabilities 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, the Company has excluded from the above table uncertain tax liabilities due to the uncertainty of the period of payment. The Company had uncertain tax liabilities of $4.9 million, exclusive of interest and penalties, as of December 31, 2010. In addition, we do not provide for deferred income tax liabilities nor foreign withholding taxes on approximately $396.5 million of cumulative undistributed earnings of our foreign subsidiaries as of December 31, 2010, as we consider these earnings to be permanently reinvested. We believe that cash flows generated by our domestic operations and available credit under our Senior Secured Credit Facility 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 non-compete, non-solicit and non-hire covenants as well as severance provisions. In general, if the executive officer is terminated without “Cause” or resigns for “Good Reason” (as such terms are defined in the respective employment agreements) the executive officer is entitled to one and a half times (two times in the case of our Chairman, President and Chief Executive Officer) the sum of base salary plus the target bonus for the year in which such termination or resignation occurs and continued health benefits for the 12-month period (18-month period in the case of our Chairman, President and Chief Executive Officer) following termination or resignation. Salary and bonus payments are payable in equal installments over the 12-month period following such termination or resignation. The aggregate potential payments under these employment agreements for terminations without Cause and resignations for Good Reason, including estimated costs associated with continued health benefits, is approximately $13.3 million at December 31, 2010.

 

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Indebtedness
See Note 8 in Item 8 — “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, for additional discussion of our debt obligations.
Senior Secured Credit Facility. Our Senior Secured Credit Facility is with a syndicate of lenders and provides for aggregate maximum borrowings consisting of (1) term loans denominated in Euros in an aggregate principal amount currently outstanding of €588.2 million ($785.9 million on a U.S. dollar equivalent basis as of December 31, 2010), (2) term loans denominated in U.S. dollars in an aggregate principal amount currently outstanding of $602.9 million and (3) a multi-currency revolving loan facility, providing for an equivalent in U.S. dollars of up to $250.0 million in multi-currency revolving loans (inclusive of swingline loans of up to $25.0 million and letters of credit of up to $70.0 million). The multi-currency revolving loan facility permits one or more of our foreign subsidiaries to become foreign borrowers under such facility upon the satisfaction of certain conditions.
Subject to the Company’s continued compliance with its covenants, the Company may at any time or from time to time request additional tranches of term loans or increases in the amount of commitments under the Senior Secured Credit Facility. The actual extension of any such incremental term loans or increases in commitments would be subject to the Company and existing and any new lenders reaching agreement on applicable terms and conditions, which may depend on market conditions at the time of any request. Additionally, the total amount outstanding under any incremental new tranches of term loans or incremental new revolving credit commitments may not exceed in aggregate the lesser of $300.0 million or an amount which would cause the Company to exceed certain ratios. To present, the Company has not requested any such incremental term loans or credit commitments.
As of December 31, 2010, an aggregate U.S. dollar equivalent of $21.2 million was outstanding under the multi-currency revolving loan facility as a result of £13.7 million outstanding in revolving loans. In addition, we had $13.5 million of undrawn letters of credit outstanding. As of December 31, 2010, we had $215.3 million of available borrowing capacity under the multi-currency revolving loan facility.
The term loans will mature on June 30, 2014 and the multi-currency revolving loan facility will mature on June 30, 2013. Subject to any mandatory or optional prepayments, the principal amounts of the term loans require quarterly amortization payments commencing on September 30, 2009 equal to 0.25% of their respective original principal amounts drawn, with the final amortization payments due at maturity. Based on an excess cash flow calculation required by the Senior Secured Credit Facility for the year ended December 31, 2009, the Company made a principal repayment of $20.9 million on the outstanding term loans in March 2010. The excess cash flow payment has been and will be applied against the Company’s scheduled installments of principal due in respect of the term loans in 2010 and part of 2011. We classified the excess cash flow payment within the short term portion of debt in our balance sheet as of December 31, 2009.
As of December 31, 2010, the interest rates on the U.S. dollar-denominated and Euro-denominated term loans were 2.76% and 3.30%, respectively, which include a variable margin of 2.5%, and amounts drawn under the multi-currency revolving loan facility bear interest at a rate of 2.84%. As of December 31, 2010, there were no loans under our Senior Secured Credit Facility denominated in currencies other than the U.S. dollar, Euro and British pound sterling.
Senior Notes and Senior Subordinated Notes . The Senior Notes and Senior Subordinated Notes, and related guarantees, are unsecured obligations of the Company and are subordinate to all of the Company’s and the Subsidiary Guarantors’ obligations under all secured indebtedness, including any borrowings under the Senior Secured Credit Facility to the extent of the value of the assets securing such obligations, and are effectively subordinate to all obligations of each of the Company’s subsidiaries that is not a guarantor of the Senior Notes or the Senior Subordinated Notes (as the case may be). The Senior Notes, and related guarantees, rank senior in right of payment to all of the Company’s and the Subsidiary Guarantors’ existing and future subordinated indebtedness, including the Senior Subordinated Notes.
The Senior Notes, which amount to $713.0 million as of December 31, 2010, will mature on July 15, 2015. Interest on the Senior Notes is payable twice a year, on each January 15 and July 15. For any interest period through July 15, 2011, the Company may elect to pay interest on the Senior Notes (1) entirely in cash (“Cash Interest”), (2) entirely by increasing the principal amount of the Senior Notes (“PIK Interest”) or (3) 50% as Cash Interest and 50% as PIK Interest. PIK Interest accrues on the Senior Notes at a rate per annum equal to the Cash Interest rate of 10.25% plus 100 basis points. Prior to July 15, 2009, the Company paid its Senior Note interest obligations as Cash Interest. On June 25, 2009, we made an election to pay PIK Interest for the semi-annual interest period commencing July 15, 2009 and ending on January 15, 2010. Accordingly, we have classified $35.0 million of accrued but unpaid interest on our Senior Notes as of December 31, 2009 within the long-term portion of debt in our balance sheet. The Company did not make an election to pay PIK Interest for any of the remaining PIK Interest eligible periods and so it has or will satisfy the related interest payments with Cash Interest.

 

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The Senior Subordinated Notes are denominated in Euros in an aggregate principal amount currently outstanding of €126.9 million ($169.5 million on a U.S. dollar equivalent basis as of December 31, 2010) and in U.S. dollars in an aggregate principal amount currently outstanding of $358.7 million. The Senior Subordinated Notes will mature on June 30, 2017. Interest on the Senior Subordinated Notes is payable quarterly on March 31, June 30, September 30 and December 31 of each year, beginning on September 30, 2007. On any interest payment date through and including March 31, 2010, the Company had the option to capitalize a portion of the interest payable on such date by capitalizing such interest and adding it to the then outstanding principal amount of the Senior Subordinated Notes. On June 25 and September 21, 2009, we made elections to capitalize an aggregate amount of approximately $5.3 million and €1.9 million ($2.6 million on a U.S. dollar equivalent basis as of December 31, 2010) of cash interest payable on our Senior Subordinated Notes for the June 30 and September 30, 2009 interest payment dates.
Interest Rate Swap Arrangements. Borrowings under our Senior Secured Credit Facility bear interest at variable rates while our Senior Notes and Senior Subordinated Notes bear interest at fixed rates. The Company manages its exposure to changes in market interest rates by entering into interest rate swaps. The Company is party to two interest rate swaps that became effective on June 29, 2007 and mature on December 31, 2012 for the purpose of fixing the variable rate of interest on a portion of our outstanding term loan borrowings under the Senior Secured Credit Facility. The interest rate swaps carry initial notional principal amounts of $425.0 million (the “USD Swap”) and €300.0 (the “Euro Swap”). The notional value of the USD Swap declines over its term in annual decrements of $25.0 million through December 29, 2011 and carries a final notional principal amount of $160.0 million for the period from December 30, 2011 through December 31, 2012. Beginning on December 31, 2007, the notional value of the Euro Swap declines over its term in annual decrements of €20.0 million through December 29, 2011 and carries a final notional principal amount of €110.0 million for the period from December 30, 2011 through December 31, 2012. Under the USD Swap and Euro Swap, the Company receives monthly interest at a variable rate equal to one-month U.S. Libor and one-month Euribor, respectively, and pay monthly interest at a fixed rate of 5.40% and 4.55%, respectively.
As of December 31, 2010, the interest rate swaps effectively convert $325.0 million of variable rate U.S. dollar-denominated debt and €220.0 million ($294.0 million on a U.S. dollar equivalent basis) of variable rate Euro-denominated debt to fixed rates of interest. The counterparty to our interest rate swap agreements is a major financial institution. The Company actively monitors its asset or liability position under the interest rate swap agreements and the credit ratings of the counterparty, in an effort to understand and evaluate the risk of non-performance by the counterparty.
The aggregate fair value of the interest rate swaps as of December 31, 2010 was a liability of $35.2 million and is reflected in other long-term liabilities. During the years ended December 31, 2010 and 2009, we recognized non-cash net unrealized gains on our swaps of $14.6 million and $0.1 million, respectively, as a component of interest expense. See Note 12 in “Item 8 — Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, for a further discussion of our interest rate swap arrangements.
Compensating Cash Balance. Our foreign subsidiaries obtain their liquidity from our global cash pooling arrangement or from formal or informal lines of credit offered by local banks. The borrowings drawn by our foreign subsidiaries from local banks are limited in aggregate by certain covenants contained within the Senior Secured Credit Facility, Senior Notes and Senior Subordinated Notes. The borrowings available to our foreign subsidiaries under our global cash pooling arrangement are limited in aggregate by the amount of compensating cash balances supporting the global cash pooling arrangement. Our compensating cash balance represents bank overdraft positions of subsidiaries participating in our global cash pooling arrangement with a third-party bank. Due to the nature of these overdrafts, all amounts have been classified within the short-term portion of debt at each period end. As of December 31, 2010, our compensating cash balance was $85.4 million.
Off-Balance Sheet Arrangements
We are not involved in any off-balance sheet arrangements that have or are reasonably likely to have a material current or future effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Critical Accounting Policies
See Note 2 included in “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for a description of our significant accounting policies. The policies 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 management’s judgment, with financial reporting results relying on estimation about the effect of matters that are inherently uncertain. Specific risks for these critical accounting policies are described in the following paragraphs. For all of these policies, management cautions that future events rarely develop exactly as forecast, and such estimates routinely require adjustment. The Company’s management has reviewed these critical accounting policies and estimates and related disclosures with its audit committee.

 

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Goodwill and Intangible Assets. We have significant amounts of goodwill and intangible assets on our consolidated balance sheet as of December 31, 2010. Goodwill represents the excess of acquisition costs over the fair value of net assets acquired in connection with the Merger and acquisitions subsequent to the Merger. 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 our trademarks and trade names and are not amortized.
We believe that accounting for goodwill and intangible assets represents a critical accounting policy because of the significant judgments and estimates that must be made by management in order to determine each asset’s useful life, to apply the impairment testing model required by U.S. GAAP and, when necessary, to determine various related fair value measurements.
We re-evaluate the estimated useful lives of our intangible assets annually. We determined that our trademarks and trade names have indefinite lives because they do not have legal, regulatory, contractual, competitive or economic limitations and are expected to contribute to the generation of cash flows indefinitely.
Goodwill and other intangible assets with indefinite useful lives are not amortized and are tested annually for impairment or 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 indication of potential impairment exists.
Indefinite-lived intangible assets other than goodwill are tested for impairment prior to goodwill or amortizable intangible assets. An impairment charge is measured if the carrying value of an indefinite-lived intangible asset exceeds its fair value. We evaluate the recoverability of our amortizable intangible assets by comparing the carrying value to estimated undiscounted future cash flows expected to be generated. If an amortizable intangible asset is considered impaired, the impairment loss to be recognized is measured as the amount by which the asset’s carrying value exceeds its fair value.
Goodwill impairment testing is performed at the reporting unit level. We have determined that our reporting units are the same as our business segments and we have elected to perform our annual impairment testing on October 1 st of each year. The goodwill impairment analysis is a two-step test. The first step (“Step 1”), used to identify potential impairment, involves comparing the reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds its estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment, if any. The second step (“Step 2”) involves calculating an implied fair value of goodwill, determined in a manner similar to the amount of goodwill calculated in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill, there is no impairment. If the carrying value of goodwill exceeds the implied fair value of goodwill, an impairment charge is recorded for the excess. Goodwill impairments cannot be reversed in subsequent periods.
The fair value of our indefinite-lived intangible assets was determined using a discounted cash flow approach which incorporates an estimated royalty rate and discount rate (among other estimates) applicable to trademarks and tradenames.
The Company estimates the fair value of each reporting unit using both the income approach (a discounted cash flow technique) and market approach (a market multiple technique). These valuation methods required management to make various assumptions, including, but not limited to, assumptions related to future profitability, cash flows, discount rates and control premiums, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit. Our estimates are based upon historical trends, management’s knowledge and experience and overall economic factors, including projections of future earnings potential. Developing discounted future cash flows in applying the income approach requires us to evaluate our intermediate to longer-term strategies for each reporting unit, including, but not limited to, estimates about revenue growth, our acquisition strategies, operating margins, capital requirements, inflation and working capital management. The development of appropriate rates to discount the estimated future cash flows of each reporting unit requires the selection of risk premiums, which can materially impact the present value of future cash flows. Selection of an appropriate peer group under the market approach involves judgment and an alternative selection of guideline companies could yield materially different market multiples. We select an acquisition control premium by referring to historical control premiums observed in the marketplace. We believe the estimates and assumptions used in the valuation methods are reasonable.
2010 Assessments
We observed a material decline in the operating results of our Science Education reporting unit during the seasonally-significant third calendar quarter of 2010, such decline representing a significant shortfall against both budgeted and prior period performance. The financial results of this reporting unit have been negatively impacted by a continued reduction in spending by schools in response to the prolonged negative economic conditions in the United States and the resultant uncertainty in state and local sources of funding and, to a lesser extent, reductions in international order flow. In addition, we observed a continued tendency on the part of state educational institutions to defer adopting new textbooks, negatively impacting Science Education’s ability to capitalize on the related publisher kitting business. These developments led management to reduce forecasted sales and profitability for this reporting unit for the remainder of 2010 and the next several years. Accordingly, we performed an interim impairment test of Science Education’s goodwill and intangible assets as of September 30, 2010.

 

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We first determined that the fair value of Science Education’s indefinite-lived intangible assets was $18.7 million as of September 30, 2010, and when compared to its carrying value of $30.0 million, we recognized a pre-tax impairment of $11.3 million. As of September 30, 2010, any further decrease in the fair value of our Science Education’s trademarks and tradenames would result in additional impairment charges. We next evaluated the recoverability of Science Education’s amortizable intangible assets by comparing the carrying value of the asset group to its estimated undiscounted future cash flows expected to be generated. As the undiscounted future cash flows of the Science Education asset group, over its expected remaining useful life, exceeded their carrying value as of September 30, 2010, there was no indication of a lack of recoverability and therefore no impairment was measured. We then commenced a two-step impairment test of Science Education’s goodwill, which had a carrying value of $36.8 million prior to this test. In Step 1, the carrying value of the Science Education reporting unit exceeded its estimated fair value and, therefore, we proceeded to Step 2. In Step 2, our calculation revealed the implied fair value of Science Education’s goodwill was zero and, accordingly, we recognized an impairment of the entire $36.8 million carrying value of goodwill as of September 30, 2010. As a result of the interim impairment tests, we recognized aggregate pre-tax impairment charges of $48.1 million during the three months ended September 30, 2010.
As of our latest annual assessment of our indefinite-lived intangible assets and goodwill on October 1, 2010, we determined that there was no measured impairment of our North American Lab and European Lab indefinite-lived intangible assets and that the estimated fair values of our North American Lab and European Lab reporting units each exceeded its respective carrying values. Accordingly, no impairment was recognized. For our annual assessment of goodwill, the amount by which the estimated fair value exceeded its carrying value was approximately $250 million in our North American Lab reporting unit and approximately $525 million in our European Lab reporting unit. For our annual assessment of indefinite-lived intangible assets, the amount by which the estimated fair value exceeded its carrying value was approximately $8 million in our North American Lab reporting unit and approximately $70 million in our European Lab reporting unit. In connection with our interim and annual impairment tests, we re-affirmed that our trademarks and tradenames have indefinite lives because they do not have legal, regulatory, contractual, competitive or economic limitations and are expected to contribute to the generation of cash flows indefinitely.
The carrying value of goodwill and intangible assets as of December 31, 2010 was $948.7 million and $1,058.1 million, respectively, for North American Lab, $808.4 million and $672.8 million, respectively, for European Lab and $0.0 million and $127.3 million, respectively, for Science Education. As of December 31, 2010, we determined that there were no impairments of our goodwill or intangible assets in any of our reporting units.
Should our planned revenue or cash flow growth or market conditions be adversely affected due to, among other things, ongoing or worsening recessionary or other macroeconomic pressures; or should we experience adverse changes in market factors such as discount rates, valuation multiples derived from comparable publicly traded companies, or control premiums derived from market transactions; additional impairment charges against goodwill and intangible assets may be required. Since we recognized impairments on our indefinite-lived intangible assets at each of our reporting units in 2008 and again in 2010 for our Science Education reporting unit, we will likely incur additional impairment charges if we experience any decrease in the fair value of these assets going forward.
2009 and 2008 Assessments
See Note 3 included in “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information on our assessments prior to 2010.
Interest Rate Swap Valuations. We apply the fair value provisions of U.S. GAAP to our interest rate swap arrangements. We determine the fair value of all of our interest rate swaps using a discounted cash flow model based on the contractual terms of the instrument and using observable inputs such as interest rates, counterparty credit spread and our own credit spread. The discounted cash flow model does not involve significant management judgment and does not incorporate significant unobservable inputs. Accordingly, we classify our interest rate swap valuation measurements within Level 2 of the valuation hierarchy. We consider our interest rate swap valuations to be a critical accounting policy as we do not apply hedge accounting and therefore changes in fair value are recognized as a component of income or loss each period. We had no other material financial assets or liabilities carried at fair value and measured on a recurring basis as of December 31, 2010.

 

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As of December 31, 2010, the incorporation of credit spreads into our discounted cash flow model had the effect of lowering the fair value (liability) of our interest rate swap arrangements by $1.2 million. As of December 31, 2010, a 100 basis point (or 1.00%) improvement (deterioration) in our own credit spread would have had the impact of increasing (decreasing) our liability for interest rate swaps by approximately $0.3 million. As of December 31, 2010, counterparty credit spread did not have a material impact on the fair value of our interest rate swaps. See Note 12 included in “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information on our interest rate swaps.
Accounts Receivable and Reserves. The carrying amount of trade accounts receivable includes a reserve representing our estimate of the amounts that will not be collected for losses due to uncollectibility and for estimated sales returns and allowances. In addition to reviewing delinquent accounts receivable, we consider many factors in estimating our reserve, including historical data, experience, customer types, creditworthiness and economic trends. From time to time, we may adjust our assumptions for anticipated changes in any of these or other factors expected to affect collectibility. During 2010, bad debt expense was $2.5 million.
Inventories. Inventories are valued at the lower of cost or market, cost being determined principally by the last-in, first-out method for the U.S. subsidiaries and the first-in, first-out method for all other subsidiaries. We review our inventory realization based upon several factors, including customer demand, supply of inventory, inventory levels, competitive activity and technology changes and record reserves for obsolescence based upon those and other factors. From time to time, we may adjust our assumptions for anticipated changes in any of these or other factors.
Rebates from Suppliers. We earn rebates from certain of our suppliers from the achievement of certain sales growth and/or purchase volume thresholds. To the extent that rebates relate to inventory on hand, the inventory cost is reduced to reflect the lower cost. During the course of the year, estimates made concerning the achievement of these goals or milestones can vary from quarter to quarter. Generally, a proportionally larger amount of rebates are earned in the fourth quarter of each year.
Agreements with Customers. We have agreements with several of our customers, which contain provisions related to pricing, volume purchase incentives and other contractual provisions. During the course of the year, estimates are made concerning customer contracts and changes in estimates related to these contracts may vary from quarter to quarter and are recorded against net sales.
Product Liability. We are subject to product liability and other claims in the ordinary course of business and, from time to time, we are named as a defendant in cases as a result of our distribution of laboratory and production supplies. While the impact on us of this litigation has typically 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 and results of operations in the future. Our estimates of potential liability are based on several factors, including our historical experience in similar cases, legal venue and the merits of each individual case.
Pension Plans. We have defined benefit pension plans covering a significant number of domestic and international employees. Accounting for these plans requires the use of assumptions, including estimates on the expected long-term rate of return on assets, discount rates and the average rate of increase in employee compensation. In order to make informed assumptions, management consults with actuaries and reviews public market data and general economic information. We periodically assess these assumptions based on market conditions, and if those conditions change, our pension cost and pension obligation may be adjusted accordingly. See Note 10 included in “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information on our defined benefit pension plans.
Income Taxes. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes and net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized.
The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which a change in judgment occurs, as a result of information that arises or when a tax position is effectively settled.
We must make assumptions, judgments and estimates to determine our current provision for income taxes and also our deferred tax assets and liabilities and any valuation allowance to be recorded against a deferred tax asset. Our assumptions, judgments and estimates take into account current tax laws, our interpretation of current tax laws and possible outcomes of current and future audits conducted by foreign and domestic tax authorities and estimates of the amount of future taxable income, if any. Any of the assumptions, judgments and estimates could cause our actual income tax obligations to differ from our estimates. See Note 9 included in “Item 8 — Financial Statements and Supplementary Data” in this Annual Report on Form 10-K for more information on income taxes.

 

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Estimates and Other Accounting Policies. The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Those estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when we believe relevant facts and circumstances warrant an adjustment. Current adverse economic conditions, illiquid credit markets, volatile equity and foreign currency markets, and declines in customer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates. Changes in those estimates resulting from continued changes in the economic environment will be reflected in our consolidated financial statements in future periods.
New Accounting Standards
See Note 2 in “Item 8 — Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, for a complete description of new accounting standards, including those standards adopted as of December 31, 2010 and to be adopted in future periods.
ITEM 7A.  
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Our Senior Secured Credit Facility contains variable interest rates, which exposes the Company to fluctuating rates of interest. In order to partially mitigate such potential variations in interest rates, the Company has entered into certain interest rate swaps. As of December 31, 2010, our two interest rate swaps effectively convert $325.0 million of variable rate U.S. dollar-denominated debt and €220.0 million ($294.0 million on a U.S. dollar equivalent basis) of variable rate Euro-denominated debt to fixed rates of interest. As of December 31, 2010, an instantaneous 100 basis point (or 1.00%) change in the variable rates for the Senior Secured Credit Facility would, on an annualized basis, impact interest expense by approximately $7.9 million on a pre-tax basis and inclusive of our interest rate swaps. See Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Indebtedness” in this Annual Report on Form 10-K for more information on our variable rate debt and our interest rate swap arrangements.
Foreign Currency Exchange Rate Risk
While we report our consolidated financial results in U.S. dollars, we derive a significant portion of our sales and incur costs in foreign currencies (principally the Euro, the British pound sterling and the Canadian dollar) from our operations outside the United States. Fluctuations in the relative values of currencies occur from time to time and could favorably or unfavorably affect our operating results. 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. A 10.00% change in foreign currency exchange rates relative to the U.S. dollar would have impacted our operating income by approximately $7.7 million. Net sales and costs tend to be incurred in the same currency, and therefore, reduce local currency risks.
Where we deem it prudent, we have engaged in hedging programs, using primarily foreign currency forward contracts, aimed at limiting the impact of foreign currency exchange rate fluctuations on cash flows and earnings. We regularly enter into foreign currency forward contracts to mitigate the risk of changes in foreign currency exchange rates primarily associated with the purchase of inventory from foreign vendors or for payments between our subsidiaries generally within the next twelve months or less. Gains and losses on the foreign currency forward contracts generally offset certain portions of gains and losses on expected commitments. These activities have not been material to our consolidated financial statements. Due to recent volatility in global capital and credit markets, our availability to enter into new derivative financial instruments has been limited and may continue to be limited; consequently, our future results of operations may be subject to increased variability. See Note 12 in Item 8 — “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K, for additional discussion of our hedging programs.
We have a significant amount of foreign-denominated debt on our U.S. dollar-denominated balance sheet. An instantaneous 10.00% change in foreign currency exchange rates associated with foreign denominated debt outstanding as of December 31, 2010 would have impacted our exchange gain or loss by approximately $83.8 million on a pre-tax basis.

 

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ITEM 8.  
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated financial statements and schedule of the Company for the periods indicated are included in this Annual Report on Form 10-K.
         
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Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
VWR Funding, Inc.:
We have audited the accompanying consolidated balance sheets of VWR Funding, Inc. and subsidiaries as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ equity and other comprehensive income (loss), and cash flows for each of the years in the three-year period ended December 31, 2010. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedule as listed on the index on page 39. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of VWR Funding, Inc. and subsidiaries as of December 31, 2010 and 2009, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of VWR Funding, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2011 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
Philadelphia, Pennsylvania
February 25, 2011

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(In millions, except share data)
                 
    December 31,  
    2010     2009  
 
               
Assets
               
Current assets:
               
Cash and cash equivalents
  $ 142.1     $ 124.4  
Compensating cash balance
    85.4       105.0  
Trade accounts receivable, less reserves of $9.1 and $10.8, respectively
    512.0       471.3  
Other receivables
    45.2       28.9  
Inventories
    293.0       263.6  
Other current assets
    28.4       24.0  
 
           
Total current assets
    1,106.1       1,017.2  
Property and equipment, net
    194.2       191.4  
Goodwill
    1,757.1       1,833.0  
Other intangible assets, net
    1,858.2       1,986.7  
Deferred income taxes
    9.8       12.6  
Other assets
    76.0       86.4  
 
           
Total assets
  $ 5,001.4     $ 5,127.3  
 
           
 
               
Liabilities, Redeemable Equity Units and Stockholders’ Equity
               
Current liabilities:
               
Current portion of debt and capital lease obligations
  $ 117.4     $ 152.4  
Accounts payable
    406.0       378.2  
Accrued expenses
    206.5       158.2  
 
           
Total current liabilities
    729.9       688.8  
Long-term debt and capital lease obligations
    2,640.3       2,719.3  
Other long-term liabilities
    137.2       135.3  
Deferred income taxes
    478.8       495.5  
 
           
Total liabilities
    3,986.2       4,038.9  
Redeemable equity units
    50.0       45.8  
Commitments and contingences (Note 13)
               
Stockholders’ equity:
               
Common stock, $0.01 par value; 1,000 shares authorized, issued and outstanding
           
Additional paid-in capital
    1,361.2       1,361.7  
Accumulated deficit
    (376.2 )     (397.7 )
Accumulated other comprehensive (loss) income
    (19.8 )     78.6  
 
           
Total stockholders’ equity
    965.2       1,042.6  
 
           
Total liabilities, redeemable equity units and stockholders’ equity
  $ 5,001.4     $ 5,127.3  
 
           
See accompanying notes to consolidated financial statements.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(In millions)
                         
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Net sales
  $ 3,638.7     $ 3,561.2     $ 3,759.2  
Cost of goods sold
    2,599.8       2,545.6       2,693.8  
 
                 
Gross profit
    1,038.9       1,015.6       1,065.4  
Selling, general and administrative expenses
    805.4       806.8       861.6  
Impairments of goodwill and intangible assets
    48.1             392.1  
 
                 
Operating income (loss)
    185.4       208.8       (188.3 )
Interest income
    1.9       2.3       5.7  
Interest expense
    (204.6 )     (226.8 )     (289.6 )
Other income (expense), net
    66.8       (23.9 )     22.1  
 
                 
Income (loss) before income taxes
    49.5       (39.6 )     (450.1 )
Income tax (provision) benefit
    (28.0 )     25.5       115.5  
 
                 
Net income (loss)
  $ 21.5     $ (14.1 )   $ (334.6 )
 
                 
See accompanying notes to consolidated financial statements.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Consolidated Statements of Stockholders’ Equity and Other Comprehensive Income (Loss)
(In millions, except share data)
For the Years Ended December 31, 2010, 2009, and 2008
                                                 
                                    Accumulated        
                    Additional             other        
    Common stock     paid-in     Accumulated     comprehensive        
    Shares     Amount     capital     deficit     income (loss)     Total  
 
                                               
Balance at January 1, 2008
    1,000     $     $ 1,360.2     $ (49.0 )   $ 96.1     $ 1,407.3  
Capital contributions from parent
                2.3                   2.3  
Share-based compensation expense associated with our parent company equity plan
                3.8                   3.8  
Reclassifications of redeemable equity units
                (5.9 )                 (5.9 )
Comprehensive (loss) income (Note 2(r)):
                                               
Net loss
                      (334.6 )           (334.6 )
Other comprehensive loss
                            (64.5 )     (64.5 )
 
                                             
Total comprehensive loss
                                            (399.1 )
 
                                   
Balance at December 31, 2008
    1,000             1,360.4       (383.6 )     31.6       1,008.4  
Capital contributions from parent
                1.4                   1.4  
Share-based compensation expense associated with our parent company equity plan
                3.4                   3.4  
Reclassifications of redeemable equity units
                (3.5 )                 (3.5 )
Comprehensive (loss) income (Note 2(r)):
                                               
Net loss
                      (14.1 )           (14.1 )
Other comprehensive income
                            47.0       47.0  
 
                                             
Total comprehensive income
                                            32.9  
 
                                   
Balance at December 31, 2009
    1,000             1,361.7       (397.7 )     78.6       1,042.6  
Capital contributions from parent
                1.7                   1.7  
Share-based compensation expense associated with our parent company equity plan
                3.4                   3.4  
Reclassification of redeemable equity units
                (5.6 )                 (5.6 )
Comprehensive income (loss) (Note 2(r)):
                                               
Net income
                      21.5             21.5  
Other comprehensive loss
                            (98.4 )     (98.4 )
 
                                             
Total comprehensive loss
                                            (76.9 )
 
                                   
Balance at December 31, 2010
    1,000     $     $ 1,361.2     $ (376.2 )   $ (19.8 )   $ 965.2  
 
                                   
See accompanying notes to consolidated financial statements.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(In millions)
                         
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Cash flows from operating activities:
                       
Net income (loss)
  $ 21.5     $ (14.1 )   $ (334.6 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
                       
Depreciation and amortization
    116.5       116.6       116.1  
Net unrealized translation (gain) loss
    (65.1 )     26.5       (30.1 )
Net unrealized (gain) loss on interest rate swaps
    (14.6 )     (0.1 )     35.4  
Impairments of goodwill and intangible assets
    48.1             392.1  
Non-cash payment-in-kind interest accretion
    3.0       43.0        
Non-cash equity compensation expense
    3.4       3.4       3.8  
Amortization of debt issuance costs
    9.6       9.6       9.6  
Deferred income tax provision (benefit)
    1.2       (58.4 )     (150.9 )
Other, net
    7.0       7.4       4.1  
Changes in working capital, net of business acquisitions:
                       
Trade accounts receivable
    (49.9 )     12.2       (11.7 )
Inventories
    (34.2 )     30.2       2.4  
Other current and non-current assets
    (20.2 )     (4.3 )     (0.1 )
Accounts payable
    41.0       18.1       (22.3 )
Accrued expenses and other liabilities
    55.0       (21.1 )     (5.1 )
 
                 
Net cash provided by operating activities
    122.3       169.0       8.7  
 
                 
Cash flows from investing activities:
                       
Acquisitions of businesses and other intangible assets
    (32.8 )     (17.9 )     (54.2 )
Capital expenditures
    (41.6 )     (23.9 )     (29.7 )
Proceeds from sales of property and equipment
          3.7       9.0  
 
                 
Net cash used in investing activities
    (74.4 )     (38.1 )     (74.9 )
 
                 
Cash flows from financing activities:
                       
Proceeds from debt
    115.0       268.3       381.7  
Repayment of debt
    (138.2 )     (309.8 )     (319.2 )
Net change in bank overdrafts
    (18.9 )     (0.1 )     14.7  
Net change in compensating cash balance
    19.6       (4.3 )     (13.3 )
Proceeds from equity incentive plans
    1.7       1.4       2.3  
Debt issuance costs
                (1.2 )
Repurchase of redeemable equity units
    (1.5 )     (6.6 )      
 
                 
Net cash (used in) provided by financing activities
    (22.3 )     (51.1 )     65.0  
 
                 
Effect of exchange rate changes on cash
    (7.9 )     2.6       (1.8 )
 
                 
Net increase (decrease) in cash and cash equivalents
    17.7       82.4       (3.0 )
Cash and cash equivalents beginning of period
    124.4       42.0       45.0  
 
                 
Cash and cash equivalents end of period
  $ 142.1     $ 124.4     $ 42.0  
 
                 
See accompanying notes to consolidated financial statements.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(In millions, except share data)
(1) Background and Nature of Operations
VWR Funding, Inc. (the “Company,” “we,” “us,” or “our”) offers products and services through its wholly-owned subsidiary, VWR International, LLC (“VWR”), and VWR’s subsidiaries. We distribute laboratory supplies, including chemicals, glassware, equipment, instruments, protective clothing, production supplies and other assorted laboratory products, primarily in North America and Europe. We also provide services, including technical services, on-site storeroom services and laboratory and furniture design, supply and installation. Services comprise a relatively small portion of our net sales. Our business is diversified across products, geographic regions and customer segments.
We report financial results on the basis of the following three business segments: North American laboratory distribution (“North American Lab”), European laboratory distribution (“European Lab”) and Science Education. Both the North American Lab and European Lab segments are engaged in the distribution of laboratory and production supplies to customers in the pharmaceutical, biotechnology, medical device, chemical, technology, food processing, clinical and consumer products industries, as well as governmental agencies, universities and research institutes, and environmental organizations. Science Education is engaged in the assembly, manufacture and distribution of scientific supplies and specialized kits principally to academic institutions, including primary and secondary schools, colleges and universities. Our operations in the Asia Pacific region (“Asia Pacific”) are engaged in regional commercial sales and also support our North American Lab and European Lab businesses. The results of our operations in Asia Pacific, which are not material, are included in our North American Lab segment.
Until June 2007, the Company was owned by affiliates of Clayton, Dubilier & Rice, Inc. (“CD&R”). On June 29, 2007, the Company was acquired from CD&R by affiliates of Madison Dearborn Partners, LLC (“Madison Dearborn”) pursuant to a merger (the “Merger”). After giving effect to the Merger and the related transactions, the Company became a direct, wholly-owned subsidiary of VWR Investors, Inc., a Delaware corporation (“VWR Investors”), which is a direct, wholly-owned subsidiary of Varietal Distribution Holdings, LLC, a Delaware limited liability company (“Holdings”). VWR Investors and Holdings have no operations other than the ownership of the Company. Private equity funds managed by Madison Dearborn Partners, LLC (“Madison Dearborn”) beneficially own approximately 75% of our outstanding common stock through their ownership interests in Holdings.
As a result of the Merger, our assets and liabilities were adjusted to their estimated fair values as of June 30, 2007. This resulted in a significant increase in the carrying value of our identifiable intangible assets and goodwill. In addition, we revalued our pension obligations, recorded significant deferred tax liabilities and certain deferred tax assets and we incurred substantial additional indebtedness.
In preparation of this Annual Report on Form 10-K, we evaluated subsequent events from December 31, 2010 through the date of issuance.
(2) Summary of Significant Accounting Policies
(a) Use of Estimates
The preparation of consolidated financial statements in conformity with generally accepted accounting principles in the United States of America (“US GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. For example, significant estimates and assumptions were made in determining triggering events and in quantifying impairments of our assets (Note 3), the fair value of our financial instruments (Note 12), the need for valuation allowances on deferred taxes (Note 9) and the discount rates and expected return on plan assets (Note 10), among others. Those estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. We adjust such estimates and assumptions when we believe relevant facts and circumstances warrant an adjustment. Recent adverse economic conditions, illiquid credit markets, volatile equity and foreign currency markets, and declines in customer spending have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from those estimates. Changes in those estimates resulting from continued changes in the economic environment will be reflected in our consolidated financial statements in future periods.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the accounts of VWR Funding, Inc. and its subsidiaries after elimination of all intercompany balances and transactions. When the Company does not have a controlling interest in an entity, but exerts significant influence over the entity, the Company applies the equity method of accounting. The consolidated financial statements exclude the accounts of Holdings and VWR Investors, but include Holdings’ investment cost basis allocated to assets and liabilities acquired in the Merger.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(c) Foreign Currency Translation
Assets and liabilities of our foreign subsidiaries, where the functional currency is the local currency, are translated into U.S. dollars using period-end exchange rates, and income and expenses are translated using average exchange rates. Resulting translation adjustments are reported in accumulated other comprehensive income as a separate component of stockholders’ equity. Foreign currency transaction gains and losses are reported in other income (expense), net within our statements of operations, except for gains and losses associated with the purchase of inventories and related derivative financial instruments, which are reported in costs of goods sold within our statements of operations (see Note 12(c)).
We have a significant amount of foreign-denominated debt on our U.S. dollar-denominated balance sheet. The translation of foreign-denominated debt obligations on our U.S. dollar-denominated balance sheet is reported in other income (expense), net as a foreign currency exchange gain or loss each period. As a result, our operating results are exposed to foreign currency risk, principally with respect to the Euro. An instantaneous 10.00% change in foreign currency exchange rates associated with foreign denominated debt outstanding as of December 31, 2010 would have impacted our exchange gains or losses by approximately $83.8 on a pre-tax basis.
Foreign currency exchange gains and losses included in other income (expense), net were as follows:
                         
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Exchange gains (losses), net
  $ 66.8     $ (23.9 )   $ 22.1  
During the years ended December 31, 2010, 2009, and 2008, we recorded foreign currency exchange gains (losses) based primarily on changes in the value of the Euro, the British pound sterling and the Canadian dollar against the U.S. dollar, as well as the Euro against the British pound sterling during such time periods. Our net exchange gains for the years ended December 31, 2010 and 2008 are substantially related to unrealized gains due to the weakening of the Euro against the U.S. dollar. Our net exchange losses for the year ended December 31, 2009 are substantially related to unrealized losses due to the strengthening of the Euro against the U.S. dollar.
(d) Cash and Cash Equivalents
Cash and cash equivalents are comprised of highly liquid investments with original maturities of three months or less. Our cash and cash equivalents primarily consisted of Euro-denominated overnight deposits and investments in money market funds. The amount of restricted cash was $0.8 and $0.2 as of December 31, 2010 and 2009, respectively.
While our global cash pooling arrangement is with a single financial institution with specific provisions for the right to offset positive and negative cash balances, we believe it is unlikely that we would offset an underlying cash deficit with a cash surplus from another country. Accordingly, we classify a positive amount of cash, equal to the aggregate bank overdraft position of subsidiaries participating in our global cash pooling arrangement, as a compensating cash balance separate from cash and cash equivalents. Due to the nature of these bank overdraft positions, amounts have been classified within the short-term portion of debt as of each period end.
(e) Trade Accounts Receivable
The carrying amount of trade accounts receivable includes a reserve representing our estimate of the amounts that will not be collected and for estimated sales returns and allowances. In addition to reviewing delinquent accounts receivable, we consider many factors in estimating our reserve, including historical data, experience, customer types, creditworthiness and economic trends. From time to time, we may adjust our assumptions for anticipated changes in any of these or other factors expected to affect collectability.
Trade accounts receivable reflects a diverse customer base and our wide geographic dispersion of businesses. As a result, no significant concentrations of credit risk existed as of December 31, 2010 and 2009.

 

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Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(f) Inventories
Inventories, consisting primarily of products held for sale, are valued at the lower of cost or market, cost being determined by the last-in, first-out (“LIFO”) method for our U.S. subsidiaries and the first-in, first-out method for all other subsidiaries. We periodically review quantities of inventories on hand and compare these amounts to the expected use of each product or product line. We record a charge to cost of goods sold for the amount required to reduce the carrying value of inventory to net realizable value. The table below shows the percentage of inventories determined using the LIFO method and the amount by which the LIFO cost is less than the current cost for each period.
                 
    December 31,  
    2010     2009  
 
               
Percent using LIFO method
    54 %     55 %
Amount less than current cost
  $ 11.4     $ 9.9  
(g) Property and Equipment
Property and equipment are recorded at cost. Property and equipment held under capital leases are recorded at the present value of minimum lease payments. Depreciation is calculated using the straight-line method over the following estimated useful lives: buildings and improvements ranges from 10 to 40 years; equipment and software ranges from 3 to 15 years. Property and equipment held under capital leases and leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the estimated remaining life of the lease. Costs for repairs and maintenance that do not significantly increase the value or estimated lives of property and equipment are treated as expense as such costs are incurred.
(h) Impairment of Long-Lived Assets
We evaluate the recoverability of long-lived assets used in operations when events or changes in circumstances indicate a possible inability to recover carrying amounts. The Company assesses recoverability by comparing the carrying value of the asset to estimated undiscounted future cash flows expected to be generated by the asset. If an asset is considered impaired, the impairment loss to be recognized is measured as the amount by which the asset’s carrying value exceeds its fair value.
(i) Goodwill and Intangible Assets
Goodwill represents the excess of acquisition costs over the fair value of net assets acquired in connection with the Merger and acquisitions subsequent to the Merger. 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 our trademarks and trade names and are not amortized.
We re-evaluate the estimated useful lives of our intangible assets annually. We determined that our trademarks and trade names have indefinite lives because they do not have legal, regulatory, contractual, competitive or economic limitations and are expected to contribute to the generation of cash flows indefinitely.
Goodwill and other intangible assets with indefinite useful lives are not amortized and are tested annually for impairment or 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 indication of potential impairment exists.
Indefinite-lived intangible assets are tested for impairment prior to testing of goodwill or amortizable intangible assets. An impairment charge is measured if the carrying value of an indefinite-lived intangible asset exceeds its fair value. We evaluate the recoverability of our amortizable intangible assets by comparing the carrying value to estimated undiscounted future cash flows expected to be generated. If an amortizable intangible asset is considered impaired, the impairment loss to be recognized is measured as the amount by which the asset’s carrying value exceeds its fair value.
Goodwill impairment testing is performed at the reporting unit level. We have determined that our reporting units are the same as our business segments and we have elected to perform our annual impairment testing on October 1 st of each year. The goodwill impairment analysis is a two-step test. The first step (“Step 1”), used to identify potential impairment, involves comparing the reporting unit’s estimated fair value to its carrying value, including goodwill. If the estimated fair value exceeds its carrying value, goodwill is considered not to be impaired. If the carrying value exceeds its estimated fair value, there is an indication of potential impairment and the second step is performed to measure the amount of impairment, if any. The second step (“Step 2”) involves calculating an implied fair value of goodwill, determined in a manner similar to the amount of goodwill calculated in a business combination. If the implied fair value of goodwill exceeds the carrying value of goodwill, there is no impairment. If the carrying value of goodwill exceeds the implied fair value of goodwill, an impairment charge is recorded for the excess. Goodwill impairments cannot be reversed in subsequent periods.

 

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Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
Impairment losses associated with goodwill and intangible assets were recorded in 2010 and 2008. No impairment losses were recognized during 2009. See Note 3.
(j) Advertising
We expense advertising costs as incurred, except for certain direct-response advertising, which is capitalized and amortized over its expected period of future benefit, generally between 12 to 48 months. Capitalized direct-response advertising, which is included in other current assets and other assets, consists of catalog production and mailing costs that are expensed over the estimated useful life from the date catalogs are mailed. Capitalized direct-response advertising as of December 31, 2010 and 2009 were $5.4 and $5.7, respectively. The table below shows total advertising expense, including amortization of capitalized direct-response advertising costs, for each of the reporting periods.
                         
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Advertising expense
  $ 21.8     $ 21.8     $ 24.9  
(k) Revenue Recognition
We record product revenue on a gross basis when persuasive evidence of an arrangement exists, the price is fixed or determinable, title and risk of loss have been transferred to the customer and collectibility of the resulting receivable is reasonably assured. Title and risk of loss is transferred at the time of shipment or upon delivery to customers, depending upon the terms of the arrangement with the customer. Products are delivered without post-sale obligations to the customer. Provisions for discounts, rebates to customers, sales returns and other adjustments are provided for as a reduction of sales in the period the related sales are recorded.
Our service revenues, which are substantially less than our product distribution revenues, are primarily comprised of technical services, on-site storeroom services, laboratory and furniture design, supply and installation. Revenues related to technical services and on-site storeroom services are recognized as the services are performed. Certain of our arrangements to provide on-site storeroom services contain multiple elements. We recognize revenue separately for each element based on the fair value of the element provided. The majority of contracts associated with our laboratory and furniture design, supply and installation are recorded under the percentage-of-completion method of accounting. Profits recognized on contracts in process are based upon estimated contract revenue and cost to completion. Cost to completion is measured based on actual costs incurred to date compared to total estimated costs. Typically, the duration of such projects does not extend beyond two months.
We record shipping and handling charges billed to customers in net sales and record shipping and handling costs in cost of goods sold for all periods presented. Sales taxes, value-added taxes and certain excise taxes collected from customers and remitted to governmental authorities are accounted for on a net basis and therefore are excluded from net sales.
(l) Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting and income tax purposes and net operating loss and credit carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized.
The Company recognizes the effect of income tax positions only if those positions are more likely than not to be sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which a change in judgment occurs, as a result of information that arises or when a tax position is effectively settled. We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense in our consolidated financial statements.

 

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Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(m) 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.
(n) Pensions and Other Postretirement Plans
We have defined benefit plans covering certain of our employees. The benefits include pension, salary continuance, life insurance and health care. Benefits are accrued over the employees’ service periods. The Company is required to use actuarial methods and assumptions in the valuation of defined benefit obligations and the determination of expense. Differences between actual and expected results or changes in the value of defined benefit obligations and plan assets are not recognized in earnings as they occur but, rather, systematically over subsequent periods. See Note 10.
(o) Share-Based Compensation
The Company expenses the grant-date fair value of share-based awards over the vesting period during which services are performed. Share-based compensation expense that has been included in selling, general and administrative (“SG&A”) expenses amounted to $3.4, $3.4, and $3.8 for the years ended December 31, 2010, 2009, and 2008, respectively.
(p) Financial Instruments and Derivatives
All derivatives, whether designated for hedging relationships or not, are recorded on the balance sheet at fair value. For all hedging relationships the Company formally documents the hedging relationship and its risk-management objective and strategy, the hedged instrument, the hedged item, the nature of the risk being hedged, how the hedging instrument’s effectiveness will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. If the derivative is designated as a fair value hedge, the changes in the fair value of the derivative and of the hedged item attributable to the hedged risk are recognized in the results of operations. If the derivative is designated as a cash flow hedge, the effective portions of changes in the fair value of the derivative are recorded in accumulated other comprehensive income (loss) and are recognized in the results of operations when the hedged item affects earnings. Ineffective portions of changes in the fair value of cash flow hedges are recognized in the results of operations. Cash flows from derivatives which are accounted for as hedges are classified in the statement of cash flows in the same category as the item being hedged or on a basis consistent with the nature of the instrument. Cash flows from our interest rate swap arrangements are classified in the statement of cash flows within operating activities consistent with the classification of interest. For derivative instruments not designated as hedging instruments, changes in fair value are recognized in the results of operations in the current period.
(q) Asset Retirement Obligations
A liability for an asset retirement obligation is recognized at fair value in the period when the asset is placed in service. The fair value of the liability is estimated using discounted cash flows. In subsequent periods, the retirement obligation is accreted to its future value or the estimate of the obligation at the asset retirement date. The accretion charge is reflected as a component of SG&A expenses. A corresponding retirement asset equal to the fair value of the retirement obligation when the asset is placed in service is also recorded as part of the carrying amount of the related long-lived asset and depreciated over the asset’s useful life. Our conditional asset retirement obligations primarily relate to restoration costs for leased facilities, including the removal of certain leasehold improvements. Costs related to our asset retirement obligations have not been material.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(r) Comprehensive (Loss) Income
Other comprehensive (loss) income components include foreign currency translation adjustments, pension and other postretirement benefit plan adjustments and realized and unrealized (losses) gains on derivatives. Accumulated other comprehensive (loss) income, net of tax, consists of:
                 
    December 31,  
    2010     2009  
 
Foreign currency translation adjustments
  $ (12.6 )   $ 78.5  
Realized loss on derivatives, net of taxes of $3.9 and $5.9
    (7.3 )     (10.5 )
Unrealized loss on derivatives, net of taxes of $0.4 in 2010
    (1.0 )     (0.2 )
Retirement benefit plans, net of taxes of $4.2 and $9.1
    1.1       10.8  
 
           
 
  $ (19.8 )   $ 78.6  
 
           
Comprehensive (loss) income is determined as follows:
                         
    Year Ended December 31,  
    2010     2009     2008  
 
Net income (loss)
  $ 21.5     $ (14.1 )   $ (334.6 )
Other comprehensive (loss) income:
                       
Foreign currency translation adjustments
    (91.1 )     68.4       (107.2 )
Benefit plan adjustments, net of tax (1)
    (9.7 )     (19.6 )     32.1  
Unrealized (loss) gain on derivatives, net of tax (2)
    (0.8 )     (3.7 )     8.7  
Amortization of realized losses on derivatives, net of tax (3)
    3.2       3.2       1.9  
Amortization of net actuarial gain, net of tax (4)
          (1.3 )      
 
                 
Comprehensive (loss) income
  $ (76.9 )   $ 32.9     $ (399.1 )
 
                 
 
     
(1)  
Benefit plan adjustments are net of taxes of $4.9, $12.4, and $22.0 for the years ended December 31, 2010, 2009, and 2008, respectively.
 
(2)  
Unrealized (loss) gain on derivatives is net of taxes of $0.4, $1.5, and $5.5 for the years ended December 31, 2010, 2009, and 2008, respectively.
 
(3)  
Amortization of realized losses on derivatives is net of taxes of $2.0, $2.2, and $1.5 for the years ended December 31, 2010, 2009, and 2008, respectively.
 
(4)  
Amortization of net actuarial gain is net of taxes of $0.9 for the year ended December 31, 2009.
(s) Supplemental Cash Flow Information
                         
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Cash paid for interest
  $ 167.2     $ 200.7     $ 242.8  
Cash paid for income taxes, net
    24.1       32.7       28.1  
See Note 8(e) for information on non-cash capital lease additions during the years ended December 31, 2010 and 2009.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(t) New Accounting Standards
The following accounting standard was adopted during 2010:
Fair Value Measurements and Disclosures
In January 2010, the Financial Accounting Standards Board (“FASB”) issued updated guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. This updated guidance requires new disclosures on significant transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy and requires a reconciliation of recurring Level 3 measurements including purchases, sales, issuances and settlements on a gross basis. This update became effective for the Company with the interim and annual reporting period beginning January 1, 2010, except for the requirement to provide the additional Level 3 activity on a gross basis, which will become effective for the Company with the interim and annual reporting period beginning January 1, 2011. The Company will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. Our adoption of this guidance did not have a material impact on the Company’s consolidated financial statements and we do not expect the adoption of the remaining guidance to have a material impact on our consolidated financial statements.
The following accounting standard will be adopted in the future:
Revenue Recognition
In October 2009, the FASB issued updated revenue recognition guidance which eliminates the requirement that all undelivered elements have vendor specific objective evidence of selling price or third party evidence of selling price before an entity can recognize the portion of an overall arrangement fee that is attributable to items that already have been delivered. Additionally, the new guidance will require entities to disclose more information about their multiple-element revenue arrangements. This update is effective for the Company on January 1, 2011 and will be applied prospectively for revenue arrangements entered into or materially modified after this date. The Company expects that the adoption of this guidance will not have a material impact on its consolidated financial statements.
(3) Impairments of Goodwill and Intangible Assets
We carry significant amounts of goodwill and intangible assets, including indefinite-lived intangible assets, on our balance sheet, as a result of the Merger and acquisitions subsequent to the Merger. These assets are evaluated periodically for impairment under US GAAP as further described in Note 2(i).
(a) 2010 Assessments
Annual Assessment — As of our latest annual assessment of our indefinite-lived intangible assets and goodwill on October 1, 2010, we determined that there was no measured impairment of our North American Lab and European Lab indefinite-lived intangible assets and that the estimated fair values of our North American Lab and European Lab reporting units each exceeded its respective carrying values. Accordingly, no impairment was recognized. For our annual assessment of goodwill, the amount by which the estimated fair value exceeded its carrying value was approximately $250 in our North American Lab reporting unit and approximately $525 in our European Lab reporting unit. For our annual assessment of indefinite-lived intangible assets, the amount by which the estimated fair value exceeded its carrying value was approximately $8 in our North American Lab reporting unit and approximately $70 in our European Lab reporting unit. In connection with our interim and annual impairment tests, we re-affirmed that our trademarks and tradenames have indefinite lives because they do not have legal, regulatory, contractual, competitive or economic limitations and are expected to contribute to the generation of cash flows indefinitely.
Interim Assessments — We observed a material decline in the operating results of our Science Education reporting unit during the seasonally-significant third calendar quarter of 2010, such decline representing a significant shortfall against both budgeted and prior period performance. The financial results of this reporting unit have been negatively impacted by a continued reduction in spending by schools in response to the prolonged negative economic conditions in the United States and the resultant uncertainty in state and local sources of funding and, to a lesser extent, reductions in international order flow. In addition, we observed a continued tendency on the part of state educational institutions to defer adopting new textbooks, negatively impacting Science Education’s ability to capitalize on the related publisher kitting business. These developments led management to reduce forecasted sales and profitability for this reporting unit for the remainder of 2010 and the next several years. Accordingly, we performed an interim impairment test of Science Education’s goodwill and intangible assets as of September 30, 2010.

 

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Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
We first determined that the fair value of Science Education’s indefinite-lived intangible assets was $18.7 as of September 30, 2010, and when compared to its carrying value of $30.0, we recognized a pre-tax impairment of $11.3. As of September 30, 2010, any further decrease in the fair value of our Science Education’s trademarks and tradenames would result in additional impairment charges. We next evaluated the recoverability of Science Education’s amortizable intangible assets by comparing the carrying value of the asset group to its estimated undiscounted future cash flows expected to be generated. As the undiscounted future cash flows of the Science Education asset group, over its expected remaining useful life, exceeded their carrying value as of September 30, 2010, there was no indication of a lack of recoverability and therefore no impairment was measured. We then commenced a two-step impairment test of Science Education’s goodwill, which had a carrying value of $36.8 prior to this test. In Step 1, the carrying value of the Science Education reporting unit exceeded its estimated fair value and, therefore, we proceeded to Step 2. In Step 2, our calculation revealed the implied fair value of Science Education’s goodwill was zero and, accordingly, we recognized an impairment of the entire $36.8 carrying value of goodwill as of September 30, 2010. As a result of the interim impairment tests, we recognized aggregate pre-tax impairment charges of $48.1 during the three months ended September 30, 2010.
Should our planned revenue or cash flow growth or market conditions be adversely affected due to, among other things, ongoing or worsening recessionary or other macroeconomic pressures; or should we experience adverse changes in market factors such as discount rates, valuation multiples derived from comparable publicly traded companies, or control premiums derived from market transactions; additional impairment charges against goodwill and indefinite-lived intangible assets may be required. See Note 12(e) for a discussion of our non-recurring fair value measurements made in connection with our impairment testing of goodwill and intangible assets as of September 30 and October 1, 2010.
(b) 2009 Assessments
Annual Assessment — Our annual assessment of indefinite-lived intangible assets and goodwill on October 1, 2009 determined that there was no measured impairment of our indefinite-lived intangible assets and that the estimated fair values of our North American Lab and European Lab reporting units each exceeded its respective carrying value. Accordingly, no impairment was recognized. The amount by which the estimated fair value exceeded its carrying value was approximately $90 in our North American Lab reporting unit and was approximately $300 in our European Lab reporting unit.
Interim Assessments — We observed a decline in the operating results of Science Education during the seasonally-significant third calendar quarter of 2009. We were also aware of the reduction in spending by schools due to the general economic conditions in the United States and the impact that unresolved state budgets have had on results and, accordingly, as of September 30, 2009, we reduced forecasted sales in the near term. As a result, we performed an interim impairment test of Science Education’s goodwill and intangible assets as of September 30, 2009. We determined that there was no measured impairment of the intangible assets. Our evaluation of reporting unit goodwill revealed a failure of Step 1. However, our Step 2 measurement of the implied fair value of goodwill exceeded the carrying value of goodwill primarily as a result of a decrease in the fair value of amortizable intangible assets. Accordingly, we did not recognize any impairment charges.
The December 2009 German appellate court ruling on our and Merck KGaA’s appeal of the German Federal Cartel Office’s order relating to our exclusive European Distribution Agreement had the potential to negatively affect our operations in Germany (see Note 13(b)). Consequently, we tested the recoverability of our chemical supply agreement intangible asset, relating to the entire geographic scope of the European Distribution Agreement, as of December 31, 2009 (see Note 4). There was no impairment recognized, as the fair value exceeded the respective carrying value.
See Note 12(e) for a discussion of our non-recurring fair value measurements made in connection with our impairment testing of goodwill and intangible assets as of September 30, October 1 and December 31, 2009.
(c) 2008 Assessments
During the fourth quarter of 2008, the Company conducted the required annual test of goodwill for impairment as of October 1, 2008. There was no indicated impairment for our North American Lab and European Lab reporting units, as the estimated fair value exceeded its corresponding carrying value. However, as a result of a decline in operating results in our Science Education reporting unit and due to a decline in forecasted cash flows, we recognized an impairment of goodwill and intangible assets of $99.0.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
As of December 31, 2008, based on an adverse change in the general business climate as a result of the global economic slowdown, the Company determined an impairment test was required for all reporting units, including tests of long-lived assets, indefinite-lived intangible assets and goodwill. As a result of our impairment tests, we recognized aggregate impairment charges of $293.1, relating to the impairment of goodwill and intangible assets. We believe that the impairment charges recognized in our North American Lab and European Lab reporting units were primarily a result of macroeconomic factors (global recession and volatility in the financial markets), while the charges recognized in our Science Education reporting unit were due to a mix of macroeconomic and industry-specific factors (reduction in discretionary spending by schools).
These impairment charges reduced the carrying value of our reporting units during the fourth quarter of 2008 as follows:
                                 
    North     European     Science        
    American Lab     Lab     Education     Total  
Asset category:
                               
Indefinite-lived intangible assets
  $ 106.6     $ 88.0     $ 39.0     $ 233.6  
Goodwill
    95.5             63.0       158.5  
 
                       
Total impairment charges
  $ 202.1     $ 88.0     $ 102.0     $ 392.1  
 
                       
(4) Goodwill and Other Intangible Assets
The following table reflects changes in the carrying value of goodwill by segment:
                                 
    North     European     Science        
    American Lab     Lab     Education     Total  
Balance at January 1, 2009:
                               
Goodwill
  $ 1,011.2     $ 832.5     $ 99.5     $ 1,943.2  
Accumulated impairment losses
    (95.5 )           (63.0 )     (158.5 )
 
                       
 
    915.7       832.5       36.5       1,784.7  
Acquisitions (Note 5)
          4.6             4.6  
Currency translation changes
    9.4       29.9             39.3  
Other
    4.8       (0.4 )           4.4  
 
                       
Balance at December 31, 2009:
                               
Goodwill
    1,025.4       866.6       99.5       1,991.5  
Accumulated impairment losses
    (95.5 )           (63.0 )     (158.5 )
 
                       
 
    929.9       866.6       36.5       1,833.0  
Acquisitions (Note 5)
    13.3       1.6             14.9  
Goodwill impairment charges (Note 3)
                (36.8 )     (36.8 )
Currency translation changes
    4.3       (60.8 )           (56.5 )
Other
    1.2       1.0       0.3       2.5  
 
                       
Balance at December 31, 2010:
                               
Goodwill
    1,044.2       808.4       99.8       1,952.4  
Accumulated impairment losses
    (95.5 )           (99.8 )     (195.3 )
 
                       
 
  $ 948.7     $ 808.4     $     $ 1,757.1  
 
                       
During the year ended December 31, 2009, we reclassified $6.6 from goodwill to identifiable intangible assets relating to customer relationships and other amortizable intangible assets in our European Lab segment as a result of our finalization of purchase accounting for acquisitions completed in 2008. The other adjustments for 2010 and 2009 primarily represent inconsequential corrections of errors related to various consolidation adjustments associated with and for periods prior to the Merger. Management believes that the corrections are inconsequential to any previously reported annual or interim consolidated financial statements.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
Other intangible assets for each of the reporting periods is shown in the table below:
                                                 
    December 31, 2010     December 31, 2009  
    Gross                     Gross              
    Carrying     Accumulated     Net Carrying     Carrying     Accumulated     Net Carrying  
    Amount     Amortization     Amount     Amount     Amortization     Amount  
Amortizable intangible assets:
                                               
Customer relationships:
                                               
North American Lab
  $ 765.8     $ 132.3     $ 633.5     $ 750.9     $ 93.8     $ 657.1  
European Lab
    478.2       84.7       393.5       513.2       64.1       449.1  
Science Education
    131.2       23.1       108.1       131.2       16.4       114.8  
Chemical supply agreement
    53.4       26.7       26.7       57.5       20.6       36.9  
Other
    16.6       9.1       7.5       19.0       7.9       11.1  
 
                                   
Total amortizable intangible assets
    1,445.2       275.9       1,169.3       1,471.8       202.8       1,269.0  
Indefinite-lived intangible assets:
                                               
Trademarks and tradenames
    688.9             688.9       717.7             717.7  
 
                                   
Total intangible assets
  $ 2,134.1     $ 275.9     $ 1,858.2     $ 2,189.5     $ 202.8     $ 1,986.7  
 
                                   
During the year ended December 31, 2010, we recognized customer relationship and other amortizable intangible assets associated with our purchase of EBOS Lab and Labart with an aggregate gross carrying amount of $13.5 (Note 5). During the year ended December 31, 2010, we recognized an impairment of $11.3 related to the indefinite-lived trademarks and tradenames of our Science Education reporting unit (Note 3).
As of December 31, 2010, the weighted average amortization periods for customer relationships in North American Lab, European Lab, and Science Education were 19.8 years, 19.5 years, and 20.0 years, respectively. The weighted average amortization periods for the chemical supply agreement, other amortizable intangible assets and total amortizable intangible assets were 7.0 years, 5.3 years and 19.4 years, respectively.
The following table shows amortization expense for each of the reporting periods:
                         
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Amortization expense
  $ 81.6     $ 81.6     $ 82.4  
The estimated amortization expense for each of the five succeeding years and thereafter is as follows:
         
Year ended December 31:
       
2011
  $ 82.2  
2012
    80.5  
2013
    78.5  
2014
    74.5  
2015
    70.5  
Thereafter
    783.1  
 
     
 
  $ 1,169.3  
 
     

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(5) Acquisitions
Our results of operations for the years ended December 31, 2010, 2009, and 2008 includes the effects of certain business combinations and acquisitions (collectively, the “Acquisitions”) noted below:
   
On April 1, 2008, we acquired Jencons (Scientific) Limited (“Jencons”), a scientific laboratory supply distributor. Based in the UK, Jencons also has operations in Ireland, Kenya and the United States.
   
On August 1, 2008, we acquired Spektrum-3D Kft (“Spektrum”), a Hungarian-based scientific laboratory supply distributor.
   
On October 1, 2008, we acquired Omnilab AG (“Omnilab”), a Swiss scientific laboratory supply distributor.
   
On October 1, 2009, we acquired X-treme Geek (“XGeek”), a domestic internet-based retailer offering high-tech gadgets and accessories to the technically inclined.
   
On December 1, 2009, we acquired OneMed Lab (“OneMed”), a scientific laboratory supply distributor operating in Finland, Norway and Sweden.
   
On September 1, 2010, we acquired the scientific distribution businesses of EBOS Group Limited (collectively “EBOS Lab”). EBOS Lab distributes general laboratory supplies and life science products in Australia and New Zealand.
   
On September 1, 2010, we acquired Labart sp. z o.o. (“Labart”), a scientific laboratory supply distributor operating in Poland.
The results of EBOS Lab have been included in our North American Lab segment from September 1, 2010. The results of Jencons, Spektrum, Omnilab, OneMed and Labart have been included in the European Lab segment from the dates of acquisition. The results of XGeek have been included in our Science Education segment from October 1, 2009. The purchase price allocation for the acquisitions of EBOS Lab and Labart are preliminary and may be adjusted in 2011, although we are unaware of any information that would cause the final allocations to differ materially from preliminary estimates. The Acquisitions were funded through a combination of cash and cash equivalents on hand and, to a limited extent, incremental borrowings made under the Company’s Senior Secured Credit Facility. The accumulated excess of the purchase price over the fair value of the acquired net assets of the Acquisitions is summarized below:
         
Purchase price
  $ 103.4  
Net tangible assets acquired
    (7.6 )
Intangible assets acquired, other than goodwill
    (43.4 )
 
     
Goodwill
  $ 52.4  
 
     
On February 1, 2011, we acquired AMRESCO Inc. (“AMRESCO”), a domestic manufacturer and supplier of high quality biochemicals and reagents for molecular biology, life sciences, proteomics, diagnostics, molecular diagnostics and histology areas of research and production. AMRESCO has annual net sales of approximately $50. The acquisition of AMRESCO was funded through a borrowing made under our Senior Secured Credit Facility.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(6) Property and Equipment
Property and equipment, net, for each of the reporting periods is shown in the table below:
                 
    December 31,  
    2010     2009  
 
Land
  $ 18.4     $ 16.6  
Buildings and improvements
    116.2       112.2  
Equipment and computer software
    152.9       128.7  
Capital additions in process
    9.4       13.4  
 
           
 
    296.9       270.9  
Less accumulated depreciation
    (102.7 )     (79.5 )
 
           
Property and equipment, net
  $ 194.2     $ 191.4  
 
           
Depreciation expense, including amortization of assets recorded under capital leases, for each of the reporting periods is shown in the table below:
                         
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Depreciation expense
  $ 34.9     $ 35.0     $ 33.7  
(7) Accrued Expenses
The components of accrued expenses for each of the reporting periods is shown in the table below:
                 
    December 31,  
    2010     2009  
 
Other accrued expenses
  $ 89.1     $ 69.1  
Employee-related accruals
    61.1       63.8  
Accrued interest
    33.9       0.2  
Deferred income taxes
    8.6       12.0  
Income taxes payable
    11.8       8.2  
Cost reduction-related accruals
    2.0       4.9  
 
           
 
  $ 206.5     $ 158.2  
 
           
As discussed in Note 8(b), we classified $35.0 of accrued but unpaid interest on our Senior Notes as of December 31, 2009 within the long-term portion of debt in the accompanying balance sheet.
The Company has undertaken cost reduction initiatives at acquired businesses, and from time to time, outside the context of an acquisition. Cost reduction initiatives typically include severance and facility closure costs. Expenses associated with such actions recognized in our statements of operations during the year ended December 31, 2010, 2009, and 2008 were $3.1, $11.4, and $4.2, respectively. As of December 31, 2010 and 2009, $2.0 and $4.9, respectively, of our aggregate liabilities are included in accrued expenses and $5.9 and $4.0, respectively, are included in other long-term liabilities.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(8) Debt
The Merger, including the redemption of previous debt and the payment of related fees and expenses, was financed in part by the issuance of senior secured term loan borrowings under a senior secured credit facility of $615.0 and €600.0 (the “Senior Secured Credit Facility”), $675.0 aggregate principal amount of 10.25%/11.25% unsecured senior notes due 2015 (“Senior Notes”) and the issuance of $353.3 and €125.0 aggregate principal amount of 10.75% unsecured senior subordinated notes due 2017 (“Senior Subordinated Notes”). The following is a summary of our debt obligations as of each period end:
                 
    December 31,  
    2010     2009  
 
Senior Secured Credit Facility
  $ 1,410.0     $ 1,495.3  
Senior Notes
    713.0       710.0  
Senior Subordinated Notes
    528.2       541.4  
Compensating cash balance
    85.4       105.0  
Capital leases
    19.2       17.9  
Predecessor Senior Subordinated Notes
    1.0       1.0  
Other debt
    0.9       1.1  
 
           
Total debt
    2,757.7       2,871.7  
Less short-term portion
    (117.4 )     (152.4 )
 
           
Total long term-portion
  $ 2,640.3     $ 2,719.3  
 
           
The following table summarizes the principal maturities of our debt as of December 31, 2010:
                                                         
    2011     2012     2013     2014     2015     Thereafter     Total  
 
                                                       
Senior Secured Credit Facility — term loans
  $ 7.4     $ 14.2     $ 14.2     $ 1,353.0     $     $     $ 1,388.8  
Senior Secured Credit Facility — revolving facility
    21.2                                     21.2  
Senior Notes
                            713.0             713.0  
Senior Subordinated Notes
                                  528.2       528.2  
Compensating cash balance
    85.4                                     85.4  
Capital leases
    2.5       2.7       2.8       2.6       1.6       7.0       19.2  
Predecessor Senior Subordinated Notes
                      1.0                   1.0  
Other debt
    0.9                                     0.9  
 
                                         
Total debt
  $ 117.4     $ 16.9     $ 17.0     $ 1,356.6     $ 714.6     $ 535.2     $ 2,757.7  
 
                                         
(a) Senior Secured Credit Facility
Our Senior Secured Credit Facility is with a syndicate of lenders and provides for aggregate maximum borrowings consisting of (1) term loans denominated in Euros in an aggregate principal amount currently outstanding of €588.2 ($785.9 on a U.S. dollar equivalent basis as of December 31, 2010), (2) term loans denominated in U.S. dollars in an aggregate principal amount currently outstanding of $602.9 and (3) a multi-currency revolving loan facility, providing for an equivalent in U.S. dollars of up to $250.0 in multi-currency revolving loans (inclusive of swingline loans of up to $25.0 and letters of credit of up to $70.0). The multi-currency revolving loan facility permits one or more of our foreign subsidiaries to become foreign borrowers under such facility upon the satisfaction of certain conditions.
Subject to the Company’s continued compliance with its covenants, the Company may at any time or from time to time request additional tranches of term loans or increases in the amount of commitments under the Senior Secured Credit Facility. The actual extension of any such incremental term loans or increases in commitments would be subject to the Company and existing and any new lenders reaching agreement on applicable terms and conditions, which may depend on market conditions at the time of any request. Additionally, the total amount outstanding under any incremental new tranches of term loans or incremental new revolving credit commitments may not exceed in aggregate the lesser of $300.0 or an amount which would cause the Company to exceed certain ratios. To present, the Company has not requested any such incremental term loans or credit commitments.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
As of December 31, 2010, an aggregate U.S. dollar equivalent of $21.2 was outstanding under the multi-currency revolving loan facility as a result of £13.7 outstanding in revolving loans. In addition, we had $13.5 of undrawn letters of credit outstanding. As of December 31, 2010, we had $215.3 of available borrowing capacity under the multi-currency revolving loan facility.
Maturity; Prepayments
The term loans will mature on June 30, 2014 and the multi-currency revolving loan facility will mature on June 30, 2013. Subject to any mandatory or optional prepayments, the principal amounts of the term loans require quarterly amortization payments which commenced on September 30, 2009 equal to 0.25% of their respective original principal amounts drawn, with the final amortization payments due at maturity. Based on an excess cash flow calculation required by the Senior Secured Credit Facility for the year ended December 31, 2009, the Company made a principal repayment of $20.9 on the outstanding term loans in March 2010. The excess cash flow payment has been and will be applied against the Company’s scheduled installments of principal due in respect of the term loans in 2010 and part of 2011. We classified the excess cash flow payment within the short term portion of debt in the accompanying balance sheet as of December 31, 2009.
Security; Guarantees
The obligations under the Senior Secured Credit Facility are guaranteed by VWR Investors, the Company and each of the Company’s wholly owned U.S. subsidiaries other than its U.S. foreign subsidiary holding companies (collectively, the “Subsidiary Guarantors”). In addition, the Senior Secured Credit Facility and the guarantees thereunder are secured by (1) security interests in and pledges of or liens on substantially all of the tangible and intangible assets of VWR Investors, the Company and the Subsidiary Guarantors and (2) pledges of 100% of the capital stock of each of the Subsidiary Guarantors and 65% of the capital stock of each of its U.S. foreign subsidiary holding companies.
Interest
At our election, the interest rates on all U.S. dollar loans, other than swingline loans, may generally be based on either (1) the then applicable British Bankers Association London Interbank Offered Rate (commonly known as U.S. Libor) plus a variable margin, or (2) the then applicable alternate base rate (defined as the greater of the U.S. Prime lending rate or the Federal Funds effective rate plus 0.5%) plus a variable margin. Swingline loans shall be denominated only in U.S. dollars and based on the alternate base rate plus a variable margin. All loans denominated in Canadian dollars may generally be based on either (1) the then applicable Canadian prime interest rate plus a variable margin, or (2) the then applicable average offered interest rate for Canadian bankers’ acceptances plus a variable margin. All loans denominated in Euros shall generally be based on the then applicable interest rate determined by the Banking Federation of the European Union (commonly known as the Euribor rate) plus a variable margin. All loans denominated in currencies other than U.S. dollars, Canadian dollars and Euros shall generally be based on the then applicable London Interbank Offered Rate for each respective loan and currency of denomination plus a variable margin.
As of December 31, 2010, the interest rates on the U.S. dollar-denominated and Euro-denominated term loans were 2.76% and 3.30%, respectively, which include a variable margin of 2.5%, and amounts drawn under the multi-currency revolving loan facility bear interest at a rate of 2.84%. As of December 31, 2010, there were no loans under our Senior Secured Credit Facility denominated in currencies other than the U.S. dollar, Euro and British pound sterling. See Note 12(c) for related interest rate swap arrangements.
Fees
The Company pays quarterly fees with respect to the Senior Secured Credit Facility, including (1) a commitment fee equal to 0.50% per year on the unused portion of the multi-currency revolving loan facility (subject to two step downs if certain net leverage ratios are met), and (2) letter of credit fees consisting of a participation fee (equal to the then applicable Eurodollar variable margin on the multi-currency revolving loan facility times any outstanding letters of credit), a fronting fee (equal to 0.125% on the outstanding undrawn letters of credit paid to the issuing bank) and administrative fees.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(b) Senior Notes and Senior Subordinated Notes
Ranking
The Senior Notes and Senior Subordinated Notes, and related guarantees, are unsecured obligations of the Company and are subordinate to all of the Company’s and the Subsidiary Guarantors’ obligations under all secured indebtedness, including any borrowings under the Senior Secured Credit Facility to the extent of the value of the assets securing such obligations, and are effectively subordinate to all obligations of each of the Company’s subsidiaries that is not a guarantor of the Senior Notes or the Senior Subordinated Notes (as the case may be). The Senior Notes, and related guarantees, rank senior in right of payment to all of the Company’s and the Subsidiary Guarantors’ existing and future subordinated indebtedness, including the Senior Subordinated Notes.
Maturity; Interest Payments
The Senior Notes, which amount to $713.0 as of December 31, 2010, will mature on July 15, 2015. Interest on the Senior Notes is payable twice a year, on each January 15 and July 15. For any interest period through July 15, 2011, the Company may elect to pay interest on the Senior Notes (1) entirely in cash (“Cash Interest”), (2) entirely by increasing the principal amount of the Senior Notes (“PIK Interest”) or (3) 50% as Cash Interest and 50% as PIK Interest. PIK Interest accrues on the Senior Notes at a rate per annum equal to the Cash Interest rate of 10.25% plus 100 basis points. Prior to July 15, 2009, the Company paid its Senior Note interest obligations as Cash Interest. On June 25, 2009, we made an election to pay PIK Interest for the semi-annual interest period commencing July 15, 2009 and ending on January 15, 2010. Accordingly, we classified $35.0 of accrued but unpaid interest on our Senior Notes as of December 31, 2009 within the long-term portion of debt in the accompanying balance sheet. The Company did not make an election to pay PIK Interest for any of the remaining PIK Interest eligible periods and so it has or will satisfy the related interest payments with Cash Interest.
The Senior Subordinated Notes are denominated in Euros in an aggregate principal amount currently outstanding of €126.9 ($169.5 on a U.S. dollar equivalent basis as of December 31, 2010) and in U.S. dollars in an aggregate principal amount currently outstanding of $358.7. The Senior Subordinated Notes will mature on June 30, 2017. Interest on the Senior Subordinated Notes is payable quarterly on March 31, June 30, September 30 and December 31 of each year, beginning on September 30, 2007. For any interest payment date through and including March 31, 2010, the Company had the option to capitalize a portion of the interest payable on such date by capitalizing such interest and adding it to the then outstanding principal amount of the Senior Subordinated Notes. On June 25 and September 21, 2009, we made elections to capitalize an aggregate amount of approximately $5.3 and €1.9 ($2.6 on a U.S. dollar equivalent basis as of December 31, 2010) of cash interest payable on our Senior Subordinated Notes for the June 30 and September 30, 2009 interest payment dates.
Guarantees
The obligations under the Senior Notes and Senior Subordinated Notes are guaranteed, jointly and severally and fully and unconditionally, on an unsubordinated basis by each of the Subsidiary Guarantors. The Subsidiary Guarantors’ obligations under the guarantees of the Senior Notes and Senior Subordinated Notes are not secured by any of the Company’s assets or the Subsidiary Guarantors’ assets.
Redemption
The Company may redeem some or all of the Senior Notes at any time prior to July 15, 2011 at a price equal to 100% of the principal amount, plus any accrued and unpaid interest to the date of redemption, plus a declining “make whole” premium. Before July 15, 2011, the Company may redeem up to 35% of the original aggregate principal amount of the Senior Notes at a redemption price equal to 110.250% of their aggregate principal amount, plus accrued interest, with the net cash proceeds of certain equity offerings. In addition, on or after July 15, 2011, the Company may redeem some or all of the Senior Notes at any time at declining redemption prices that start at 105.125% of their aggregate principal amount and are reduced to 100% of their aggregate principal amount on or after July 15, 2013. The Company is required to offer to purchase the Senior Notes at 101% of their aggregate principal amount, plus accrued interest to the repurchase date, if it experiences specific kinds of changes in control.
The Company may redeem some or all of the Senior Subordinated Notes at any time prior to June 30, 2012 at a price equal to 100% of the principal amount, plus any accrued and unpaid interest to the date of redemption, plus a declining “make whole” premium. Before June 30, 2012, the Company may redeem up to 40% of the original aggregate principal amount of the Senior Subordinated Notes at a redemption price equal to 110.750% of their aggregate principal amount, plus accrued interest, with the net cash proceeds of certain equity offerings. In addition, on or after June 30, 2012, the Company may redeem some or all of the Senior Subordinated Notes at any time at declining redemption prices that start at 105.375% of their aggregate principal amount and are reduced to 100% of their aggregate principal amount on or after June 30, 2014. The Company is required to offer to purchase the Senior Subordinated Notes at 101% of their aggregate principal amount, plus accrued interest to the repurchase date, if it experiences specific kinds of changes in control.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
Registration Rights
The Company entered into a Registration Rights Agreement with respect to the Senior Notes (the “Senior Notes Registration Rights Agreement”). The Company satisfied its obligations under the Senior Notes Registration Rights Agreement, and in February 2008, it completed the exchange offer pursuant to which 100% of the outstanding Senior Notes were exchanged for new Senior Notes registered with the Securities and Exchange Commission (“SEC”) and with the same terms.
The Company entered into a Registration Rights Agreement with respect to the Senior Subordinated Notes (the “Subordinated Notes Registration Rights Agreement”). Under the Subordinated Notes Registration Rights Agreement, the Company is obligated, upon the request of holders of a majority in principal amount of the Senior Subordinated Notes, to (1) file and cause to become effective a registration statement with respect to an offer to exchange the Senior Subordinated Notes for other freely tradable notes that have substantially identical terms, or (2) file with the SEC and cause to become effective a shelf registration statement relating to the resales of the Senior Subordinated Notes if the Company is not able to effect the exchange offer. The Company is obligated to pay additional interest on the Senior Subordinated Notes in certain instances, including if we do not file the registration statement within 90 days following a request or completed the related exchange offer within 30 days of the effective date of the registration statement. If the Company fails to satisfy certain of the registration obligations under the Subordinated Notes Registration Rights Agreement, it will be subject to a registration default and the annual interest on the Senior Subordinated Notes will increase by 0.25% and by an additional 0.25% for each subsequent 90-day period during which the registration default continued, up to a maximum additional interest rate of 1.0% per annum. If we determine a registration payment arrangement is probable and can be reasonably estimated, a liability will be recorded. As of December 31, 2010, we concluded the likelihood of having to make any payments under the arrangements was remote, and therefore did not record a contingent liability.
(c) Covenant Compliance
The Senior Secured Credit Facility does not contain any financial maintenance covenants that require the Company to comply with specified financial ratios or tests, such as a minimum interest expense coverage ratio or a maximum leverage ratio, unless the Company wishes to make certain acquisitions, incur additional indebtedness associated with certain acquisitions or make certain restricted payments.
The indentures governing the Senior Notes and Senior Subordinated Notes contain covenants that, among other things, limit the Company’s ability and that of its restricted subsidiaries to make restricted payments, pay dividends, incur or create additional indebtedness, issue certain types of common and preferred stock, make certain dispositions outside the ordinary course of business, execute certain affiliate transactions, create liens on assets of the Company and restricted subsidiaries, and materially change our lines of business.
As of December 31, 2010, the Company was in compliance with the covenants under the Senior Secured Credit Facility and with the indentures and related requirements governing the Senior Notes and Senior Subordinated Notes.
(d) Compensating Cash Balance
Our compensating cash balance represents bank overdraft positions of subsidiaries participating in our global cash pooling arrangement with a third-party bank. Due to the nature of these overdrafts, all amounts have been classified within the short-term portion of debt as of each period end.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(e) Other
During the year ended December 31, 2010 and 2009, we recognized aggregate capital lease obligations of approximately $2.2 and $12.3, respectively, related to facilities in Singapore and Spain with a corresponding non-cash increase to property and equipment, net.
Substantially all of the debt obligations of the Company outstanding prior to the consummation of the Merger were repaid or redeemed through the tender offers and redemptions as of the Merger. As of December 31, 2010 and 2009, $1.0 of 8% unsecured senior subordinated notes due 2014 (“Predecessor Senior Subordinated Notes”) remain outstanding. Effective on the closing date of the Merger, the indenture relating to the Predecessor Senior Subordinated Notes was amended pursuant to a supplemental indenture, which eliminated substantially all of the restrictive covenants and certain events of default and related provisions in the indenture.
(9) Income Taxes
(a) Income Tax (Provision) Benefit
The components of income (loss) before income taxes are as follows:
                         
    Year Ended December 31,  
    2010     2009     2008  
 
United States
  $ (47.9 )   $ (119.9 )   $ (406.1 )
Foreign
    97.4       80.3       (44.0 )
 
                 
Total income (loss) before income taxes
  $ 49.5     $ (39.6 )   $ (450.1 )
 
                 
The components of income tax (provision) benefit are as follows:
                         
    Year Ended December 31,  
    2010     2009     2008  
Current:
                       
Federal
  $     $     $ 0.5  
State
    (0.3 )     (0.3 )      
Foreign
    (26.5 )     (32.6 )     (35.9 )
 
                 
 
    (26.8 )     (32.9 )     (35.4 )
 
                 
 
                       
Deferred:
                       
Federal
    (4.0 )     38.2       88.3  
State
    (2.0 )     6.2       19.5  
Foreign
    4.8       14.0       43.1  
 
                 
 
    (1.2 )     58.4       150.9  
 
                 
Total income tax (provision) benefit
  $ (28.0 )   $ 25.5     $ 115.5  
 
                 
During the years ended December 31, 2010 and 2009, in addition to providing an income tax (provision) benefit of $(28.0) and $25.5, respectively, in our statement of operations, the Company also recorded deferred taxes through goodwill of $0.2 and $2.3, respectively, and through stockholders’ equity of $5.2 and $13.1, respectively.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
The income tax (provision) benefit in the accompanying consolidated statements of operations differs from the (provision) benefit calculated by applying the statutory federal income tax rate of 35% due to the following:
                         
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Statutory tax (provision) benefit
  $ (17.3 )   $ 13.9     $ 157.6  
State income taxes, net of federal benefit
    (1.6 )     3.7       12.9  
Change in foreign tax rates
          3.5        
Foreign rate differential
    4.1       4.2       (5.7 )
Asset impairments
    (8.0 )           (44.9 )
Foreign tax settlement
          3.3        
Nondeductible expenses
    (1.3 )     (1.4 )     (1.7 )
Change in valuation allowance
    (3.5 )     (1.8 )     (2.8 )
Other, net
    (0.4 )     0.1       0.1  
 
                 
Total income tax (provision) benefit
  $ (28.0 )   $ 25.5     $ 115.5  
 
                 
The tax provision recognized in 2010 is the result of operating profits generated in our foreign operations and net exchange gains (see Note 2(c)) recognized in our domestic operations, partially offset by the tax benefit associated with an impairment of indefinite-lived intangible assets in our Science Education segment (see Note 3). Impairment charges associated with the Company’s goodwill are generally not deductible for tax purposes. Accordingly, our 2010 effective tax rate was negatively impacted. The change in valuation allowance for the year ended December 31, 2010 excludes valuation allowances recongnized with respect to intercompany transactions, foreign taxes and state net operating losses.
The tax benefit in 2009 reflects our recognition of a deferred tax benefit on domestic net operating losses, a favorable tax rate reduction in Canada, a favorable foreign rate differential on operating profits in our foreign operations and a favorable settlement of a prior year uncertain tax position.
The tax benefit in 2008 primarily reflects our recognition of tax benefits for net operating losses and impairment charges associated with indefinite-lived intangible assets. Impairment charges associated with the Company’s goodwill are generally not deductible for tax purposes. The foreign rate differential for 2008 primarily relates to rate differences applied to impairment charges associated with indefinite-lived intangible assets.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(b) Deferred Tax Assets and Liabilities
Deferred tax assets and liabilities are comprised of the following:
                 
    December 31,  
    2010     2009  
Deferred tax assets:
               
Net operating loss carryforwards
  $ 255.4     $ 251.0  
Pension and other compensation benefits
    5.5       0.2  
Foreign currency translation loss
          17.9  
Derivative financial instruments
    14.1       19.5  
Foreign tax credit and alternative minimum tax carryforwards
    8.3       7.6  
Inventory overhead capitalization
    2.9       2.4  
Accrued expenses
    5.9       4.5  
Receivables
    3.0       3.6  
Transaction fees
    8.6       9.6  
 
           
 
    303.7       316.3  
Valuation allowances
    (67.5 )     (56.6 )
 
           
Total deferred tax assets, net of valuation allowances
    236.2       259.7  
Deferred tax liabilities:
               
Intangible assets
    645.0       693.5  
Property and equipment
    11.1       14.7  
Inventory valuation
    15.0       16.5  
Goodwill amortization
    22.4       17.1  
Foreign currency translation gain
    9.0        
Other
    3.3       3.3  
 
           
Total deferred tax liabilities
    705.8       745.1  
 
           
Net deferred tax liability
  $ 469.6     $ 485.4  
 
           
Deferred income taxes have been classified in the accompanying consolidated balance sheets as follows:
                 
    December 31,  
    2010     2009  
 
Deferred tax asset — current (included in other current assets)
  $ 8.0     $ 9.5  
Deferred tax asset — noncurrent
    9.8       12.6  
Deferred tax liability — current (included in accrued expenses)
    (8.6 )     (12.0 )
Deferred tax liability — noncurrent
    (478.8 )     (495.5 )
 
           
Net deferred tax liability
  $ (469.6 )   $ (485.4 )
 
           
The Company evaluates the realization of deferred tax assets taking into consideration such factors as the reversal of existing taxable temporary differences, expected profitability by tax jurisdiction and available carryforward periods. The extent and timing of the reversal of existing taxable temporary differences will influence the extent of tax benefits recognized in a particular year. As of December 31, 2010, the Company had valuation allowances of $67.5 associated with certain intercompany transactions, foreign net operating loss carryforwards, foreign tax credit carryforwards, short-lived state net operating losses and other deferred tax assets that are not expected to be realized. Should applicable losses, credits and deductions ultimately be realized, the resulting reduction in the valuation allowance will generally be recognized as a component of our tax (provision) benefit.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(c) Uncertain Tax Positions
We conduct business globally and, as a result, the Company or one or more of its subsidiaries, files income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities mainly throughout North America and Europe, including jurisdictions in which we have significant operations such as Germany, France, the UK, Belgium, Sweden and the U.S. We have concluded all U.S. federal income tax matters for years through 2005. Substantially all income tax matters in the major foreign jurisdictions that we operate have been concluded for years through 2004. Substantially all state and local income tax matters have been finalized through 2005. While it is reasonably possible that the amount of unrecognized tax benefits will change in the next twelve months, management does not expect the change to have a significant impact on the results of operations or the financial position of the Company.
As of December 31, 2010 and 2009, the Company had $5.1 and $5.2, respectively, of unrecognized tax benefits, including $0.2 at each period end for the payment of interest and penalties. Accruals for interest and penalties were immaterial during the years ended December 31, 2010, 2009, and 2008. Although substantially all tax uncertainties pertain either directly to the Merger or relate to uncertain positions from periods prior to the Merger, should such tax uncertainties ultimately be different, the resultant reduction in tax uncertainties will generally be recognized as a component of our income tax (provision) benefit.
The following table reflects changes in the reserve associated with uncertain tax positions, exclusive of interest and penalties:
                         
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Balance at January 1
  $ 5.0     $ 8.6     $ 13.9  
Tax positions related to the current year — additions
                4.9  
Tax positions related to prior years — additions
          0.3        
Tax positions related to prior years — reductions
          (3.3 )     (8.7 )
Reductions for settlements or payments
    (0.1 )     (0.6 )     (1.5 )
 
                 
Balance at December 31
  $ 4.9     $ 5.0     $ 8.6  
 
                 
During the year ended December 31, 2009, a French income tax examination was formally concluded. During the year ended December 31, 2008, the U.S. federal income tax and German income tax audits for the 2004 and 2005 tax years were concluded, we benefited from a Belgian court decision and we favorably resolved certain other foreign and state tax matters, offset by charges related to a pre-Merger uncertain tax position that became known to us.
(d) Other Matters
Neither income taxes nor foreign withholding taxes have been provided on $396.5 of cumulative undistributed earnings of foreign subsidiaries as of December 31, 2010. These earnings are considered permanently invested in the business. We make an evaluation at the end of each reporting period as to whether or not some or all of the undistributed earnings are permanently reinvested. Future changes in facts and circumstances could require us to recognize income tax liabilities on the assumption that our foreign undistributed earnings will be distributed to the United States.
As of December 31, 2010, the Company has federal net operating loss carryforwards of $494.1 that begin to expire in 2025 and state net operating loss carryforwards of $488.2, with a corresponding state tax benefit of $19.5, that expire at various times through 2030. In addition, the Company has foreign net operating loss carryforwards of $225.5, which predominantly have indefinite expirations. Further, as of December 31, 2010, there are U.S. foreign tax credit carryforwards of $7.7 that will expire at various times through 2020.
The Company files a consolidated federal and certain state combined income tax returns with its domestic subsidiaries and its parent, VWR Investors.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(10) Benefit Programs
The Company sponsors various retirement plans, and our significant plans are summarized below.
(a) U.S. Defined Benefit Plan
The U.S. defined benefit plan (“U.S. Retirement Plan”) is a funded and tax-qualified defined benefit retirement plan that covers substantially all VWR’s full-time U.S. employees who completed one full year of service as of May 31, 2005. Benefits under the U.S. Retirement Plan were frozen on May 31, 2005. The Company generally funds the minimum amount required by applicable laws and regulations. As of December 31, 2010, the U.S. Retirement Plan covered approximately 3,700 participants. The Company uses a December 31 measurement date for the U.S. Retirement Plan.
The change in benefit obligation, change in plan assets, and reconciliation of funded status were as follows:
                 
    Year Ended December 31,  
    2010     2009  
 
               
Change in benefit obligation:
               
Benefit obligation — beginning of year
  $ 163.9     $ 159.1  
Service cost
    0.6       0.4  
Interest cost
    9.3       9.2  
Actuarial loss
    11.7       0.2  
Benefits paid
    (5.8 )     (5.6 )
Early retirement benefits
          0.6  
 
           
Benefit obligation — end of year
    179.7       163.9  
 
           
Change in plan assets:
               
Fair value of plan assets — beginning of year
    201.9       216.6  
Actual gain (loss) on plan assets
    17.7       (9.1 )
Benefits paid
    (5.8 )     (5.6 )
 
           
Fair value of plan assets — end of year
    213.8       201.9  
 
           
Funded status
  $ 34.1     $ 38.0  
 
           
Amounts recognized in the consolidated balance sheet for the U.S. Retirement Plan were as follows:
                 
    December 31,  
    2010     2009  
 
               
Other assets
  $ 34.1     $ 38.0  
Accumulated other comprehensive income or loss — pretax
    (31.4 )     (37.9 )
The amount in accumulated other comprehensive income (loss) that has not been recognized as net periodic pension income as of December 31, 2010 relates to an actuarial gain. The accumulated benefit obligation was $179.7 and $163.9 as of December 31, 2010 and 2009, respectively.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
Net periodic pension (income) cost includes the following components:
                         
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Service cost
  $ 0.6     $ 0.4     $ 1.1  
Interest cost
    9.3       9.2       8.9  
Expected return on plan assets
    (12.0 )     (11.7 )     (8.3 )
Recognized net actuarial gain
    (0.6 )     (2.2 )      
Early retirement benefits
          0.6        
 
                 
Net periodic pension (income) cost
  $ (2.7 )   $ (3.7 )   $ 1.7  
 
                 
The following net actuarial (losses) gains were included in other comprehensive income or loss:
                         
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Net actuarial (loss) gain included in other comprehensive income or loss
  $ (6.0 )   $ (20.9 )   $ 61.9  
The net periodic pension (income) cost and the projected benefit obligation were based on the following assumptions:
                         
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Discount rate for benefit obligation as of year end
  5.40%     5.75%     5.80%  
Discount rate for net periodic pension (income) cost
  5.75%     6.05% / 5.80%     6.05%  
Expected rate of return on plan assets for net periodic pension (income) cost
  6.03%     6.82% / 5.20%     5.70%  
Assumed annual rate of compensation increase for benefit obligation and net periodic pension (income) cost
  Not applicable     4.00%     4.00%  
We select our discount rate by comparing certain bond yield curves available as of year end with Moody’s ratings of “Aa” or “AA,” respectively. Based on our review as of December 31, 2010, we selected 5.40% to adjust for any differences between the maturity of the reference bonds and the weighted average maturity date of our future expected benefit payments.
During the year ended December 31, 2008, U.S. Retirement Plan assets experienced a substantial increase in value as the lower interest rate environment applicable to our fixed income fund returns more than offset both declines in equity market returns and also the interest rate yield curve applicable to our discount rate (due to widening credit spreads). During the second quarter of 2009, the U.S. Retirement Plan liquidated its holdings in these fixed income funds and invested the proceeds in a diversified fixed income fund (which invests in long duration investment grade corporate bonds primarily across industrial, financial and utilities sectors). As a result of these changes, the discount rate and expected rate of return on plan assets, each for net periodic pension (income) cost from January 1 through June 30, 2009 was 5.80% and 5.20%, respectively, and from July 1 through December 31, 2009 was 6.05% and 6.82%, respectively.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
As of December 31, 2010, the overall investment strategy of the U.S. Retirement Plan continues to be to correlate asset returns with expected plan liabilities while maintaining a sufficient amount of cash on hand to satisfy near-term benefit payments. The current target allocations for plan assets are 90% fixed income funds and 10% cash and money market funds. The fixed income fund investment is managed by a single institution. The fair values of the U.S. Retirement Plan’s assets as of December 31, 2010, by asset class were as follows (see Note 12 for more discussion on fair value measurements):
                                                                 
    December 31, 2010     December 31, 2009  
            Quoted     Significant                     Quoted     Significant        
            Prices in     Other     Significant             Prices in     Other     Significant  
            Active     Observable     Unobservable             Active     Observable     Unobservable  
            Markets     Inputs     Inputs             Markets     Inputs     Inputs  
Asset Class   Total     (Level 1)     (Level 2)     (Level 3)     Total     (Level 1)     (Level 2)     (Level 3)  
 
                                                               
Money market funds
  $ 12.1     $     $ 12.1     $     $ 18.7     $     $ 18.7     $  
Fixed income fund
    201.7             201.7             183.2             183.2        
 
                                               
Total
  $ 213.8     $     $ 213.8     $     $ 201.9     $     $ 201.9     $  
 
                                               
The Company does not expect to make contributions to the U.S. Retirement Plan in 2011. The following benefit payments are expected to be paid:
         
2011
  $ 6.5  
2012
    7.1  
2013
    7.7  
2014
    8.3  
2015
    9.0  
2016 – 2020
    53.0  
(b) Other U.S. Benefit Plans
The Company sponsors defined contribution plans as well as a supplemental pension plan and a nonqualified deferred compensation plan for certain senior officers. The supplemental pension plan was frozen on May 31, 2005, is unfunded and covered 15 participants (3 current employees) as of December 31, 2010. In addition, certain employees are covered under union-sponsored, collectively bargained, multi-employer plans. Expenses under these union-sponsored, multi-employer plans are determined in accordance with negotiated labor contracts. Expenses incurred under these plans were as follows:
                         
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Defined contribution plans
  $ 8.1     $ 8.8     $ 8.0  
Union-sponsored, multi-employer plans
    0.6       0.6       0.8  
Supplemental pension plan
    0.4       0.5       0.5  
Nonqualified deferred compensation plan
    0.2       0.1       0.1  
In addition, the Company provides health benefits to certain retirees and their spouses. These benefit plans are unfunded. Shown below are the accumulated postretirement benefit obligation and the weighted average discount rate used in determining the accumulated postretirement benefit obligation. The annual cost of these plans is not material.
                 
    December 31,  
    2010     2009  
 
               
Postretirement benefit obligations
  $ 2.1     $ 1.5  
Weighted average discount rate
    5.40 %     5.75 %
Health care cost trend rate assumed for next year
    8.50 %     8.80 %
Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)
    4.50 %     4.50 %
Year that the rate reaches the ultimate trend rate
    2028       2028  
Assumed health care cost trend rates have a significant effect on the amounts reported for health care plans. A one-percentage-point change in assumed health care cost trend rates would change our postretirement benefit obligation as of December 31, 2010 by approximately $0.4. The postretirement benefit obligation as of December 31, 2010 includes a reduction of $0.3 related to anticipated savings associated with a federal subsidy.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(c) Non-U.S. Benefit Plans
The Company has defined benefit pension plans at various foreign subsidiaries. Our significant non-U.S. defined benefit plans are in Germany, the UK and France. Our German subsidiary has an unfunded defined benefit pension plan for current employees and retirees. Our UK subsidiary has established two defined benefit plans. Our French subsidiary has a defined benefit pension plan for a certain group of employees that is closed to new participants. In addition, the Company has several small defined benefit pension plans at other locations. The Company uses a December 31 measurement date for these non-U.S. defined benefit plans. Combined information for the German, French and the UK plans’ change in benefit obligation, change in plan assets, and reconciliation of funded status were as follows:
                 
    Year Ended December 31,  
    2010     2009  
Change in benefit obligation:
               
Benefit obligation — beginning of year
  $ 110.4     $ 82.6  
Service cost
    2.0       1.8  
Interest cost
    5.7       5.2  
Plan participants’ contributions
    0.3       0.3  
Actuarial loss
    7.0       16.8  
Benefits paid
    (3.8 )     (3.6 )
Currency translation changes
    (5.9 )     7.3  
 
           
Benefit obligation — end of year
    115.7       110.4  
 
           
Change in plan assets:
               
Fair value of plan assets — beginning of year
    58.4       45.3  
Actual gain on plan assets
    7.2       8.7  
Company contributions
    1.9       1.3  
Plan participants’ contributions
    0.3       0.3  
Benefits paid
    (2.8 )     (2.5 )
Currency translation changes
    (2.4 )     5.3  
 
           
Fair value of plan assets — end of year
    62.6       58.4  
 
           
Funded status
  $ (53.1 )   $ (52.0 )
 
           
Amounts recognized in the consolidated balance sheet were as follows:
                 
    December 31,  
    2010     2009  
 
               
Other assets
  $ 0.3     $ 0.2  
Other long-term liabilities
    (53.4 )     (52.2 )
Accumulated other comprehensive income or loss — pretax
    19.5       16.4  
The amount in accumulated other comprehensive income or loss that has not been recognized as net periodic pension cost as of December 31, 2010 relates to net actuarial losses. The combined accumulated benefit obligation was $108.1 and $102.3 as of December 31, 2010 and 2009, respectively.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
Combined net periodic pension cost includes the following components:
                         
    Year Ended December 31,  
    2010     2009     2008  
 
Service cost
  $ 2.0     $ 1.8     $ 3.1  
Interest cost
    5.7       5.2       5.4  
Expected return on plan assets
    (3.8 )     (2.9 )     (4.4 )
Recognized net actuarial loss
    0.4              
 
                 
Net periodic pension cost
  $ 4.3     $ 4.1     $ 4.1  
 
                 
The following net actuarial losses were included in other comprehensive income or loss:
                         
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Net actuarial loss included in other comprehensive income or loss
  $ (3.6 )   $ (11.4 )   $ (6.0 )
The combined net periodic pension cost and the combined projected benefit obligation were based on the following weighted average assumptions:
                         
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Discount rate for benefit obligation as of year end
    5.21 %     5.54 %     6.13 %
Discount rate for net periodic pension cost
    5.54 %     5.85 %     5.78 %
Expected rate of return on plan assets for net periodic pension cost (French and UK plans only)
    6.86 %     6.13 %     6.50 %
Assumed annual rate of compensation increase for benefit obligation
    3.53 %     3.57 %     3.19 %
Assumed annual rate of compensation increase for net periodic pension cost
    3.59 %     3.26 %     3.42 %
The Company expects to make contributions to the French and UK plans of approximately $0.9 in 2011. The French and UK plans primarily invest in insurance contracts. The combined weighted target allocations for the underlying investments of such insurance contracts are approximately 65% equity index funds and 35% debt securities, equally divided between corporate bonds and government securities. The combined fair values of the French and UK plan’s assets as of December 31, 2010, by asset class are as follows (see Note 12 for more discussion on fair value measurements):
                                                                 
    December 31, 2010     December 31, 2009  
            Quoted     Significant                     Quoted     Significant        
            Prices in     Other     Significant             Prices in     Other     Significant  
            Active     Observable     Unobservable             Active     Observable     Unobservable  
            Markets     Inputs     Inputs             Markets     Inputs     Inputs  
Asset Class   Total     (Level 1)     (Level 2)     (Level 3)     Total     (Level 1)     (Level 2)     (Level 3)  
 
                                                               
Insurance contracts
  $ 62.6     $     $ 62.6     $     $ 58.4     $     $ 58.4     $  
 
                                               
Total
  $ 62.6     $     $ 62.6     $     $ 58.4     $     $ 58.4     $  
 
                                               

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
The following combined benefit payments, which reflect expected future service, as appropriate, are expected to be paid:
         
2011
  $ 3.3  
2012
    3.2  
2013
    3.4  
2014
    3.8  
2015
    3.9  
2016 – 2020
    22.0  
(d) Other Non-U.S. Postemployment Benefits
Certain of the Company’s European subsidiaries provide post employment benefits in the form of lump-sum cash payments to employees when they leave the Company, regardless of their reason for leaving. The Company estimates and accrues a liability for these benefits. The largest such plans are in France, Italy and Belgium. The combined liability recorded for these plans was $4.2 and $3.3 as of December 31, 2010 and 2009, respectively.
(11) Share-Based Compensation
(a) Overview
Holdings has established the 2007 Securities Purchase Plan (“Holdings Equity Plan”) pursuant to which members of management, members of the Board of Directors (“Board Members”) and consultants (“Consultants”) may be provided the opportunity to purchase equity units of Holdings. To date, the equity units issued by Holdings have consisted of vested Class A Preferred Units (“Preferred Units”), vested Class A Common Units (“Common Units”), and unvested Class A Common Units (“Founders Units”). The proceeds of these issuances have ultimately been contributed to the Company as additional capital contributions.
The Preferred Units, which are fully vested upon issuance, are non-voting units that accrue a yield at a rate of 8.0% per annum on a daily basis, compounded quarterly, on the amount of unreturned capital with respect to such Preferred Units. As of December 31, 2010, the aggregate accrued yield on the outstanding Preferred Units was $451.8, which is recorded at Holdings.
The Common Units, which are fully vested upon issuance, each are entitled to one vote for all matters to be voted on by holders of equity units. The Common Units are subordinate to the Preferred Units, including with respect to the unreturned capital and unpaid yield on the Preferred Units. Holders of Common Units will be entitled to participate in distributions, if and when approved by Holdings’ Board of Managers, ratably on a per-unit basis.
The terms of the Founders Units are the same as the Common Units except that they are subject to vesting pro rata on a daily basis during the four-year service period following issuance, subject to accelerated vesting upon the occurrence of certain events. Founders Units are owned upon issuance. The vesting feature of the Founders Units impacts only the purchase price applicable to the repurchase and put options described below.
As a holding company that operates through its subsidiaries, Holdings would be dependent on dividends, payments or other distributions from its subsidiaries to make any dividend payments to holders of the Preferred Units, Common Units or Founders Units. Holdings has not in the past paid any dividends on any of the Units and it currently does not expect to pay any dividends on the Units in the foreseeable future, except for tax distributions to the extent required by Holdings’ limited liability company operating agreement.
(b) Holdings Equity Plan Activity — Management Investors
During the years ended December 31, 2010, 2009, and 2008, certain members of management (“Management Investors”) acquired equity units of Holdings in the aggregate of $1.7, $1.4 and $2.3, respectively. These investments were allocated to Preferred Units, Common Units and Founders Units in accordance with the related Management Unit Purchase Agreements (“Management Agreements”). The ratio of Preferred Units to Common Units acquired by the Management Investors was the same as the ratio of Preferred Units to Common Units acquired by Madison Dearborn and other institutional co-investors in connection with the Merger and related transactions (the “Preferred/Common Ratio”). The Founders Units are only available to Management Investors.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
The equity units purchased by the Management Investors had a fair value, for accounting purposes, in excess of the original cost paid to purchase such units. The excess was attributed to the Founders Units. As Founders Units contain a vesting requirement predicated upon an employee’s future service with the Company, the excess is recognized as compensation expense over the applicable four-year vesting period. The fair value of equity units issued during the year ended December 31, 2010, 2009, and 2008 exceeded their original cost by $1.1, $0.1 and $1.9, respectively. During the years ended December 31, 2010, 2009, and 2008, we recognized non-cash compensation expense relating to the Founders Units of $3.4, $3.4, and $3.8, respectively, which is included in SG&A expenses. As of December 31, 2010, there was $3.0 of unamortized compensation related to unvested Founders Units, which is being amortized to compensation expense over their four-year vesting period (a weighted average period of 1.0 years as of December 31, 2010).
The Management Agreements include certain repurchase and put options that are triggered if a Management Investors’ employment is terminated. Upon the termination of a Management Investors’ employment, Holdings and its affiliates would first have an option to repurchase the Management Investors’ equity units. If Holdings or its affiliates do not exercise the option, then the Management Investor has the right to put the equity units to Holdings. Under the put option, the payment to the Management Investor would be effected with cash for the Preferred Units and via the issuance of a subordinated promissory note for the Common Units and Founders Units.
Under the repurchase option or put option, the Preferred Units, the Common Units and the vested Founders Units can be repurchased by or sold to Holdings at fair market value and unvested Founders Units can be repurchased by or sold to Holdings at the lower of original cost or fair market value. Upon a termination for “cause” (as defined in the Management Agreements), Common Units and vested and unvested Founders Units can be repurchased by or sold to Holdings at the lower of original cost or fair market value. The fair market value of the equity units is calculated in accordance with the relevant transaction documents. The fair market value of the Preferred Units has been based on unreturned capital plus accrued and unpaid yield thereon (the “Preferred Unit Liquidation Preference”). The calculation of the fair market value of the Common Units (the “Common Unit Calculated Value”) takes into account the enterprise value of Holdings, the Preferred Unit Liquidation Preference, and the number of outstanding Common Units and Founders Units. The funding to effect repurchases of units from terminated employees with cash is dependent on dividends, payments or other distributions from the Company, through its subsidiaries. During the years ended December 31, 2010, 2009, and 2008, the Company, through its subsidiaries, provided the funding to effect various repurchases of units from terminated employees in accordance with the applicable Management Agreements, and the Company expects to continue to provide the funding to effect future repurchases of units.
As a result of the put option, the equity units issued to the Management Investors are subject to a repurchase obligation due to events outside of our control. We therefore classify all equity units held by Management Investors outside of permanent equity on our consolidated balance sheet with a carrying value that reflects the aggregate amount that would be paid to Management Investors for the equity units pursuant to the put option as of the balance sheet date. On a quarterly basis, we adjust the reported carrying value of redeemable equity units based on the Preferred Unit Liquidation Preference and Common Unit Calculated Value as of that date, which will typically result in a corresponding adjustment to additional paid-in capital. The following table reflects changes in the carrying value of redeemable equity units:
                 
    Year Ended December 31,  
    2010     2009  
 
               
Balance at January 1
  $ 45.8     $ 46.4  
Reclassifications from permanent equity, net
    5.6       3.5  
Reclassifications to accrued expenses upon notification of redemption
    (1.4 )     (4.1 )
 
           
Balance at December 31
  $ 50.0     $ 45.8  
 
           
As of December 31, 2010 and 2009, $0.1 and $0.2, respectively, was included within accrued expenses in the accompanying balance sheets relating to the committed repurchase of units by Holdings.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(12) Financial Instruments and Fair Value Measurements
Our financial instruments consist primarily of cash and cash equivalents, our compensating cash balance, trade accounts receivable, accounts payable, short and long-term debt, foreign currency forward contracts, interest rate swaps and investments held by certain pension plans we sponsor.
Our financial instruments, other than our trade accounts receivable and payable, are spread across a number of large financial institutions whose credit ratings we monitor and believe do not currently carry a material risk of non-performance. Certain of our financial instruments, including our interest rate swap arrangements and foreign currency forward contracts contain off-balance-sheet risk.
(a) Recurring Fair Value Measures
Fair value is defined as an exit price (i.e., the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date). The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as shown below. An instrument’s classification within the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Level 1 — Quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2 — Inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.
Level 3 — Inputs that are unobservable for the asset or liability based on the Company’s own assumptions (about the assumptions market participants would use in pricing the asset or liability).
The carrying amounts reported in the accompanying balance sheets for cash and cash equivalents, our compensating cash balance, trade accounts receivable, accounts payable and short-term debt approximate fair value due to the short-term nature of these instruments. Accordingly, these items have been excluded from the table below. The following table presents information about the Company’s other financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and 2009:
                                 
    December 31,                    
Description   2010     Level 1     Level 2     Level 3  
Liabilities
                               
Interest rate swap arrangements
  $ (35.2 )   $     $ (35.2 )   $  
Foreign currency forward contracts
  $ (2.2 )   $     $ (2.2 )   $  
 
                               
                                 
    December 31,                    
Description   2009     Level 1     Level 2     Level 3  
Liabilities
                               
Interest rate swap arrangements
  $ (49.8 )   $     $ (49.8 )   $  
Foreign currency forward contracts
  $ (0.5 )   $     $ (0.5 )   $  
We determine the fair value of our interest rate swap arrangements using a discounted cash flow model based on the contractual terms of the instrument and using observable inputs such as interest rates, counterparty credit spread and our own credit spread. The discounted cash flow model does not involve significant management judgment and does not incorporate significant unobservable inputs. Accordingly, we classify our interest rate swap valuations within Level 2 of the valuation hierarchy. The fair value of our foreign currency forward contracts was estimated based on period-end spot rates and we believe such valuations qualify as a Level 2 measurement.

 

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Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(b) Debt Instruments
The table below shows the carrying amounts and estimated fair values of our primary long-term debt instruments:
                                 
    December 31,  
    2010     2009  
    Carrying             Carrying        
    Amount     Fair Value     Amount     Fair Value  
 
                               
Senior Secured Credit Facility
  $ 1,410.0     $ 1,344.3     $ 1,495.3     $ 1,415.0  
Senior Notes
    713.0       748.6       710.0       738.4  
Senior Subordinated Notes
    528.2       554.6       541.4       516.0  
 
                       
 
  $ 2,651.2     $ 2,647.5     $ 2,746.7     $ 2,669.4  
 
                       
The fair values of our debt instruments as of December 31, 2010 and 2009 are based on estimates using quoted market prices and standard pricing models that take into account the present value of future cash flows as of the respective balance sheet date. We believe that the inputs to our pricing models qualify as Level 2 measurements, except for our publicly-traded Senior Notes which we believe qualify as a Level 1 measurement.
(c) Derivative Instruments and Hedging Activities
Interest Rate Swap Arrangements
Borrowings under our Senior Secured Credit Facility bear interest at variable rates while our Senior Notes and Senior Subordinated Notes bear interest at fixed rates. The Company manages its exposure to changes in market interest rates by entering into interest rate swaps. The Company is party to two interest rate swaps that became effective on June 29, 2007 and mature on December 31, 2012 for the purpose of fixing the variable rate of interest on a portion of our outstanding term loan borrowings under the Senior Secured Credit Facility. The interest rate swaps carry initial notional principal amounts of $425.0 (the “USD Swap”) and €300.0 (the “Euro Swap”). The notional value of the USD Swap declines over its term in annual decrements of $25.0 through December 29, 2011 and carries a final notional principal amount of $160.0 for the period from December 30, 2011 through December 31, 2012. Under the USD Swap, the Company received quarterly interest at a variable rate equal to three-month U.S. Libor and paid quarterly interest at a fixed rate of 5.45% through June 30, 2008. The notional value of the Euro Swap declines over its term in annual decrements of €20.0 through December 29, 2011 and carries a final notional principal amount of €110.0 for the period from December 30, 2011 through December 31, 2012. Under the Euro Swap, the Company received quarterly interest at a variable rate equal to three-month Euribor and paid quarterly interest at a fixed rate of 4.68% through June 30, 2008.
The fair value of the interest rate swaps as of June 29, 2007 was a liability of $2.1, representing an unrealized loss on derivative transactions, with a corresponding adjustment to accumulated other comprehensive income (loss), which is being amortized to interest expense over the remaining term of the hedged instruments.
The interest rate swaps were accounted for as cash flow hedges with the effective portions of changes in the fair value reflected in other comprehensive income (loss). Effective June 30, 2008, the Company amended the USD Swap and Euro Swap to secure lower fixed rates of interest of 5.40% and 4.55%, respectively, and further amended the floating leg of the instrument to one-month U.S. Libor and one-month Euribor, respectively. There were no other changes in the terms and conditions of the original swaps. We refer to the amended USD Swap and the amended Euro Swap collectively as the “Amended Swaps.” Upon entering into the Amended Swaps, the Company discontinued hedge accounting for the original swaps and measured the fair value of the USD Swap and the Euro Swap. As of June 30, 2008, $10.5, representing a net unrealized loss, was included in other comprehensive income (loss). This net unrealized loss is being reclassified from other comprehensive income (loss) to interest expense over the remaining term of the swap arrangements.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
The Amended Swaps were designated as cash flow hedges, but during the third quarter of 2008 the amended USD Swap no longer qualified for hedge accounting and there was measured ineffectiveness associated with our amended Euro Swap. Accordingly, we discontinued hedge accounting under the Amended USD Swap, effective July 1, 2008, and under the Amended Euro Swap, effective October 1, 2008. The cumulative effective portion of changes in fair value of the Amended Swaps was $3.5, in the aggregate, representing a net unrealized loss and included in other comprehensive income (loss) as of September 30, 2008. This unrealized loss is being reclassified from other comprehensive income (loss) to interest expense over the remaining term of the swap arrangements. Subsequent to September 30, 2008, changes in the fair value of the Amended Swaps are recognized as a non-cash component of interest expense, but will impact the Company’s operating cash flows when realized.
As of December 31, 2010, the Amended Swaps effectively convert $325.0 of variable rate U.S. dollar-denominated debt and €220.0 ($294.0 on a U.S. dollar equivalent basis) of variable rate Euro-denominated debt to fixed rates of interest. The counterparty to our interest rate swap agreements is a major financial institution. The Company actively monitors its asset or liability position under the interest rate swap agreements and the credit ratings of the counterparty, in an effort to understand and evaluate the risk of non-performance by the counterparty.
Foreign Currency Forward Contracts
We regularly enter into foreign currency forward contracts to mitigate the risk of changes in foreign currency exchange rates primarily associated with the purchase of inventory from foreign vendors or for payments between our subsidiaries generally within the next twelve months or less. Gains and losses on the foreign currency forward contracts generally offset certain portions of gains and losses on expected commitments. To the extent these foreign currency forward contracts are considered effective hedges, gains and losses on these positions are deferred and recorded in accumulated other comprehensive income (loss) and are recognized in the results of operations when the hedged item affects earnings. The notional value of our outstanding foreign currency forward contracts was $61.3 and $25.7 as of December 31, 2010 and 2009, respectively.
In 2007, in connection with the anticipated issuance of Euro-denominated debt under the Senior Secured Credit Facility, the Company entered into a series of foreign currency forward agreements. These foreign currency forward agreements, designated as cash-flow hedges, were settled upon the issuance of the Euro-denominated debt with a corresponding realized loss on derivative transaction of $6.0, net of $3.8 in taxes, to accumulated other comprehensive income (loss), which is being amortized to interest expense over the life of the underlying Euro-denominated debt.
Tabular Disclosures
The following tables reflect the balance sheet classification and fair value of our derivative instruments on a gross basis as of December 31, 2010 and 2009:
                         
    Liability Derivatives  
    December 31,  
    2010     2009  
        Fair         Fair  
    Balance Sheet Location   Value     Balance Sheet Location   Value  
Derivatives designated as hedging instruments
                       
Foreign currency forward contracts
  Accrued expenses   $ (1.3 )   Accrued expenses   $ (0.5 )
Derivatives not designated as hedging instruments
                       
Interest rate swap derivatives
  Other long-term liabilities     (35.2 )   Other long-term liabilities     (49.8 )
Foreign currency forward contracts
  Accrued expenses     (0.9 )          
 
                   
Total derivatives
      $ (37.4 )       $ (50.3 )
 
                   

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
The following table reflects the amount of gains (losses) recognized for our derivative instruments and the classification of gains (losses) within our statements of operations, or equity in the case of any effective portion of cash flow hedges, for the years ended December 31, 2010 and 2009:
                                     
                        Amount of Gain (Loss)  
    Amount of Gain (Loss)     Location of Gain (Loss)   Reclassified from Other  
    Recognized in Other     Reclassified from Other   Comprehensive Income  
    Comprehensive Income     Comprehensive Income   into Earnings  
    (Effective Portion)     into Earnings   (Effective Portion)  
Derivatives in cash flow hedging relationships   2010     2009     (Effective Portion)   2010     2009  
Interest rate swap derivatives
  $     $     Interest expense   $ (4.0 )   $ (4.2 )
Foreign currency forward contracts
              Interest expense     (1.2 )     (1.2 )
Foreign currency forward contracts
    (2.5 )     (2.6 )   Cost of goods sold     (1.4 )     2.0  
Foreign currency forward contracts
              Other income (expense)           0.7  
 
                           
Total
  $ (2.5 )   $ (2.6 )       $ (6.6 )   $ (2.7 )
 
                           
                     
        Amount of Gain (Loss)  
    Location of Gain (Loss)   Recognized in Earnings  
Derivatives not designated as hedging instruments   Recognized in Earnings   2010     2009  
 
                   
Interest rate swap derivatives — realized
  Interest expense   $ (31.0 )   $ (32.2 )
Interest rate swap derivatives — unrealized
  Interest expense     14.6       0.1  
Foreign currency forward contracts
  Other income (expense)     (1.1 )     (0.3 )
 
               
Total
      $ (17.5 )   $ (32.4 )
 
               
During the year ended December 31, 2008, we recognized a non-cash net unrealized loss included in interest expense of $35.4 on our Amended Swaps and we recognized a gain from settled foreign currency forward contracts included in cost of goods sold of $1.3.
As of December 31, 2010, approximately $5.0 of pretax net losses currently deferred in other comprehensive income (loss) are expected to be recognized in earnings as interest expense within the next 12 months.
(d) Pension Investments
See Note 10 for a description of the material pension plans that we sponsor, including investment strategies, major classes of plan assets and their respective fair values and classification within the fair value hierarchy (for funded plans) and discussion of concentrations of risk, if any. In determining the funded status of these pension plans, we evaluate the fair value of investments held by each plan. The fair value of pension plan holdings is determined through observing values for underlying investment holdings, either directly or indirectly, through market corroboration.
(e) Non-Recurring Fair Value Measures
As discussed in Notes 3 and 5, the Company applied the fair value measurement principles of GAAP to certain of its non-recurring nonfinancial assets as follows:
   
On October 1, 2010 and 2009, the Company determined the fair value of the North American Lab and European Lab reporting units in connection with an annual goodwill impairment Step 1 test required under GAAP;
 
   
On September 30, 2010 and 2009, the Company determined the fair value of indefinite-lived intangible assets and also the fair value of the Science Education reporting unit in support of interim tests for impairment triggered as a result of a change in circumstances;

 

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Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
   
On December 31, 2009, the Company determined the fair value of a chemical supply agreement in its European Lab segment in connection with an interim impairment test triggered as a result of a change in circumstances; and
 
   
On various dates during 2010 and 2009, the Company determined the fair value of acquired intangible assets related to the Acquisitions.
The following table presents the Company’s nonfinancial assets measured on a non-recurring basis and impairment charges recognized, if applicable:
                                 
                    Impairment Charges  
    Carrying value     Year Ended December 31,  
    2010     2009     2010     2009  
Significant unobservable inputs (Level 3)
                               
Annual impairment test of reporting unit goodwill — October 1st:
                               
North American Lab
  $ 940.5     $ 929.9     $     $  
European Lab
    823.8       866.6              
Interim impairment test of Science Education reporting unit — September 30th:
                               
Goodwill
          36.5       36.8        
Indefinite-lived intangible assets
    18.7       30.0       11.3        
Chemical supply agreement — December 31, 2009
  Not applicable       36.9     Not applicable        
Acquired intangible assets — various dates
    12.7       6.9     Not applicable     Not applicable  
 
                           
 
                  $ 48.1     $  
 
                           
The Company estimates the fair value of each reporting unit using both the income approach (a discounted cash flow technique) and market approach (a market multiple technique). These valuation methods required management to make various assumptions, including, but not limited to, assumptions related to future profitability, cash flows, discount rates and control premiums, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit. Our estimates are based upon historical trends, management’s knowledge and experience and overall economic factors, including projections of future earnings potential. Developing discounted future cash flows in applying the income approach requires us to evaluate our intermediate to longer-term strategies for each reporting unit, including, but not limited to, estimates about revenue growth, our acquisition strategies, operating margins, capital requirements, inflation and working capital management. The development of appropriate rates to discount the estimated future cash flows of each reporting unit requires the selection of risk premiums, which can materially impact the present value of future cash flows. Selection of an appropriate peer group under the market approach involves judgment and an alternative selection of guideline companies could yield materially different market multiples. We select an acquisition control premium by referring to historical control premiums observed in the marketplace.
The fair value of our indefinite-lived intangible assets was determined using a discounted cash flow approach which incorporates an estimated royalty rate and discount rate (among other estimates) applicable to trademarks and tradenames.
The Company estimated the fair value of the chemical supply agreement based on expected future cash flows discounted at a rate of return that reflects the relative risk of the cash flows.
The Company estimated the fair value of acquired intangible assets using discounted cash flow techniques which included an estimate of future cash flows, consistent with overall cash flow projections used to determine the purchase price paid to acquire the business, discounted at a rate of return that reflect the relative risk of the cash flows.
We believe the estimates and assumptions used in the valuation methods are reasonable.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(13) Commitments and Contingencies
(a) Lease Commitments
The Company leases office and warehouse space and computer equipment under operating leases, certain of which extend up to 15 years, subject to renewal options. Rental expense is shown in the table below:
                         
    Year Ended December 31,  
    2010     2009     2008  
 
                       
Rental expense
  $ 30.8     $ 34.2     $ 34.6  
Future minimum lease payments as of December 31, 2010, under capital leases and under non-cancelable operating leases having initial lease terms of more than one year are as follows:
                 
    Capital     Operating  
    Leases     Leases  
 
               
Year ended December 31:
               
2011
  $ 3.5     $ 32.6  
2012
    3.6       26.1  
2013
    3.5       17.5  
2014
    3.1       12.4  
2015
    2.0       9.9  
Thereafter
    7.6       58.5  
 
           
Total minimum payments
    23.3     $ 157.0  
 
             
Less amounts representing imputed interest
    4.1          
 
             
Present value of minimum lease payments
  $ 19.2          
 
             
(b) Contingencies
Our business involves a 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. 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 consummate acquisitions that vertically integrate portions of our business. We maintain insurance policies, including product liability insurance, and in many cases we have indemnification rights against such claims from the manufacturers of the products we distribute. 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 manufactures’ 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.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
During 2005, the German Federal Cartel Office (“GFCO”) initiated an investigation with regard to our European Distribution Agreement with Merck KGaA. The purpose of the investigation is to determine whether this agreement violates or otherwise infringes the general prohibition of anti-competitive agreements under either German or EU rules. We submitted information to the GFCO in response to its initial request. During 2007, the GFCO requested additional information, which we provided. In December 2007, Merck KGaA received a letter from the GFCO, which asserted that the aforementioned agreement is contrary to applicable competition regulations in Germany. In February 2008, we submitted a response to the GFCO. In June 2008, the GFCO requested additional information, which we provided. In May 2009, we and Merck KGaA received a letter from the GFCO, which again asserted that the aforementioned agreement is contrary to applicable competitive regulations in Germany. Following our response to these assertions, in July 2009, the GFCO issued its formal decision that the exclusivity and non-competition provisions of the agreement violate certain provisions of German and EU law and ordered Merck KGaA to either supply chemical products to other distributors in Germany, in addition to us, on non-discriminatory terms or to supply chemical products directly to end customers in Germany without involving any distributors. Merck KGaA and we filed formal appeals of this decision and the competent German appellate court temporarily suspended enforcement of the GFCO’s order. In December 2009, the German appellate court granted partial injunctive relief, but lifted the suspension with respect to a majority of the products covered by the European Distribution Agreement. In February 2010, the GFCO indicated that it had opened a new investigation with regard to the European Distribution Agreement. As a result of the Merger on June 29, 2007 and related purchase accounting, we recorded certain amortizable intangible assets related to the entire geographic scope of our European Distribution Agreement with Merck KGaA. As of December 31, 2010, the net book value of these intangible assets was $26.7. We cannot assess the likely outcome of our and Merck KGaA’s appeal of the GFCO’s initial decision or any subsequent investigation, but we do not believe an adverse ruling in either case would result in a material adverse effect on our business, financial condition or results of operations.
We also are involved in various legal and regulatory cases, claims, assessments and inquiries, which are considered routine to our business and which include being named from time to time 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 and we believe the range of reasonably possible loss from current matters continues to be immaterial, there can be no assurance that the impact of the pending and any future claims will not be material to our business, financial condition or results of operations in the future.
(c) Employment Agreements
The employment agreements with our executive officers include non-compete, non-solicit and non-hire covenants as well as severance provisions. In general, if the executive officer is terminated without “Cause” or resigns for “Good Reason” (as such terms are defined in the respective employment agreements) the executive officer is entitled to one and a half times (two times in the case of our Chairman, President and Chief Executive Officer) the sum of base salary plus the target bonus for the year in which such termination or resignation occurs and continued health benefits for the 12-month period (18-month period in the case of our Chairman, President and Chief Executive Officer) following termination or resignation. Salary and bonus payments are payable in equal installments over the 12-month period following such termination or resignation. The aggregate potential payments under these employment agreements for terminations without Cause and resignations for Good Reason, including estimated costs associated with continued health benefits, is approximately $13.3 as of December 31, 2010.
(d) Significant Relationship
Merck KGaA and its affiliates are one of our major suppliers of chemical and other products. The Company has a European Distribution Agreement with Merck KGaA to distribute certain chemical products in Europe. The European Distribution Agreement was originally entered into in April 2004 with a five year term and has been extended for a second five year term through April 2014. Merck KGaA has the right to terminate this agreement if certain events occur. See Note 13(b) for a discussion of legal matters relating to the European Distribution Agreement with Merck KGaA.
The Company also has distribution agreements with affiliates of Merck KGaA to distribute certain chemical products in North America. The North American chemical distribution agreement was originally entered into in April 2004 with a five-year term and automatically extended for a second five-year term, ending April 2014. Affiliates of Merck KGaA may terminate the North America chemical distribution agreement if certain events occur.
Merck KGaA and its affiliates supplied products accounting for approximately 11%, 13%, and 13% of our consolidated net sales during the years ended December 31, 2010, 2009 and 2008, respectively, representing less than 10% of our North American Lab net sales and 25% or less of our European Lab net sales in each of 2010, 2009 and 2008.

 

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Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(14) Transactions with Related Parties
As of December 31, 2010, Madison Dearborn and Avista Capital Partners, L.P. (“Avista”), through certain of their investment funds, beneficially own approximately 75.4% and 7.7% of our total outstanding common stock, respectively, through their ownership interests in Holdings. The Company is party to a management services agreement with affiliates of Madison Dearborn and Avista (the “Management Services Agreement”). Pursuant to the Management Services Agreement, Madison Dearborn and Avista or their affiliate parties thereto will provide the Company with management and consulting services and financial and other advisory services and will be paid an aggregate annual management fee of $2.0 (paid quarterly) in connection with the provision of such services as well as board-level services. In addition, Madison Dearborn and Avista will receive a placement fee of 2.5% of any equity financing that they provide to us prior to a public equity offering. The Management Services Agreement shall remain in effect until the date on which none of Madison Dearborn or its affiliates hold directly or indirectly any equity securities of the ultimate parent of the Company or its successors. As of December 31, 2009, the Company had an accrued but unpaid balance of $1.1 included in accrued expenses on the accompanying balance sheet, due to affiliates of Madison Dearborn and Avista related to the Management Services Agreement. As of December 31, 2010, all such amounts had been paid and no amounts were due.
(15) Segment and Geographical Financial Information
We report financial results on the basis of the following three business segments: North American Lab, European Lab, and Science Education. The Company’s operating segments have been identified giving consideration to both geographic areas and the nature of products among businesses within its geographic area. North American Lab and European Lab are organized as distinct operating segments primarily because of geographic dispersion and the inherent differences in business models. The North American Lab segment is highly standardized and operated as an integrated business, whereas the European Lab business is more fragmented and its customer markets are more localized. The Science Education operating segment has been differentiated from the North American Lab segment because of its unique and specialized product lines, concentration of customers in the educational sector and because it has higher gross margins. Operations within each of North American Lab and European Lab have been aggregated due to the similarity of economic characteristics, product lines, customers and distribution methods.
The Company allocates its centralized management of corporate costs to its operating segments as follows:
   
Corporate costs are allocated to its North American Lab and Science Education operating segments using allocation factors that management considers reasonable to distribute costs on the basis of usage.
 
   
Centralized costs related to the management of the European Lab operating segment are incurred within the segment structure and no inter-segment allocation is required.
We maintain shared services operations in Coimbatore, India and Mauritius to which we have transferred certain functions from our North American and European operations. The costs of operating our shared services operations have been allocated to our business segments based on relative utilization.
Selected business segment financial information is presented below. Inter-segment activity has been eliminated. Therefore, revenues reported for each operating segment are substantially all from external customers.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
                         
    Year Ended December 31,  
    2010     2009     2008  
Net sales
                       
North American Lab
  $ 2,081.0     $ 2,017.0     $ 2,092.2  
European Lab
    1,430.0       1,407.2       1,503.4  
Science Education
    127.7       137.0       163.6  
 
                 
Total
  $ 3,638.7     $ 3,561.2     $ 3,759.2  
 
                 
Operating income (loss)
                       
North American Lab
  $ 122.3     $ 113.7     $ (95.3 )
European Lab
    111.7       93.1       2.8  
Science Education
    (48.6 )     2.0       (95.8 )
 
                 
Total
  $ 185.4     $ 208.8     $ (188.3 )
 
                 
Capital expenditures
                       
North American Lab
  $ 32.2     $ 12.8     $ 18.1  
European Lab
    7.8       9.9       9.7  
Science Education
    1.6       1.2       1.9  
 
                 
Total
  $ 41.6     $ 23.9     $ 29.7  
 
                 
Depreciation and amortization
                       
North American Lab
  $ 63.9     $ 62.7     $ 61.5  
European Lab
    44.7       46.4       47.1  
Science Education
    7.9       7.5       7.5  
 
                 
Total
  $ 116.5     $ 116.6     $ 116.1  
 
                 
The operating loss of Science Education for the year ended December 31, 2010 is primarily due to $48.1 in pre-tax charges relating to an impairment of goodwill and intangible assets. Our total operating loss during the year ended December 31, 2008 is primarily due to $392.1 in pre-tax charges relating to the impairment of goodwill and intangible assets, including $202.1, $88.0, and $102.0 of charges recorded in our North American Lab, European Lab and Science Education segments, respectively. See Note 3.
Total assets by segment are as follows:
                 
    December 31,  
    2010     2009  
Total assets
               
North American Lab
  $ 2,650.2     $ 2,576.5  
European Lab
    2,172.2       2,313.1  
Science Education
    179.0       237.7  
 
           
Total
  $ 5,001.4     $ 5,127.3  
 
           

 

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Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
The following is a reconciliation of operating income (loss) by segment to loss before income taxes:
                         
    Year Ended December 31,  
    2010     2009     2008  
Operating income (loss)
                       
North American Lab
  $ 122.3     $ 113.7     $ (95.3 )
European Lab
    111.7       93.1       2.8  
Science Education
    (48.6 )     2.0       (95.8 )
 
                 
Total
    185.4       208.8       (188.3 )
Interest income
    1.9       2.3       5.7  
Interest expense
    (204.6 )     (226.8 )     (289.6 )
Other income (expense), net
    66.8       (23.9 )     22.1  
 
                 
Income (loss) before income taxes
  $ 49.5     $ (39.6 )   $ (450.1 )
 
                 
Net sales, long-lived assets and total assets by geographic area are as follows:
                         
    Year Ended December 31,  
    2010     2009     2008  
Net sales
                       
United States
  $ 1,961.8     $ 1,890.5     $ 1,979.3  
International
    1,676.9       1,670.7       1,779.9  
 
                 
Total
  $ 3,638.7     $ 3,561.2     $ 3,759.2  
 
                 
                 
    December 31,  
    2010     2009  
Long-lived assets
               
United States
  $ 101.2     $ 93.3  
International
    93.0       98.1  
 
           
Total
  $ 194.2     $ 191.4  
 
           
Total assets
               
United States
  $ 2,522.0     $ 2,555.4  
International
    2,479.4       2,571.9  
 
           
Total
  $ 5,001.4     $ 5,127.3  
 
           

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
(16) Unaudited Quarterly Financial Information
                                 
    2010 Quarterly Periods  
    First     Second     Third     Fourth  
 
                               
Net sales
  $ 874.3     $ 881.8     $ 903.3     $ 979.3  
Gross profit
    256.7       251.2       256.5       274.5  
Operating income
    54.1       48.4       12.8       70.1  
Interest expense, net
    (53.7 )     (49.3 )     (53.3 )     (46.4 )
Other income (expense), net
    58.3       70.5       (80.7 )     18.7  
Income (loss) before income taxes
    58.7       69.6       (121.2 )     42.4  
Net income (loss)
    38.4       40.9       (85.6 )     27.8  
Operating income in the third quarter of 2010 includes $48.1 million of changes relating to the impairment of goodwill and intangible assets. See Note 3.
                                 
    2009 Quarterly Periods  
    First     Second     Third     Fourth  
 
                               
Net sales
  $ 841.2     $ 876.0     $ 902.1     $ 941.9  
Gross profit
    244.4       244.8       260.1       266.3  
Operating income
    42.4       44.0       63.0       59.4  
Interest expense, net
    (62.3 )     (50.4 )     (59.1 )     (52.7 )
Other income (expense), net
    36.6       (46.0 )     (30.0 )     15.5  
Income (loss) before income taxes
    16.7       (52.4 )     (26.1 )     22.2  
Net income (loss)
    11.2       (26.8 )     (15.7 )     17.2  
(17) Condensed Consolidating Financial Information
The following tables set forth the condensed consolidating financial statements of the Company. These financial statements are included as a result of the guarantee arrangements relating to the issuance of the Senior Notes in connection with the Merger. The Senior Notes are jointly and severally guaranteed on an unsecured basis by the Subsidiary Guarantors. The guarantees are full and unconditional and each of the Subsidiary Guarantors is wholly owned, directly or indirectly, by the Company. These condensed consolidating financial statements have been prepared from the Company’s financial information on the same basis of accounting as the Company’s consolidated financial statements.
The following condensed consolidating financial statements present the balance sheets as of December 31, 2010 and 2009 and statements of operations and cash flows for the years ended December 31, 2010, 2009, and 2008 of (1) the Company (“Parent”), (2) the Subsidiary Guarantors, (3) subsidiaries of the Company that are not guarantors (the “Non-Guarantor Subsidiaries”), (4) elimination entries necessary to consolidate the Company, the Subsidiary Guarantors and the Non-Guarantor Subsidiaries, and (5) the Company on a consolidated basis. The eliminating adjustments primarily reflect inter-company transactions, such as accounts receivable and payable, advances, royalties and profit in inventory eliminations. We have not presented separate notes and other disclosures concerning the Subsidiary Guarantors as we have determined that such material information is available in the notes to the Company’s consolidated financial statements.

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
Condensed Consolidating Balance Sheet
December 31, 2010
                                         
            Subsidiary     Non-Guarantor             Total  
    Parent     Guarantors     Subsidiaries     Eliminations     Company  
Assets
                                       
Current assets:
                                       
Cash and cash equivalents
  $ 0.4     $ 10.5     $ 131.2     $     $ 142.1  
Compensating cash balance
                85.4             85.4  
Trade accounts receivable, net
          211.4       300.6             512.0  
Inventories
          149.1       143.9             293.0  
Other current assets
          27.2       46.4             73.6  
Intercompany receivables
    18.5       3.4             (21.9 )      
 
                             
Total current assets
    18.9       401.6       707.5       (21.9 )     1,106.1  
Property and equipment, net
          83.6       110.6             194.2  
Goodwill
          867.5       889.6             1,757.1  
Other intangible assets, net
          1,071.2       787.0             1,858.2  
Deferred income taxes
    195.8             9.8       (195.8 )     9.8  
Investment in subsidiaries
    2,513.8       1,694.5             (4,208.3 )      
Other assets
    33.9       36.3       5.8             76.0  
Intercompany loans
    1,033.0       110.6       21.3       (1,164.9 )      
 
                             
Total assets
  $ 3,795.4     $ 4,265.3     $ 2,531.6     $ (5,590.9 )   $ 5,001.4  
 
                             
 
                                       
Liabilities, Redeemable Equity Units and Stockholders’ Equity
                                       
Current liabilities:
                                       
Current portion of debt and capital lease obligations
  $ 28.7     $ 0.4     $ 88.3     $     $ 117.4  
Accounts payable
          193.0       213.0             406.0  
Accrued expenses
    35.8       63.5       107.2             206.5  
Intercompany payables
          1.0       20.9       (21.9 )      
 
                             
Total current liabilities
    64.5       257.9       429.4       (21.9 )     729.9  
Long-term debt and capital lease obligations
    2,622.5       1.1       16.7             2,640.3  
Other long-term liabilities
    35.8       25.5       75.9             137.2  
Deferred income taxes
          436.0       238.6       (195.8 )     478.8  
Intercompany loans
    57.4       1,031.8       75.7       (1,164.9 )      
 
                             
Total liabilities
    2,780.2       1,752.3       836.3       (1,382.6 )     3,986.2  
Redeemable equity units
    50.0                         50.0  
Total stockholders’ equity
    965.2       2,513.0       1,695.3       (4,208.3 )     965.2  
 
                             
Total liabilities, redeemable equity units and stockholders’ equity
  $ 3,795.4     $ 4,265.3     $ 2,531.6     $ (5,590.9 )   $ 5,001.4  
 
                             

 

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VWR FUNDING, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements — (Continued)
(In millions, except share data)
Condensed Consolidating Balance Sheet
December 31, 2009
                                         
            Subsidiary     Non-Guarantor             Total  
    Parent     Guarantors     Subsidiaries     Eliminations     Company  
Assets
                                       
Current assets:
                                       
Cash and cash equivalents
  $ 1.3     $ 10.1     $ 113.0     $     $ 124.4  
Compensating cash balance
                105.0             105.0  
Trade accounts receivable, net
          190.1       281.2             471.3  
Inventories
          134.9       128.7             263.6  
Other current assets
          14.4       38.5             52.9  
Intercompany receivables
    14.8       2.1             (16.9 )      
 
                             
Total current assets
    16.1       351.6       666.4       (16.9 )     1,017.2  
Property and equipment, net
          71.6       119.8             191.4  
Goodwill
          905.1       927.9             1,833.0  
Other intangible assets, net
          1,125.8       860.9             1,986.7  
Deferred income taxes
    221.9             12.6       (221.9 )     12.6  
Investment in subsidiaries
    2,649.7       1,759.3             (4,409.0 )      
Other assets
    41.9       42.2       2.3             86.4  
Intercompany loans
    1,045.3       136.6       19.2       (1,201.1 )      
 
                             
Total assets
  $ 3,974.9     $ 4,392.2     $ 2,609.1     $ (5,848.9 )   $ 5,127.3  
 
                             
 
                                       
Liabilities, Redeemable Equity Units and Stockholders’ Equity
                                       
Current liabilities:
                                       
Current portion of debt and capital lease obligations
  $ 44.3     $ 0.4     $ 107.7     $     $ 152.4  
Accounts payable
          177.9